Robertson needs to get his fiscal tools ready

The governor of the Reserve Bank will send out a press release today informing the world whether or not the bank will cut, raise or hold the official cash rate. The change is immediate – the dollar often wiggles in response as the market rushes to price the rate cut in.

By the time journalists file into the Reserve Bank’s museum for the quarterly Monetary Policy Statement press conference, we could be looking at a fairly different economic picture.

Things happen rapidly, not just because investors are making quick bets but because the bank’s changes are real and immediate.

The Reserve Bank affects the interest rates of all the banks because it controls wholesale lending rates, which have a real and material effect on banks’ cost of lending.

For decades, this has been the primary firefighting tool when it comes to tackling a financial crisis. During the great financial crisis, governor Alan Bollard laid waste to the OCR, flooding the economy with cheap money. It’s a useful tool because it’s so effective. When money is cheap, banks tend to lend more, getting money out into the real economy, where people can spend it.

The OCR is fast too – investors price in the changes, and it doesn’t take banks long to start adjusting their retail rates of lending.

In the last financial crisis, the OCR was cut nearly 6 per cent over a year, from 8.25 in June 2008 to just 2.5 in March 2009, flooding New Zealand with cheap money. It worked, to a point, and the economy started growing again – though not as well as it should have done. In normal circumstances, the economy never fully recovered. Ten years on, the OCR is at 1.5. Economists think today it will fall even lower, to 1.25.

That means the Government won’t have the luxury of relying on the Reserve Bank in the next crisis – it’ll be on its own. That matters, as with Trump, Brexit, the trade war, and an overvalued US stockmarket dominating the headlines, it appears another downturn could be just around the corner. Our policymakers should be preparing for it.

With the OCR already at record lows, there’s only so far the bank can go before further cuts – even cutting into negative territory – become ineffective.

The bank has other cards up its sleeve, termed ‘‘unconventional monetary policy’’, but these are untested in New Zealand, and any governor will be wary of using them.

But while Finance Minister Grant Robertson might be on his own, he has tools in his armoury. He’s got the balance sheet to fight off a fairly ugly crisis. Crown debt is low. The Government, if it wants, could easily flood the economy with money until things start to work again.

This is what the Treasury recommends. In a briefing paper to Robertson, it said the Government should look at ways to get money into people’s pockets, including in the form of one-off discretionary payments, increasing benefits, or cutting taxes. It’s fairly conventional fiscal policy – spend and stimulate the economy until things start to improve. Textbook even.

There are advantages to this approach too. Slashing interest rates makes borrowing cheap, creating asset bubbles as speculators take advantage of the low rates to buy things like property.

Fiscal stimulus can be more equitable by using things like benefit changes that assist the less welloff. The problem is that it’ll need to be fast and this is where Robertson isn’t quite as blessed as the Reserve Bank with its wholesale interest rates.

He’s constrained by the technical infrastructure of government. Even when it wants to spend money, it takes a government time to do so. Benefit changes take weeks to process, the winter energy payment system rollout was full of faults, even when government agencies had months to get it ready.

The public sector is riddled with disastrous payments systems. Bureaucrats would be advised to shore these up so they’re ready when the Government needs them.

New Zealand is not alone here. There are calls in the United States for its government to get its bureaucracy ready to distribute massive stimulus in the event of a crisis.

In New Zealand, the proposals needn’t be spectacular. The Government only agreed to a fraction of the Welfare Expert Advisory Group’s $5.2 billion worth of recommendations. It could look at implementing big-spending policies, such as a programme to install heat pumps in homes..

The lesson learnt from the last crisis is that when things go south, they go south fast. Bollard’s memoir of the period recalls moments when the economic data was so bad that it was difficult to use it to forecast the future. Robertson should learn from this experience and get his fiscal tools ready for the next crisis.

The lesson learnt from the last crisis is that when things go south, they go south fast.