Reserve Bank dances tight line

As Judith Collins was mulling the appointment of Andrew Bayly to be her finance spokesman, dissatisfied partymembers told the same story. Under Simon Bridges’ leadership, Bayly was asked to do some work on superannuation.

What he came back with was radical: some politically unpalatable choices tomake superannuation more affordable. It was not what the party had in mind. Usually, when MPs are put to policywork, what they come up with is at least somewhat constrained by what is politically possible. Bayly’s solution, however, was pure economics. The anecdote was told to emphasise Bayly’s lack of political nous.

The people telling that story were unlikely to be reassured by Bayly’s attack on the Reserve Bank last week. National Party chatter last week was mostly negative. Bayly, it appears, took the hint. Further press releases on his idea of writing to the Reserve Bank and calling on it to ease up on the stimulus directed at the housing market, which Bayly hinted at earlier in the week, never arrived.

But fast-forward aweek and Bayly was hosting a standup with media, trying to claim credit for the idea. Collins was thrilled.

On the other side of the aisle, the Green Party’s new finance spokeswoman, Julie Anne Genter, and co-leaderMarama Davidson found themselves pushing for a more traditional interpretation of the Reserve Bank’s role.

They found themselves on the same page as governor Adrian Orr, who on Wednesday said that if you wanted to cool the demand-side pressure on housing, tax, rather than monetary policy, should be where the discussion started.

Labour, National and ACT, which all have some connection to the 1989 decision to give the Reserve Bank operational independence, were encroaching upon that independence. The Greens, who only a couple of elections ago called for political quantitative easing (money printing), though not quite saying it, were the only ones pushing for a more orthodox way of doing things.

This was one of only a handful of weeks in politics where everyone involved came out looking good.

The big news was the admission from everyone that New Zealand has a serious issue with housing demand. Until now, the debate has mainly focused on increasing housing supply, which remains the cause of our housing crisis. But the cheap money unleashed by the Reserve Bank’s monetary stimulus has created a demand problem, too.

The problem for our politicians is that this demand issue is not just the Reserve Bank’s fault. One of the reasons there is so much demand to invest in housing is the tax privileges in the form of almost completely untaxed capital gains on houses when sold. But with new taxes on housing firmly off the table for ACT, National and (for now at least) Labour, the buck needed to be passed to the Reserve Bank.

The Greens, by contrast, have left everything on the table. It suits them to be able to argue that tax, rather than monetary policy is the key lever. It certainly helps that the Reserve Bank governor seems to agree – noting that fiscal and regulatory solutions (code for tax and planning reform) are better fixes to the housing problem than blunt monetary policy. But Finance Minister Grant Robertson has walked away from the episode looking good aswell.

We are firmly in the era of unconventional monetary policy (to borrow the bank’s own language).

That means the bank is using methods other than the official cash rate to achieve its goals. This includes whole sale money printing and cheap funding for banks.

This policy has pushed the Reserve Bank and the Government closer together and has caused some to question whether the full operational independence of the bank is a bit passe´. Robertson, after all, indemnifies the bonds the bank purchases. He is also probably the single biggest beneficiary of its accommodating monetary policy because of the vastly lower borrowing rates the Government receives thanks to the bank’s efforts to tame interest rates.

A call from the Reserve Bank to implement some kind of demandstifling tax could be what Robertson needs to wriggle his way into the policy solution the Government probably wants. Robertson has said that he would not view an extension of the bright line test (from five years to forever) as a violation of the promise not to introduce new taxes.

But the bright line test, which taxes income from investment properties sold within five years of purchase, is precisely a capital gains tax. (Even the Treasury thinks so – its assessment of the bright line test extension from 2017 makes the point that the two taxes are substantially similar.) Revenue spokesman David Parker has an answer to that: the bright line test is an income tax, not a capital gains tax.

National – which brought in the bright line test – made the same point, arguing the tax was different.

If the political pressure continues to grow, don’t be surprised if a bright line test extension is put on the table.

The debate has mainly focused on increasing housing supply.