Friday 12 April 2024

Afternoon roundup

More bits as I clear through the tabs. 

Net zero means net negative?

Will look forward to reading the Climate Commission's latest report. This bit, from Jim Rose over at Carbon News, is a bit concerning:

The world is not on track to meet the Paris Agreement’s 1.5 degrees target, the commission says, and New Zealand is likely to continue contributing to global warming after 2050.

That’s because the country’s current target doesn’t require biogenic methane to reach net zero by 2050 and has no requirement for long-lived greenhouse gases to be reduced beyond net zero.

“This means that it is possible to achieve the 2050 target and still have net positive emissions of 700–1,000 KtCH4 – and the associated contribution to global warming – in 2051 and every year after,” the commission says.

The commission says that when New Zealand’s net zero target was set in 2019 it was seen as ambitious but that’s no longer the case.

I had always understood Net Zero 2050 to mean that the unbacked NZU issued before 2050 would represent the sum total of net emissions from the covered sector from now until forever. An NZU might be redeemed after 2050; it's the quantum of unbacked units issued through 2050 that determines the amount of net emissions overall. 

If the Commission is shifting to a view that Net Zero implies undoing the emissions that have obtained from an indeterminate start point through to 2050, that's of course a much bigger job, and one that Parliament certainly didn't authorise.  

A clean ETS is certainly capable of driving beyond net zero. The government or others just need to buy credits through the system and retire the credits, unused. And if tech follows some potential paths, doing so may well be cost-effective in undoing some accumulated emissions. But probably a good idea to wait and see what the cost paths wind up looking like before committing on that one. 

Wednesday 10 April 2024

Afternoon roundup

The afternoon's worthies, as I close the tabs from one of the many open browsers....

Tuesday 9 April 2024

In a structural deficit, the only real tax cut is a spending cut

This week's column in the Stuff papers. A snippet:

Tabarrok warned that America had two political parties – “the Tax and Spenders and the No-Tax and Spenders” – and neither was fiscally conservative. In the two decades after Tabarrok’s warning, the federal government never achieved a balanced budget. America’s federal deficit ranged from 1.1% of GDP to over 14% of GDP and gross federal debt doubled, rising from 60% of GDP to 120% of GDP.

New Zealand’s Public Finance Act aims to avoid those kinds of outcomes.

The fiscal architecture is neutral about whether core government spending should be about 27% of GDP, as it was in 2018, or over 33% of GDP, which it is forecast to be in 2024.

The six-percentage point difference in core Crown expenditure, as a proportion of GDP, might not sound like much. But in a $405 billion economy, it amounts to almost $25b in increased core government spending per year across a population of just over 5 million people. Or over $18,000 for a family of four.

Some of that substantial increase in spending has been funded by a higher tax take. Core Crown tax revenue increased from just over 27% of GDP in 2018 to over 29% in 2024. The rest, after accounting for other bits of government spending and revenue, is funded by what is now a substantial structural deficit.

Taking on debt during the depths of lockdown to deal with the crisis was one thing. Now, that crisis has long since passed – but the structural deficit remains. The One Big Task for the coming budget is providing a credible path out.

It is not just a test for the current government. It is also a test of the Public Finance Act.

I'm all for tax cuts. Start by balancing the structural budget. That's the most important tax cut to make. Then see whether there are opportunities to go further. There should be. The government takes in a lot more in tax than it did in 2018, and is spending a lot more than was projected in the 2019 Wellbeing Budget. 

I'd filed the column a few days before having a chat with RNZ's Morning Report on proposed staff reductions in government agencies. I was a bit frustrated about that RNZ rarely informs listeners about whether cutbacks in an agency simply undo the last couple years of hiring, whether they revert staffing levels to levels comparable to pre-Covid, whether they go back to where things were when National left office, or whether they go further than that. If an agency has stayed fairly constant over time, and there haven't been substantial productivity improvements or other shifts, a 40% cut would mean they can't keep doing stuff they've been doing for a long time. But if one has tripled in size recently, and then cuts back by 40%, well, there are options around what things no longer get done.

Checking the last five years' data is really easy at the Public Service Commission's website. Click the link, scroll down to the table, click the tab to open the 'Five Year Trend' view. Done. 

I don't know why Radio New Zealand doesn't check. They were really outraged about proposed 40% staffing reductions at the Ministry for Pacific Peoples. That Ministry had 40 staff in Q2 2018 and 136 by Q2 2023. They reduced a bit at the end of 2023 to 121 staff. If a 40% reduction comes off that figure, they'd still be left with more staff than they had in Q2 2020.

Update: Kate MacNamara does some checking

Thursday 28 March 2024

Things I'd have hoped we could all agree on

This week's Budget Policy Statement was disappointing. 

There are a few things I'd have thought we could all have agreed on. They seem pretty basic.

  1. If the Reserve Bank is still using monetary policy to push against inflation, fiscal stimulus is a pretty bad idea;
  2. While fiscal stimulus through tax reduction seems more effective than fiscal stimulus through spending increases, it is a mistake to run fiscal stimulus when the Reserve Bank is pushing the other way. Sure, things are slowing down, but leave that to monetary policy.
  3. Core Crown Expenditure for 2024 is forecast to be more than five percentage points of GDP higher than it was in 2019. Total Crown is higher too; that includes interest on the debt we took on to deal with Covid (and all the other stuff Robertson spent the Covid money on). Fiscal consolidation requires getting spending down. Tax reductions should not precede the spending reductions that make room for them. Otherwise all you're doing is increasing future taxes.
  4. If you think that fiscal consolidation through reductions in government spending and transfers has bad macroeconomic consequences, remember that the Reserve Bank has the next move. Sharp reductions in government expenditure would make it easier for the Bank to ease monetary policy, which would encourage other activity to pick up any slack. If you worry that monetary policy has a lag, that's easily solved. The earlier you signal that spending will be coming down to pre-Covid levels, as % GDP, the more RBNZ can do to work it into their models. 
I agree that they can't solve it all in a single budget. Ben Thomas points to the core of the problem:

Trading in stories of government incompetence and spending overruns, opposition MPs can easily believe 6.5% of all state expenditure consists of lavish intra-departmental powhiri and expensive dinners for senior management. Government waste, like representations of toxic waste in popular culture, would be obvious: lying on the ground, oozing and glowing, in storage barrels with hazard markings ready to be taken away.

Instead, much of it is hidden. It might be a team of 10 senior people doing routine work that could be performed by half a dozen juniors. It could be a programme that was once highly valuable but has achieved its purpose, but runs on with full funding. This is waste, but it doesn’t show up in the lines of any accounts. It needs to be identified by people who are familiar with the work of that agency and the public service.

This leaves ministers hostage to fortune or, more acutely, to the public service bosses. That’s bad news too, because after six years of pushing on an open door for funding increases, a door which led to a room full of money, and lack of clear direction from inexperienced Labour ministers, it is not clear the public service has the capability, let alone the will, to deliver surgical savings at the micro level or bold changes at the programme level.

Ministers can identify programme-level cuts: that is, drawing a red line through an initiative or service. But, as evidenced by the political optics disaster of disability carer allowance restrictions, ministers are not in the weeds of the detail of most operational matters.

But National has set Core Crown spend of 30% of GDP as a target to which to aspire. That's more than a full percentage point of GDP higher than Ardern's Wellbeing Budget had projected, and more than two percentage points of GDP higher than when Labour took office. 

And they're still signaling that debt is going to fund tax reductions. If they can't achieve the necessary spending reductions more quickly, they really ought to be phasing in tax reductions more slowly. 

Wednesday 27 March 2024

The alcohol levy review - an ongoing OIA saga

I keep a bit of a watching brief on the old BERL social cost of alcohol figure. It turns up in weird places. 

As aide memoire, BERL produced the number as commissioned work in the late 2000s that was meant to follow the method set by Collins & Lapsley in Australia. 

The Collins and Lapsley method has a few problems. But BERL compounded those problems with choices that seemed designed to generate a larger number for the tallied social costs. 

For example, Collins & Lapsley had aetiological tables that tried to attribute the fraction of different disorders that might be attributed to alcohol use. Their tables had a few disorders where the aetiological fraction was negative because drinking reduces the incidence of that disorder. BERL decided that, because they were only looking at harmful drinking, it was ok to just set all those cells in the table to zero rather than maintain a number showing benefits (and consequent reductions in net harm). 

Matt Burgess and I went through the BERL report, seeing what the number would look like if more standard method were followed. For example, BERL counted as social cost to the country every dollar spent on alcohol, including every dollar spent on excise, by those drinking more than about 2 pints of beer a day. Drinkers' spending on beer is a social cost only in the sense that private costs are part of social costs. And since benefits enjoyed by drinkers would need to be netted for any sensible net cost figure, the whole thing was a bit suspect. 

BERL responded to the critique by updating the figure to no longer count as a social cost drinkers' spending on alcohol excise, but let the rest stand. 

Brad Taylor joined Matt and me for an update to the review in 2011, when we went through the underlying Collins & Lapsley work. We adjusted upward the revised BERL figure, but the majority of the BERL-tallied costs were either double-counting or costs far better considered private than external and social. 

BERL provided an updated figure in 2018, but it turned out just to be the old figure multiplied by GDP growth over the period. Which could be fine if the initial number were sound (it wasn't) or if alcohol social costs scaled with GDP (they don't necessarily, and especially where alcohol consumption was declining over the relevant period). 

And the whole thing is a bit silly where the measured social cost really doesn't matter. The policy question is always whether any intervention, whether excise or otherwise, provides net benefits. Interventions can fail to do so despite very high measured social cost; they can also provide benefits even if social costs are low. The only reason for generating large social cost numbers is to motivate "something must be done" responses. 


The number turned up again in last year's "Independent Review of the Alcohol Levy Stage 1: Rapid Review". The work for the Public Health Agency was undertaken by NZIER and Allen + Clarke. 

The work included this section:

90. The cost of alcohol-related harm to New Zealand society is significant. This section provides a summary of existing estimates of the cost of alcohol-related harm in Aotearoa New Zealand. 

91. The most recent study to quantify the social cost of alcohol in Aotearoa New Zealand was conducted by BERL in 2009. Commissioned by ACC and the Ministry of Heath, the report aimed to quantify the social cost of alcohol and drug related harm looking at the personal, economic, and social impacts. While the estimate of the social cost of alcohol-related harm in Aotearoa New Zealand published by BERL in 2009 and updated in 2018, or rather the methods used to generate it, have been criticised by some commentators, it has been widely cited in the alcohol-harm research and policy space in New Zealand over the last 14 years (BERL, 2009; Nana, 2018). The Law Commission’s 2010 report on the review of the regulatory framework for the sale and supply of liquor also cited the BERL 2009 report. 

92. In 2018, the updated estimate of the social cost of alcohol, based on the BERL methodology, was calculated to be $7.85 billion per year (Nana, 2018). This estimate included costs resulting from justice, health, ACC, social services, unemployment, and lost productivity. Intangible costs such as years of life lost from premature death, lost quality of life, child abuse, sexual abuse, and impacts on victims of alcohol-caused crime are also relevant to assessing the overall impact of alcohol-related harm on society. The 2018 update did not include intangible costs. A recent Australian Study found that in Australia $48.6 billion AUD of intangible costs could be attributable to alcohol (National Drug Research Institute, Curtin University, 2021). 

This section seemed particularly poorly undertaken. Citing the 2018 figure seemed particularly odd where the thing was just the old number multiplied by cumulative GDP growth. 

It's also incorrect to say that the 2018 update didn't include intangible costs. Intangible costs of lost life and lost quality of life were included in the 2009 figure, and the 2018 figure just inflated the old number by GDP growth.  

Paragraph 91 alludes to that 'some commentators' have criticised it, but said nothing about the nature of those critiques or who made them. Were the concerns trivial or notable?

Meanwhile, the bibliography included these two relevant references that weren't included in Para 91:

Crampton, E. (2018). The alcohol cost ‘zombie’ has returned. 

Crampton, E., & Burgess, M. (2009). The Price of Everything, The Value of Nothing: A (Truly) External Review Of BERL’s Study Of Harmful Alcohol and Drug Use (Working Paper No. 10/2009).

The 2009 piece was my original critique of the BERL figure with Matt; I'd have preferred the updated critique from 2011. The 2018 column had my initial guess that the updated BERL figure was just an inflation and population growth adjustment; my 2019 column had Ganesh Nana's confirmation that the new figure was the old figure inflated by cumulative GDP growth. So I'd have pointed to the 2019 column instead. 

But the authors clearly knew about my critiques. That they were in the bibliography suggested that there might have been more fulsome discussion of those critiques in earlier drafts. 

On 6 September 2023, I sent an OIA request to the Ministry of Health asking for all early and working drafts produced by NZIER [Paragraph 14 of the report said that NZIER undertook the analysis of existing data and evidence]; for correspondence between and notes from conversations between MoH, HPA, Allen + Clarke and NZIER regarding NZIER's analysis; and, for any peer review of the report. 

On 15 September, MoH replied saying that the correspondence would be extensive and that I needed to refine the request if I wanted to get anywhere. 

I replied immediately asking them to prioritise delivery of early and working drafts, and any peer review. I also suggested prioritising correspondence and relevant notes from meetings between and among MoH, HPA, and Allen + Clarke regarding the NZIER report. 

On 6 October, I reminded MoH that the refinement of my request only asked that they prioritise two parts of the request, and should not have triggered a clock reset; the requested information was due.

On 17 October, I had a reply from the Public Health Agency's Ross Bell. He noted that they'd considered the refinement as having triggered a time extension. But more substantively, they refused early and working drafts, as well as peer reviews, under 9(2)(g)(i) to protect free and frank expression of opinions. 

I proceeded immediately with the Ombudsman. 

On 16 November, the Ombudsman's Office commenced investigation. 

On 13 December, the Ombudsman's Office advised that the Ministry was prepared to reconsider its decision with respect to final drafts and asked whether that would be sufficient. I wouldn't know until I'd seen any released documents - if the released drafts let me see what had happened in the relevant section, that would be fine. If they didn't, I'd need to see more. I'd have to wait. 

On 2 February, a Senior Investigator at the Office of the Ombudsman noted that the Ministry had advised it would be providing a partial release, and asked whether I wished that they review the withholding of the earlier drafts; I noted that I couldn't know until I'd seen what they would release.

On 4 March, the Office reported that they were still chasing the Ministry about the later drafts. 

On 11 March, the Ombudsman advised that he had sent a letter to the Ministry recommending that the documents be released immediately and apologise for the delay.

At close of business on 14 March, the Ministry of Health released the later drafts. Ross Bell, Group Manager, Public Health Strategy & Engagement at the Public Health Agency, apologised for the delay and any related inconvenience.  

While those drafts did include some annotations from "KT" and Te Whatu Ora, they did not provide much light on what had happened with the section on alcohol social cost. The earliest draft was substantially similar to the final. 

So I still cannot really tell what happened. 

The bibliography references to the critiques suggest that, at minimum, those references were included as a citation in an earlier draft of Para 92. It's possible that an earlier version included more substantive discussion of those critiques, but it's hard to say.

I've asked the Ombudsman to form a determination around those earlier drafts' discussions of the costs of alcohol-related harm.

I suspected that the first draft from NZIER included substantive discussion of the relevant arguments. NZIER aren't idiots; they know this stuff. It's in the bibliography, so it was there at some point. 

If there had been more substantive discussion, was it excised at request of Allen + Clarke, or at request of the Public Health Agency?

In either case, the effect is a document sent to the Minister, advising on the alcohol health levy, that provides a fairly one-sided view on alcohol social costs. 

I yesterday received an additional bit from the Ministry, which might speak to the Public Health Agency's views on things:

Kia ora Eric,

Further to the below email sent to you containing the reconsidered documents of your OIA (ref. H2023031477), the Ministry has identified a paragraph pertaining to yourself in one of the early draft documents. While the Ministry is maintaining its position on withholding the early draft documents under 9(2)(g)(i) of the Act, the following excerpt is being released to you under section 16(1)(e) of the Act: 

So it seems that early drafts did include substantive discussion of my critique of the BERL figure, and that someone caused it to be erased.

I'd also note that I was discussant at the NZAE meetings on the BERL paper in 2009. It was standing room only, because my critique of the BERL paper had already been released. The Ministry could consider asking any economist in the room whether my critique was just a me-thing, or whether the profession broadly shared my concerns.

I did that work as an academic in the Department of Economics at Canterbury, five years before I joined the Initiative, and two years before doing any industry-funded work. The funded 2011 work [funded by NABIC] discovered an error in the earlier unfunded work that had us revise upward the earlier estimate of alcohol social cost. 

I note that Ross Bell, now relevant Group Manager at the Public Health Agency, was Executive Director of the Drug Foundation when the BERL figure was originally being critiqued. 

Here is the issue of the Drug Foundation's "Matters of Substance" newsletter that included discussion of the controversy around BERL's number. It would be surprising if Bell were not aware of the difficulties with BERL's figure. He had the masthead editorial on the issue of their newsletter in which my critique of the BERL figure was discussed. 

I'll look forward to seeing whether I can get any further with this via the Ombudsman. 

In the meantime, it looks pretty obvious that the Public Health Agency was very happy to put a biased document up to the Minister as advice - whether they requested that outcome directly, or had Allen + Clarke do it.

A provisional health warning on advice from the Public Health Agency may be in order. At least until we can figure out what the heck is going on over there. 

And a reminder that government-commissioned reports face censorship regimes. If the Ministry doesn't like what it says, well, the offending bit gets disappeared. As an offending bit here seems to have been disappeared. 

Tuesday 26 March 2024

Public service cuts and context

Richard Harmon's Politik newsletter provides a bit of the context that ought to have been showing up in other media reports on potential reductions in public service staffing.

Media has been reporting on staffing cuts on the order of about 7%. Is that a big number or a small number relative to growth in the overall public service?

The public service in 2023 had headcount 38% larger than it had in 2017, when National was last in office, and 19% larger than in 2019, before Covid. 

There has not been 20% population growth since 2019. 

Budget 2024 needs to provide a credible path out of deficits, ideally focused on getting Core Crown expenditure, as a fraction of GDP, back to where it was in 2019 - at least as an interim goal. That would only take things back to where Ardern had had it in the 2019 Wellbeing Budget. 

The 2019 Wellbeing Budget was not austere. It was set to increase Core Crown expenditure's fraction of GDP by about a percentage point as medium-term steady state, from just under 28% of GDP to just under 29% of GDP. 

The 2023 Half-Year Fiscal Update had forecast 2024 Core Crown expenditure at 33.4% of GDP, and a forecast path down to 31.4% by 2028. 

Shaving that back down to 29% more quickly isn't austerity, or at least not the swear word version of it. It's just retrenching after a giant shock. 

And it sure would be great if news outlets appalled at 7% cuts to Ministry rosters could remind folks that that would still generally be a substantial increase on pre-Covid staffing.