The politics of money returns after 30 years in the desert

ANALYSIS: As Judith Collins pondered Andrew Bayly’s appointment to be her shadow treasurer, dissatisfied members of her party would tell the same story.

In the early days of Simon Bridges’ leadership with Amy Adams as Finance spokesperson, Bayly was asked to leave and work into retirement. What came back was radical: some politically unsavory options to make retirement more affordable.

Nor was it much that the Party had in mind when it put Bayly to work. Usually when parliamentarians get to work on policy, what they come up with is at least somewhat limited by what is politically possible. Bayly’s solution, however, was purely economic.

The anecdote was told to emphasize Bayly’s lack of political sense. He had the practical experience National needed in a finance role, sure, but his predecessors, Goldsmith, Adams, and Joyce were notable politicians too.

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The people who tell that story are unlikely to be reassured by Bayly’s attack on the Reserve Bank last week. The talk on the National Party channels last week was mostly negative. The man who was to rebuild National’s financial credibility was not supposed to begin his tenure by attacking the Reserve Bank.

Bayly apparently got the hint. No more press releases arrived about his idea to write to the Reserve Bank and ask it to ease the stimulus targeting the housing market, which Bayly hinted at earlier in the week.

But fast forward a week, Bayly was organizing a stand up on the black and white mosaics of Parliament, trying to claim credit for the idea (which mainly goes to David Seymour, who started this whole debate with an impromptu comment to Interest.co.nz in October).

Bayly was right: the gamble paid off. Collins, seen late that night in Parliament, was excited, as was Rep. Shane Reti.

Across the hall, new Green Party Finance spokesperson Julie Anne Genter and co-leader Marama Davidson found themselves pushing for a more traditional interpretation of what the role of the Reserve Bank should be.

They ended up finding themselves on the same page as Governor Adrian Orr, who said Wednesday that if demand-side pressure on housing is to be cooled, taxes, rather than monetary policy, should be where the discussion begins.

At first glance, this would seem to make very little sense. Labor, National and ACT, which have some connection to the 1989 decision to grant operational independence to the Reserve Bank under then-governor Don Brash, were crossing several red lines to invade, albeit tentatively, that independence.

The Greens, who only a couple of elections ago, had called for a political quantitative easing (money printing), although they did not say it completely, they were the only ones who were pushing a more orthodox way of doing things.

The reasons are obvious, and this was one of the few weeks in politics that everyone involved came out looking good.

The big news of the week was everyone’s admission that New Zealand has a serious problem with housing demand. Until now, the debate has focused mainly on increasing the supply of housing, which was and continues to be the cause of our housing crisis.

But the cheap money unleashed by the Reserve Bank’s monetary stimulus has also created a demand problem.

The problem for our politicians is that this demand problem is not only the fault of the Reserve Bank; One of the reasons there is such a demand for investing in housing is the huge tax privileges it brings in the form of almost completely tax-free capital gains on the houses when they are sold.

But with the new home taxes off the table for ACT, National and (for now at least) Labor, it was necessary to pass the buck to the Reserve Bank. The many reasons for the problems on the demand side were grouped into one: Reserve Bank Governor Adrian Orr.

The Greens, by contrast, have left everything on the table, including taxes. It fits his political argument to be able to argue that taxes, rather than monetary policy, are the key lever to pull to solve demand-side problems in the housing market. It certainly helps that the Governor of the Reserve Bank seems to agree, pointing out that fiscal and regulatory solutions (the code for planning and fiscal reform) are better solutions to the housing problem than hard monetary policy.

But Robertson has also walked away from the episode looking good. We are firmly in the era of unconventional monetary policy (to borrow the bank’s own language). This means that the bank is using methods other than the Official Cash Rate to achieve its objectives. This includes bulk money printing and cheap financing for banks.

This policy has brought the Reserve Bank and the government closer together, causing some to question whether the bank’s full operational independence is a bit outdated. Robertson, after all, indemnifies the bonds the bank buys. It is also probably the biggest beneficiary of its accommodative monetary policy due to the much lower borrowing rates the government receives thanks to the bank’s efforts to control interest rates.

The bank is not doing this as a favor to Robertson, it is a byproduct of its economy-wide effort to regain some inflation and employment, but it certainly doesn’t hurt Robertson to have interest rates that low.

We are already seeing some signs of where things are going. The Reserve Bank has been quite clear that it does not believe that Robertson’s suggestions would have forced it to change its monetary stimulus this year; that’s also a little reprimand for Bayly, who also suggested a change in monetary policy on the bank’s financing for loans. program, designed to give banks cheap financing.

Instead, we could see that it uses other tools, such as loan-to-value (LVR) or debt-to-income (DTI) to cool demand, although Orr provided a coded warning that some of the tools at the Bank’s disposal could it hurts first-time home buyers more than it helps them; both LVRs and DTIs would likely hurt first-time home buyers.

But the bank could also be giving the government some political help. Orr seems to be putting a lot of emphasis on a paragraph in Robertson’s letter asking the Reserve Bank to help with the broader policy work the government is doing on housing affordability.

Orr’s comments this week suggest that if the bank’s experts think a tax is the best policy solution for Robertson, then a tax is precisely what he will recommend.

At first glance, that would be bad for Robertson. His high-risk tactic with the letter could end with Orr telling Robertson how to do his job, and not the other way around.

But it could also be of great help. A call from the Reserve Bank to implement some kind of tax that stifles demand could be what Robertson needs to fight his way to the political solution that the government probably wants. Let’s not forget: Robertson started the year by breaking (well, just) the Budgetary Responsibility Rules from his first term with a $ 12 billion stimulus package. The package broke the line, in large part, thanks to growing political calls for Labor to shed the rules that had forced the party to rule with a red-tinged form of austerity.

Now that even bank economists are lecturing Labor on the merits of taxes in order to preserve social cohesion, a similar political argument is brewing. Don’t expect a wealth tax, but consider capital gains tax, once discarded.

Robertson has said that he would not view an extension of the government’s bright line test (from five years to forever) as a violation of the government’s 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 believes so, its assessment of the extent from the 2017 bright line test notes that the two taxes are substantially similar).

Bright-lined text could also touch upon leader Jacinda Ardern’s promise to never implement a CGT under her leadership. Income spokesman David Parker has an answer to that: The bright line test is an income tax, not a capital gains tax.

Robertson can make this argument, National, which introduced the bright line test, made the same point, arguing that the tax was different.

If the political pressure continued to mount, don’t be surprised if a brilliant line test extension is put very firmly on the table.