Reaction to Labour’s monetary policy

The Dom Post is supportive:

 Unlike its recent pronouncements on trucks in highway fast lanes, or the flagging national demand for wood, Labour’s ambitious new monetary policy has real heft.

The idea is first to make KiwiSaver compulsory, with payment levels about 9 per cent of income. That’s not monetary policy per se, but it’s a good idea – our savings are chronically low, which pushes up our interest rates.

Compulsory savings are also necessary for Labour’s next big idea – making KiwiSaver payment rates adjustable. Under the plan, the Reserve Bank could recommend increasing savings rates as a way of slowing the economy – or, conversely, lowering them to heat things up.

They have some reservations:

What about low-wage workers, who don’t have mortgages and can’t afford unpredictable shifts in income? Labour is considering exceptions for them, but that poses its own problems.

What about the wisdom of constantly mucking around with people’s retirement savings? Isn’t that an odd message to send, that they are subject to the whims of the economic cycle?

And will such adjustments be as effective as interest rate hikes in cooling the housing sector, the most inflationary part of the economy?

So Labour has some more explaining to do. But the questions should not puncture the idea – some might be unanswerable until the policy is tried.

The Herald is also supportive:

The Labour Party has done well to come up with a constructive monetary policy for the coming election. Its proposal to make KiwiSaver compulsory and use its contribution rate as an alternative to interest rate rises is imaginative and reasonable.

But also a reservation:

But if the bank can merely recommend that a government increase the KiwiSaver levy, the tool might seldom be used. If Labour leads the next government it might welcome recommendations, at least until the combined contributions of employers and earners rise from the current 6 per cent to 9 per cent.

Even Labour, though, would be reluctant to raise the levy in normal economic times, and would make exemptions for the lower paid. The bank would usually have to resort to the official cash rate.

This is a key point – that the Government would make the decision on changing the contribution rate. It means that political considerations will be placed ahead of monetary considerations. The reality is that changing the level of contributions will not be a tool that will be used often – which means interest rates would by far remain the dominant tool.

The Reserve Bank considers changing the OCR every six weeks or so. One could not cope with having the KiwiSaver contribution rate changing more than once a year. Employer software needs to change. Employees need certainty over their take home pay, and employers need certainty over their costs.

So while the proposed tool is not without some value, it is not a tool that can be used frequently or immediately.

Brian Fallow sums up some reaction:

Labour’s proposal to introduce a variable contribution rate to compulsory KiwiSaver as a counter-cyclical tool has received mixed reviews from bank economists.

Most were tepid: It can’t do any harm, it will probably be less effective than Labour hopes.

Probably a fair summary.

But ANZ chief economist Cameron Bagrie was unimpressed: “It has political bun fight written all over it.

“Will a Government really step up to the plate and alter KiwiSaver contributions [if] asked to by the Reserve Bank? Imagine the bank asked the Government of the day to alter tax rates to help with monetary policy. This would alter public saving as opposed to private saving, but would have similar economic effects. What do you think the response would be?” Bagrie said.

“A change in take-home pay is highly personal. For low-income earners in particular the fact that they will get the money back in several decades’ time will be to all intents and purposes irrelevant.”

Indeed. A low income earner needs the money now – not in 30 years.

And this is one of the problems of universal KiwiSaver – it means the state is making decisions on behalf of each individual family as to how much they need to save – and when. For many New Zealanders it can be more sensible to put surplus funds into a business or paying off a mortgage quicker.

The Herald also looks at winners and losers:

Households struggling to keep on top of their mortgages would be the winners under Labour’s proposed interest rate shake-up, but at the expense of those who can’t afford to get a foot on the property ladder, a budgeting service warns. …

But New Zealand Federation of Family Budgeting Services chief executive Raewyn Fox said the policy to keep interest rates low while forcing everyone to save more raised issues of fairness.

“The people who don’t have mortgages will be in effect subsidising the economy for the people who are obtaining an asset by buying a house.”

Yep – the biggest winners will be those with the biggest mortgages.

Bernard Hickey also looks at the pros and cons:

The Pros

The VSR would allow the Reserve Bank to remain independent and give it another way to slow or speed up the economy. There would, of course, be a Policy Targets Agreement between the Minister of Finance and the Reserve Bank Governor to govern how the VSR could be tweaked, but the decisions on when and how to use it would be made by the Governor.

Politically, the idea of increasing the KiwiSaver contribution rate seems more attractive than raising interest rates, at least for exporters and mortgage borrowers. It means the extra savings are kept by the wage or salary earner, rather than being ‘lost’ to the bank and term depositers.

In theory, raising the VSR would allow the Reserve Bank to avoid putting up interest rates and therefore take pressure off the currency.

The other parts of the policy that didn’t get as much attention may be just as important. Labour is saying the Reserve Bank could use macro-prudential tools such as capital requirements to limit lending growth or pressure on the currency. The Reserve Bank has already partly gone down this path with higher capital requirements for high LVR mortgages and the speed limit.

This wider use of macro-prudential tools could also help reduce the reliance on the OCR.

The Cons

Simply imposing KiwiSaver compulsion and a higher contribution rate may not necessarily improve national savings. The Australian experience has been mixed at best. It turned out Australians felt richer as their superannuation pots got bigger, which encouraged them to borrow even more against the value of their houses.

Compulsion in tandem with Labour’s policy of gradually increasing the retirement age to 67 is controversial within Labour and on the left of politics. There are plenty who argue poorer manual workers are discriminated against. There’ll be some tricky questions around who gets exemptions because of ill health and who can ask to be exempted on the grounds of hardship.

The other risks with compulsion are around the issue of Government guarantees, funds management fees and means testing. If you are forced to save by the Government you could argue your funds should be guaranteed by the Government.

The Australian scheme has become notorious for high fees and compulsion has become something of a subsidy for the funds management industry, and ironically, the banking sector. There would have to be some tough conversations and negotiations around fees. Here’s an excellent Grattan Institute report about Australia’s fees mess.

And finally there is the argument against compulsion that used to be made by the ‘Father’ of KiwiSaver, Michael Cullen, which is that once these funds get very big political pressure will build for means testing, as is the case in Australia. That would rob the current NZ Super scheme of some of the simplicity and fairness behind the universal pension.

I think the policy probably won’t achieve a lot, but it could be a potentially useful extra tool for the Reserve Bank. However to be truly effective you need the Reserve Bank able to decide – not just recommend to the Government.

But one should be aware that monetary policy is ultimately about reducing demand in the economy, and hence inflation. Now increasing KiwiSaver rates could reduce spending by households. But if Government spending is not restrained, then the overall impact on the economy will be insignificant. Fiscal policy and mometary policy need to work together. Just reducing household spending will not work, if government spending is not restrained.