RBNZ governor Adrian Orr. Photo / File
COMMENT: There are increasing concerns about the performance of several key government entities, including the Reserve Bank of New Zealand, the Treasury, Statistics NZ, and the Inland Revenue Department (IRD).
The Reserve Bank's handling of the CBL Insurance debacle has been woeful and governor Adrian Orr has given mixed messages about future interest rate movements.
The Treasury, which has long been the dominant Crown policy adviser, has taken a more low-profile approach in recent years. Its joint secretarial role with the Tax Working Group (TWG) is being questioned as the introduction of a watered-down capital gains tax would have been more likely if the final TWG report had been more convincing.
The Government has committed an additional $16.2 million to Statistics NZ for the 2018 Census and 2023 Census because of the unsatisfactory outcome of the former, while TWG chair Sir Michael Cullen made critical comments about the IRD in a recent Herald column.
Sir Michael wrote: "The only issue is whether the IRD is up to the job, having suffered some ill-thought-through restructuring which has seen the loss of some of its best and brightest".
This comment was a reference to the need for the IRD to clamp down on artificial tax-avoidance schemes whereby income was being transferred "out of the revenue account (and so taxed) and moved into the capital account (and so not taxed)".
The performance of our government entities is important because the success of small economies, particularly Singapore, has been highly dependent on the quality of their public service.
Consequently, it is disquieting to observe our Reserve Bank, the Treasury, Statistics NZ, and the IRD are struggling to maintain high-quality outputs.
The first point to note about the Reserve Bank and CBL, the failed insurance group, is that the central bank regulates the insurance sector.
A High Court affidavit released in March last year revealed that on July 27, 2017, the Reserve Bank directed CBL Insurance, 100 per cent owned by the NZX-listed CBL Corporation, to raise its solvency ratio to 170 per cent. CBL's solvency ratio had dropped sharply from 189 per cent at the end of 2016. CBL Insurance, which generated about 60 per cent of its gross written premium in France, represented approximately two-thirds of CBL Corporation's business.
The Reserve Bank head of supervision's affidavit went on to state: "In the meantime, the bank's own internal review concluded in August 2017, based on information available at the time, that CBL Insurance had significantly under-reserved its French business to such an extent its adjusted capital for solvency purposes (ie excluding inadmissible components) was more likely to be less than zero, and that there was a material likelihood that the wider CBL group had insufficient resources to meet the shortfall".
This affidavit was extraordinary because none of these issues was revealed to the stock exchange at the time, even though the insurance regulator had declared that "public disclosure is a cornerstone of the Reserve Bank's approach to prudential regulation and supervision".
This non-disclosure had a huge impact on investors, as just over 47 million CBL shares were traded on the NZX and ASX between the end of August 2017 and February 2, 2018, the day before the company's shares were suspended by the NZX.
What have the regulators done about CBL since February 2, 2018?
Nothing much, as far as we can see, as the NZX still lists CBL as one of its 40 largest main board companies on its public website — with a market value of $747m — and the Reserve Bank has made no official media comment on CBL this year.
However, the Reserve Bank announced on June 27 last year that it was investigating CBL matters with the Serious Fraud Office and was co-operating with a Financial Markets Authority investigation.
No further substantive information on these investigations has been released in the past 10 months, even though the Reserve Bank believes that disclosure is the cornerstone of its regulation and supervisory activities.
In addition, governor Orr has been criticised for his focus on climate change and social issues while flip-flopping on the outlook for the domestic economy and interest rates.
This is understandable as Orr is a big talker and his verbosity has led him down paths where most central bankers would never go.
Orr would be best advised to stick to prepared speeches if he wants to avoid continued criticism from market participants, the media and banks that may be subject to his proposed new Reserve Bank capital requirements.
The TWG's secretarial role has been described as a joint venture between the Treasury and IRD. The IRD puts it this way: "The Government established the TWG in order to examine further improvements in the structure, fairness and balance of the tax system. We (IRD) have provided support to the TWG through the secretariat including robust policy and guidance alongside the Treasury."
In other words, the TWG secretariat was a cross-agency group of officials from the Treasury, IRD and other government entities.
The final TWG report showed clear signs of being written by a committee of public servants that didn't have a clear consensus. The report was not well written and didn't have a logical flow. It promoted an all-embracing capital gains tax regime but didn't have strong arguments to support this.
This demonstrates the problems of having the Treasury, IRD and other officials working together, whereas in the past the Treasury would have dominated policy strategy and written a much more coherent report.
This lack of consensus was also clear at the high-powered Working Group level as three of the 11 TWG members rejected the full recommendations, including former deputy commissioner of IRD Robin Oliver.
The final TWG report shot itself in the foot with the following comment: "The personal tax changes discussed in this report (a comprehensive capital gains tax regime) are likely to have a minor impact on income inequality. A material reduction in income inequality through the personal tax system would require broader income tax changes, including an increase in the top marginal rate."
The TWG report went on to state: "Such a change is beyond the scope of the Group's Terms of Reference".
Sir Michael Cullen's big Herald column swing at the IRD, and TWG member Robin Oliver's dissenting view, gives a strong hint that Cullen believes the IRD has let him down.
But Statistics NZ is also in the firing line, mainly because of its poor management of the 2018 Census.
Censuses should collect important information on wealth distribution but the TWG placed more emphasis on income distribution, partly because its terms of reference focused on this but also because New Zealand's wealth distribution statistics are inadequate.
The TWG made numerous recommendations regarding the establishment of a far better assessment of wealth distribution, including a question on wealth in the next Census and the need to "commission research on using a variety of data sources on capital income, including administrative data, to estimate the wealth of individuals".
This analysis would allow any future work on a capital gains tax to take into the account wealth distribution, as well as income distribution.
Early this week Statistics Minister James Shaw announced $10.4m in additional spending on the 2023 Census and $5.8m to complete the delayed work on the 2018 Census. Shaw said: "The previous National-led Government decided to shift the 2018 Census to a mostly online survey and, at the same time, directed Stats NZ to cut costs over two Census cycles".
An estimated 1.2 per cent fewer people participated in the 2018 census and about 500,000 individuals failed to answer all the questions.
The Reserve Bank, the Treasury, Statistics NZ and IRD have all been in the spotlight in recent months and throwing money at them isn't always the best solution. We clearly need better governance at the top of these government entities.
- Brian Gaynor is a director of Milford Asset Management.
The New Zealand sharemarket reached its highest level in a month.