There’s almost no issue on which outgoing Labour MP and former Finance Minister Grant Robertson would find agreement with former National and Act leader Don Brash.
But when Robertson was asked during his exit interview with the Herald whether he thought it was worth considering Brash’s idea of moving away from the blunt Official Cash Rate (OCR) as the Reserve Bank’s primary tool for controlling interest rates and use something else instead, he said it was worth looking at at least.
Brash, who was one of New Zealand’s most successful Reserve Bank governors, has been talking about the idea since at least 2008 and thinks the Reserve Bank should look at using something like raising and lowering fuel tax to control the amount of spending in the economy, and thereby bring inflation under control.
He believed it would lead to quicker and more equitable outcomes, unlike interest rates, which tend to punish people who have only recently bought homes.
“For those who have recently bought a home with a very large mortgage, the effect is very severe. For those who have a debt-free home, and with savings in the bank, the effect is also substantial - but beneficial,” Brash told the Herald last year.
Former Speaker Trevor Mallard also thinks a move away from the OCR might be a good idea, although he favours giving the Reserve Bank the ability to ratchet up or lower KiwiSaver contributions as a method of injecting or withdrawing money from the economy.
For decades, fiscal and monetary policy have coexisted under a church and state-like separation, but the pandemic forced Robertson and Reserve Bank governor Adrian Orr to rewrite the rule book, maintaining the separation most areas, while muddying it in others.
Robertson’s ultimate undoing as finance minister, and the undoing of his Government, was in many ways a victim of that monetary response, despite his lack of control over it.
“I definitely think monetary policy, writ large, is under challenge.
“The way we measure inflation, whether the OCR is a good [tool], I think these are legitimate discussions to have,” Robertson said, but said he would not “pretend to be the one who has all the wisdom” on what tool to use.
Robertson said some in the world of monetary policy took an inflexible and doctrinaire in their approaches to the discipline, immune to new ideas and thinking. He appears slightly burnt by the reaction to his decision as Finance Minister to give the Reserve Bank a dual mandate to control not just CPI inflation, but achieve maximum sustainable employment (since repealed) - a fairly conventional change which is common in other jurisdictions including the United States.
“I personally came into the role of finance spokesperson for the Labour Party really wanting to learn about monetary policy, and I did, and we put up the changes which I think I still think were good ones.
“This is most definitely not about Adrian [Orr] because he’s the opposite of this in many ways, but there are some in the world of monetary policy who sort of see it as a religious tract that you can’t change and actually we all have to have open minds. I think Adrian does, and I think others in the monetary policy world do,” he said.
“So I do think there is room to look and say, do we have the right tools?” Robertson said, adding that this would include the OCR.
He said the Reserve Bank was often slow to be reformed by politicians, even when reform was necessary. Monetary policy operated on long cycles, while politics tended to be short term.
As Finance Minister, Robertson embarked on a series of reforms to the Reserve Bank’s organisational and decision making structure, moving to a committee-based system for setting the cash rate. This was the first time the Act had had a “thorough” review since it was passed in 1989, Robertson’s final year of high school.
“I think we should be looking more often at some of the fundamental principles and making sure if we agree on those, do we have the tools to meet them? Monetary policy should not be different in that respect than any other policy,” Robertson said.
The second half of Robertson’s time as Finance Minister will be characterised, in large part, by the fiscal and monetary response to Covid-19.
The fiscal side, involving taxing, borrowing and spending, Robertson is directly responsible for. The monetary side is more complicated. With the OCR at an historic low of 1 per cent on the eve of the pandemic, the Reserve Bank reached for unconventional tools to stimulate the economy and fight deflation.
One of those tools, printing more than $50 billion of digital money and buying injecting it into the economy by buying Government debt from banks and financial institutions. The tool worked. The economy bounced back and employment stayed low. But it had massive consequences, particularly in the housing market.
With the Bank doing everything it could to keep interest rates low, asset values, particularly house prices, shot up. REINZ’s measure of New Zealand’s median house price was $612,000 in January 2020. It climbed to $925,000 by November 2021, before finally falling.
It was devastating for Labour, and Robertson, who in 2017 were elected on a platform to improve housing affordability and tackle poverty, which in in large part was a function of unaffordable house prices.
In his first term, Robertson had been untouchable from the right. He spent more on health and welfare, but never enough to look profligate. He was the worthy inheritor of Sir Michael Cullen’s “Dr No” attitude to Budget bids. The strongest critique came from the left, with the Greens arguing for more borrowing and spending, slowly unshackling themselves from the fairly conservative Budget Responsibility Rules they’d jointly agreed with Labour. Robertson himself is receptive to that criticism, and while he still agrees with the idea of the rules, he told the Herald the debt figure set in them (net core Crown debt to be 20 per cent of GDP) was too low and did not leave enough room for future investment.
Monetary policy was different. The response during the pandemic energised critics on the right and the left. Nicola Willis, appointed National’s finance spokeswoman in 2022, joined Green revenue spokeswoman Chlöe Swarbrick in launching devastating attacks on the Government’s economic response to the pandemic.
Robertson had gone into 2020 as one of Labour’s most marketable ministers.
Detailed polling, which Labour was happy to share, showed he was liked and trusted by the public at large. He fronted election ads in which he told voters National was no longer the party of Key and English. That all changed in 2021. As the painful side effects of the economic response began to be felt in higher house prices and the first hints of the inflation crisis, Labour’s political fortunes declined. After a fairly flawless response in 2020, opposition parties had finally spotted a chink in Labour’s armour: housing and later inflation.
Robertson, the face of that economic success, became the target of those attacks, and the public face of those failures.
Looking back, does he think he made the right call when the Reserve Bank asked Robertson for the Crown to indemnify the purchase of up to $30 billion worth of bonds in March 2020?
Robertson said the conversations around the indemnity were “iterative”.
“I remember the conversations that began March-April, about real concerns about global markets, about the bond markets and about how we were going to get through,” Robertson said.
Papers went “back and forth” between the Beehive and the Bank on what these new tools would be, and how they would be used.
“It’s an interesting position because monetary policy is set independently, but the tools are agreed to by the Government and so there’s quite an interesting kind of creative tension in that.”
Robertson said the conversation involved what the tools would be, giving the tools to the bank, and then asking, “how are you then, Adrian Orr and your team going to use those tools?” All of this in the space of a few weeks, although the Bank had been prepping the tools for some time beforehand.
Early in 2020, before Covid arrived, Treasury and the Reserve Bank warned Robertson that should these tools ever be used, there would be uncomfortable distributional side effects, like inflating the price of assets, making the owners of those assets very wealthy, at the expense of non-owners.
Did Robertson ever consider using fiscal tools, like new taxes to blunt the edge of that boom (in 2021, the Government extended the bright line test and began phasing out interest deductions for landlords)?
“This is where the interaction between fiscal and monetary policy and the independence of monetary policy occurs,” Robertson said.
“We certainly talked about lots of different ways that have been done, but ultimately the Reserve Bank is the one that makes the decisions about which tools it uses,” he said.
Looking back, Robertson has not given too much thought into tools that might have blunted the harsher edges of that monetary response, but he does have a couple of ideas.
“In some other countries around the world, you have... particular class asset classes perhaps weren’t available with particular types of lending... is something that could be looked at,” Robertson said.
That could mean a monetary response directed less at the housing market, and more at other parts of the economy. Of course, for that to be effective New Zealand banks and consumers would have to rethink the sacrosanct role of housing in the economy.
After decades in Wellington, Robertson is on his way south, to Dunedin, where he will become the Vice-Chancellor of the University of Otago.
He told the Herald he has never burnt a couch, despite spending his youth in Dunedin, and that he doesn’t plan to start burning them now.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
Expectations tempered around return to surplus in 2027/28.