Motions — Reserve Bank—Ratification of Funding Agreement

I move, That, pursuant to section 161(2) of the Reserve Bank of New Zealand Act 1989, the House ratify the funding agreement entered into by the Minister of Finance and the Governor of the Reserve Bank of New Zealand pursuant to section 159 of that Act on 26 May 2015 and presented to the House on 3 June 2015. The Reserve Bank’s operating expenditure is funded from its gross income and apportioned under a 5-year funding agreement. This funding agreement applies from 1 July 2015 to 30 June 2020. The Act provides that funding agreements apply for 5-year periods. The current agreement expires at the end of this month. The Reserve Bank makes a profit each year, and a dividend is expected to be paid to the Crown after allowing for the bank’s capital requirements. Since 2008 the Reserve Bank’s responsibilities have expanded in a number of areas, including prudential supervision of insurers and anti - money-laundering compliance, as well as developing its macro-prudential policy capabilities and tool kit. Having acquired and invested in these capabilities, a period of consolidation is planned for the next 5 years without compromising the quality of core outputs. The agreement reflects the bank’s recognition of the tight fiscal position.

This agreement sees the Reserve Bank’s core operating expenditure profile, which excludes the cost of issuing banknotes and coins, increase marginally from $49 million in 2014-15 to $49.6 million in 2015-16, then increase to $52.1 million by the final year of 2019-20. The increase in core operating expenditure over the 5 years is modest, averaging about 1 percent per year and below the target rate of inflation. Cost growth will be minimised as a result of cost-saving initiatives, including a restructuring of the workforce and operational expenditure that commenced in February of this year. There are limited new initiatives included in the agreement, and limited provision is made for contingencies to allow for unforeseeable priorities that are not of a scale to warrant seeking a revision to the funding agreement. The agreement includes funding for issuing banknotes and coins, including the provision of an additional $35 million in total to upgrade the country’s banknotes. This would ensure New Zealand’s banknotes keep up with technological advances in security features. The transparency costs associated with issuing banknotes and coins are classified separately from core operating expenses.

Over the course of the current agreement, the Reserve Bank has continued to strengthen its performance, developed a more integrated approach to policy, and enhanced its infrastructure and risk management. The Government expects it to deliver excellence in outcomes, while providing leadership across its entire range of activities. The governor understands the need to use the resources he has available, to best effect. The Reserve Bank faces a full agenda in the years ahead to help position the New Zealand economy for sustainable expansion while maintaining price and financial systems stability. Ratification of this new 5-year funding agreement is evidence of a commitment by Parliament that the Reserve Bank remains operationally independent and that it is equipped to fulfil the range of roles that Parliament has given it. I therefore ask for the House’s support in ratifying this new funding agreement.

I rise on behalf of the Labour Party to support the motion and to support the Reserve Bank getting the funding that it needs. More than ever, the Reserve Bank needs this funding because it is having to do the work that the Government is failing to do. It is having to effectively run housing policy in New Zealand today, because the Government has abrogated its responsibilities in that regard. Do not let it be said that this is just Opposition parties saying this. What comes before us today is an agreement between the Minister of Finance and the Governor of the Reserve Bank, but it has to be set in the context of recent announcements from the bank, from the governor himself, and from his two deputies around their urging for the Government to do something in the area of housing. It is unprecedented for the governor and his two deputies to launch wave after wave of urging of the Government to do something in housing, to do something about the supply of housing, and to do something about managing demand issues.

In speeches by deputy governors Grant Spencer and Dr John McDermott we have seen the bank taking on the role of housing policy adviser for the Government, which is an extraordinary position for the Reserve Bank to find itself in. When we look at what Grant Spencer said in his speech, he isolated the Government’s complete failure to manage the question of the supply of housing in Auckland. What we know from the Reserve Bank’s visits to the Finance and Expenditure Committee is that it recognises the 20,000 house shortfall in terms of what Auckland needs right now, and the failure of the Government to create the supply or support the creation of the supply to reach the target of 10,000 houses a year from there, currently reaching around 7,000 in terms of consent. The bank itself has clearly said to the Government: “You are not doing enough on housing supply, especially when it comes to Auckland.” But then the bank also went on to say that in terms of demand issues, it was now being forced to act because there was a Government that was unable to manage that demand. It had stuck its head in the sand.

I warmly support the idea that the Reserve Bank and the Minister of Finance have reached an agreement on the funding that it needs, because that is now needed more than ever if we are actually to have the Reserve Bank fulfil all of the roles that have been left to it. The Government has, effectively, outsourced housing policy to the Reserve Bank, because of the complete failure over 7 years to create a sustainable plan for housing in the Auckland region and for housing policy that affects the rest of New Zealand. Never let it be said that this is not an issue that affects people outside of Auckland. It does. We know that right around New Zealand today people are paying higher interest rates than they need to because of the Government’s failure to deal with the Auckland housing crisis. The Reserve Bank Governor is the person who has been telling us he would like to lower interest rates, but he is unable to do so, for fear of pouring petrol on the overheated Auckland housing market. That failure by the Government to deal with the Auckland housing crisis has impacts right across New Zealand, let alone if the Reserve Bank Governor’s diplomatic language of a sharp correction or, as most people would know it, the bursting of the Auckland housing bubble were to happen. The rest of New Zealand would then really understand just how little this Government has done and just how dangerous its inaction in the housing area has been.

The Reserve Bank has found itself in the position, as I say, of taking on extraordinary measures to tell New Zealanders that the Government is failing it on housing, and that more needs to be done. When the Reserve Bank Governor came to the Finance and Expenditure Committee after his last Financial Stability Report, he highlighted the three significant risks to New Zealand’s financial stability, two of which directly relate to this Government’s policy failures. The first of those, as I have said, is in housing. The second of those is in the risk to New Zealand of the massive decline in value from the dairy sector entering New Zealand. Although the Government is not directly responsible for the decline, what the Government is responsible for is the failure to diversify the economy in the face of what it knew to be a 5-year glut in global dairy prices. We find ourselves with the dairy auction from this week seeing a 54 percent drop in the value of those dairy prices over the last year and 28 percent since February. This is a sector that makes up a third of our exports, and the Government sits there on its hands and hopes for the best. It hopes it will be able to ride out the wave of commodity prices—

💬 Mr DEPUTY SPEAKER: Order! This motion is incredibly narrow. The member is wandering a long way away from it. Having read through it myself I am aware of that, and so will the member be. So he should stick to the motion.

Thank you, Mr Deputy Speaker. What I am doing is assessing whether or not the funding agreement struck between the Minister of Finance and the Reserve Bank Governor is sufficient in order to meet the tasks that the Reserve Bank has. As I have indicated to you, I do not believe that, given that the outsourcing of housing policy from the Government has gone to the Reserve Bank. It would certainly need a high level of money. I see that it is looking at around $49 million for this year, in the motion that we are debating. It is a legitimate question to ask—whether that is sufficient, when the Government has outsourced housing policy and has left New Zealand’s financial stability exposed by its failure to diversify the economy. So it is a legitimate question for this House to ask whether or not the Reserve Bank is being funded sufficiently to do its job. What I would suggest to you is that the longer the Government goes on failing to do its job, the more difficult it will get for the Reserve Bank to do the job that is required of it, with the funding that is put forward in today’s motion.

If I may move to another matter in this regard—the funding agreement is based around the idea of the policy targets agreement. That is specifically what one of the measures within the funding agreement is about, which is to allow the Reserve Bank to implement the policy targets agreement. I want to say that it is, in my belief, high time for a review of that policy targets agreement and high time for a review of monetary policy in general, which I do not believe is covered under the funding that is proposed in here today. We have reached a point where the policy targets agreement is all but meaningless. We heard in the Finance and Expenditure Committee that we are likely to have 6 years outside of the inflation band that is provided for in the policy targets agreement. We find ourselves asking what the point is of such an agreement if we are constantly outside of it. The Reserve Bank Governor himself has said to us that inflation expectations are simply not being met quarter after quarter, year after year. Questions have even been raised as to whether or not we are measuring the right things when it comes to inflation.

The question for this House is whether the Reserve Bank has the resources in order to be able to assess that. I think it should be funded for a comprehensive overview of monetary policy and of the policy targets agreement. On this side of the House we continue to believe that although we want independence for the bank provided for by this funding and although we want to ensure that the bank has a clear focus on price stability and on controlling inflation, if that is all we get the bank to do and it does not meet it, then we need to reassess what we are doing. So we want to see an overhaul of monetary policy to ensure that it works for all New Zealanders—that it works for exporters, that it ensures and helps to control the exchange rate, and that, yes, it controls inflation, but not at the expense of the health of the overall economy.

I want to raise one last matter that is relevant to me as a local MP, actually, and indeed to the operations of the Reserve Bank. This year or possibly early next year will mark the end of the operation of the Reserve Bank’s childcare centre—the creche that operates in the building at the beginning of The Terrace. It is with great regret, as the constituency MP, that I note that. This has been a service that has been well used by many MPs’ children and by the children of public servants, and unfortunately, because, actually, of some of the things in the funding agreement today around the tasks of the Reserve Bank, that is no longer possible. It is my understanding that an alternative premises may now have been located and I want to thank the Reserve Bank Governor for his allowance for some extra time for that childcare centre in those premises. But it is with regret that something that has served the people of this city so well, provided for by the Reserve Bank, does not now seem possible.

I want to conclude by saying that the Labour Party will vote for this funding agreement. We support a strong, independent Reserve Bank, but we cannot sit on the sidelines and let the Government push more and more work on to that bank by failing to have a housing policy that works, by failing to diversify the economy, and by not actually giving the Reserve Bank the kind of policy targets agreement that would enable a monetary policy that actually supports the exporters of New Zealand.

I rise on behalf of the Green Party to speak in favour of the Government motion No. 1, with regard to the funding agreement between the Reserve Bank and the Minister of Finance. The kinds of activities that are financed by this funding agreement are of two basic natures. There is price stability and there is financial stability. For the first probably almost 20 years of the operation of the Reserve Bank of New Zealand Act—so through the 1990s and up to the global financial crisis—the main focus of the debate really was around price stability. The issue was around the operation of monetary policy and the way the Reserve Bank operated monetary policy.

Essentially, the Reserve Bank had a single tool to achieve a single objective. So it had the official cash rate and interest rates attached to the official cash rate in order to achieve a single target—inflation—within certain bounds. The debate that occurred around the Reserve Bank’s activities—activities that are funded by this funding agreement—was really that by targeting inflation with a single tool, effectively what the Reserve Bank was doing was consistently crushing activity in the tradable sector and in the productive sector by driving up interest rates very high and by increasing the value of the New Zealand currency by having high interest rates or high official cash rates; that is, that the tradable or productive sector of the New Zealand economy was consistently affected in a negative way by this particular approach.

The question was whether it was it too narrow a target just to have inflation alone as the kind of activity funded by this agreement, or whether the New Zealand Reserve Bank should be like pretty much every other Reserve Bank in having more than one target—essentially, having an inflation target on the one hand and having some kind of other economic activity target on the other, whether it was external imbalances, whether it was employment, whether it was GDP output. So the debate was about whether we were really restricting ourselves by just having one target for the Reserve Bank—inflation.

The second question was whether the official cash rate was the right tool to tackle inflation coming out of particular sectors of the economy anyway. In particular, as we came through the early 2000s, when we had this massive housing bubble from 2002 to 2007, when the price of housing doubled in the space of less than 7 years, the question was whether the official cash rate was actually the right tool to deal with the inflation that was coming out of the housing sector, or whether we should have had tools that were specifically focused on asset inflation coming out in that sector.

A lot of this debate, then, was superseded by what happened during the global financial crisis because the second part of the Reserve Bank’s activities, which never received a lot of attention prior to that, of course, was financial stability. Post the global financial crisis and the collapse of the finance companies, and with a global focus on financial sector stability, that part of the Reserve Bank’s mandate has come to the fore.

What we have seen is a very creative response in many respects by the Reserve Bank, in which it has used its mandate under financial stability in order to try to tackle some of the asset bubble problems in the Auckland housing market. So we have seen the evolution of the loan-to-value ratios produced by the Reserve Bank, targeting that problem, and then more recently we have seen the restrictions on loans to investors going specifically into the Auckland housing market. So there have been some very interesting developments in terms of the activities of the Reserve Bank, things that 15 years ago—or even 10 years ago—no one would have guessed that the Reserve Bank was going to be doing and that were part of the debate.

The issue now is the crossover between the two kinds of activities of the Reserve Bank: the price stability activity and the financial sector stability activity, because by targeting the Auckland housing market and trying to restrict asset inflation in the Auckland housing market, it is actually also helping the other objective. It is targeting the Auckland housing market with the objective, so it says, of financial stability, because we do not want the Auckland housing market to get out of control, but it does also have other benefits in terms of price stability. So in the other kind of activity that the Reserve Bank is financed to do, which is around price stability, there is a synergistic kind of relationship by the targeting of the Auckland housing market in terms of inflation.

Except, of course, that what has happened now is inflation is just not really a problem at all. We are seeing extremely low levels of inflation, and so now it is really the targeting of the Auckland housing market by the Reserve Bank that has become one of its No. 1 focuses. In this respect, I think it is important to see that the Reserve Bank’s activities really need to be complementary with central government, and there needs to be a synergy between the Reserve Bank and the rest.

The Government, to give it its due, has introduced a capital gains tax. It is of a very limited nature, but it has some benefits in terms of controlling asset inflation in the Auckland housing market. Also, some of the restrictions around foreign buyers—the requirement to lodge a tax number—I think will help a little bit as well. That will assist the Reserve Bank in its job in trying to control the bubble in the Auckland housing market.

The Government says that it is increasing supply, and the Reserve Bank has spoken repeatedly about the need to increase supply. The thing is, when we had the Reserve Bank Governor in front of the Finance and Expenditure Committee recently, he made the point that if you really wanted to increase supply rapidly and affordably in Auckland, it had to be via apartments. This idea that we can get out of there and—

💬 David Seymour: That’s the point you made—it’s not the point he made.

It is the point I made, and the Reserve Bank Governor agreed with that point, and if you read the transcript you will see that that is actually on the record. The way to actually increase housing supply quickly in Auckland is through apartments, not through sprawl. In fact, you cannot beat the problem through sprawl; there is just no way that you can increase supply fast enough. So if you are actually going to deal with that supply problem and support the Reserve Bank in its activities—the Reserve Bank activities trying to control the Auckland housing bubble, as is financed by this agreement that we are discussing today—then you need to deal with that problem. Compact urban form, not sprawl, is going to be much more helpful in terms of dealing with the Auckland housing problem.

There is also the issue of foreign buyers, which was discussed by the Reserve Bank Governor, and we discussed it in the Finance and Expenditure Committee with the Reserve Bank Governor on many occasions. The issue is, we do not really know the exact level of offshore demand for Auckland housing, and there is a lot of conjecture as to what exactly it is. We do know it is very significant, and in other markets similar to the Auckland housing market in Sydney, Melbourne, and Toronto we are seeing a very significant impact from offshore buyers—

💬 Mr DEPUTY SPEAKER: Order! I just have to raise with the member the point I made with the previous speaker, and that is that the specific motion ratifies the Reserve Bank’s funding agreement between the Minister and the governor. So he needs to tailor his address in relation to that funding arrangement, rather than the other mechanisms he has spoken about or appearances before select committees.

So part of what this agreement finances is the operations of the Reserve Bank, including paying the Reserve Bank Governor. And the Reserve Bank Governor, as part of his job, appears in front of the Finance and Expenditure Committee on a regular basis, and as part of his job has made many comments about foreign buyers of housing and has debated with pretty much everyone—

💬 Mr DEPUTY SPEAKER: And the funding—

—to try to figure out what the issue is. The funding agreement funds the Reserve Bank to do all of these activities. It could not do any of these activities were it not for this motion that we are debating right now. So I am discussing the activities financed by this motion that Parliament is currently debating. That is around the Reserve Bank’s interventions on financial stability. Part of that is about trying to control the Auckland housing market. We know that the foreign buyers are a big problem, because there may well be unlimited offshore demand for housing in Auckland. So what on earth do you do about that? Can you build your way out of that on the supply side? It is not at all clear that you can.

One of the issues that the Reserve Bank and all of us are trying to get our heads around is whether you can control the housing asset bubble in Auckland simply by building more urban sprawl. I think the answer is no. I think this is one of the issues that the Reserve Bank Governor has consistently brought up, because financial stability is part of the mandate of the Reserve Bank, as is paid for by this motion right in front of the House today. That is how it works. That is part of the history of the debate—how we have ended up now, and the two components of the Reserve Bank’s activities, which are price stability and financial stability. Price stability was the big focus of the early part of the history after the Reserve Bank of New Zealand Act got passed, and then financial stability has been the real focus now.

But we really do need the Government to help the Reserve Bank in what it is trying to achieve in the Auckland housing market. At the moment it is not getting as much help as it really needs and is having to carry a lot of the load, using the money that we are talking about in this motion right now, in developing policy in order to control housing price inflation coming out of Auckland. We need the Government to help out more.

For the benefit of members, I will just give a further indication that debate should address the level of funding contemplated in the agreement and its adequacy to support the bank’s activities, rather than the actual activities and their wider impact on the economy. I offer you that in the interest of being an efficient Chair.

Thank you, Mr Deputy Speaker. I will try to remain within the confines, as you have set out. However, this is a once-in-a 5-year opportunity to put on record the views of the New Zealand First Party with regard to that relationship and the funding as laid out in this agreement. So I will move on, and please—

💬 Hon Paul Goldsmith: See how you go.

Yes, I will see how I go.

💬 Mr DEPUTY SPEAKER: I will just remind you that this debate may not provide that opportunity, because it is to address the matters that I have just outlined. So we will listen with interest.

Thank you. Most New Zealanders will not actually know much about the Reserve Bank, aside from what they hear every several months about setting the official cash rate and interest rates. With regard to the funding, we actually used to print the New Zealand money in Whangarei, but in 1990 that work was sent offshore across the Tasman and jobs were lost in New Zealand. It is perhaps emblematic of the two-tier economy that seems to have developed of late.

The Reserve Bank of New Zealand Act was passed in 1989, which actually seems like a lifetime ago. Perhaps it is for Mr Seymour. My point is that it was hailed as revolutionary and world-leading at the time. However, times have changed and given the funding that this bill seeks to endow the Reserve Bank with, we must, in our opinion, ask the question about the relationship that New Zealand has with the rest of the world. What is happening out there?

It would appear that having set what was good legislation for its time, the Reserve Bank and this Government have kind of got stuck in their ways and after 26 years are not willing to change their minds on how best to discuss an accord or go beyond the bounds of the agreements that are being debated today.

Consider the staid nature of this agreement. Consider the fact that, as spoken about today inside this House and outside, there are actually discussions about change and the need for change. For example, I refer to the comments of Michael Reddell, ably reported by Hamish Rutherford, who described the powers of our Reserve Bank Governor as one of the most powerful on Earth. Mr Reddell ought to know, as he was the special economics adviser at the Reserve Bank until April. He describes the governor’s power to make the final call on both interest rate decisions and financial stability as “outdated, risky, and out of step internationally”. This motion is about our governor’s salary and the relationship that he has with this Minister of Finance.

Since Mr Peters was Treasurer, the Governor of the Reserve Bank has turned into some kind of monetary policy demigod. In other countries, such power is not concentrated as it is here in New Zealand, and these are not the words of an embittered former employee. Treasury has even lobbied for change itself. It has seen the inherent flaws in investing such vast powers in one individual. In April the deputy governor, Grant Spencer, called for fresh consideration of possible policy measures to address the tax-preferred status of housing investment. The nominally independent Reserve Bank—if you would picture this—walked across the street, into the Beehive, took the lift to level seven, and essentially said to the finance Minister: “Take a walk. We are taking over.”

Although my party has issues with this Government’s economic policies, it is elected, whereas Messrs Wheeler and Spencer most definitely are not, although, to be fair, I can feel their frustration as this Government’s inaction, particularly in the housing market, and it has been very frustrating for all. It is engaging in public policy by stretching the definition of financial stability so far that you could bungy jump off the top of the building itself. What gives the Reserve Bank Governor a demigod-like power to say whatever he or she wants and to challenge an elected power? I put it to you: it is the Reserve Bank of New Zealand Act and the negotiations, this agreement, that we are discussing today. This agreement is enabling these powers, and the relationship between the Minister and the governor has not been clarified in this agreement.

New Zealand First is not advocating for something along the lines of creating a Bank of England - type committee. Unsurprisingly, New Zealand First actually put a solution to the House, when the Rt Hon Winston Peters put a member’s bill before the House. I will talk to some of the reasons for it. In November 2013, before sanctions in Europe cut heavily into our export commodities and before regional neglect was so blatantly exposed by the Northland by-election, the Rt Hon Winston Peters put his member’s bill to amend the Reserve Bank of New Zealand Act in front of this House twice and it was voted down both times.

💬 Mr DEPUTY SPEAKER: That needs to be applied to the motion about funding for the Reserve Bank.

I endeavour to do so, Mr Deputy Speaker. If you will forgive me, I am talking about policy as it relates to what has been allowed through this funding document.

The policy initiative could deliver so much in terms of the benefits to the New Zealand economy. The amendments put forward to the House were coined in such a way that the changes were needed so much because there is no more important a piece of legislation that would benefit the rank and file provincial voters who hitherto have been voting for the National Party.

The intention of this motion remains clear and compelling. The Reserve Bank Governor needs the flexibility to promote growth, exports, and employment, as well as price stability. The reasons why an amended Act is urgently needed still remain. New Zealand is still not paying its way, proving that some things never change. We still get the National Party line that everything is perfect and that it has got a plan that is working. It is clearly not, when departments such as this go to war and former employees call for decisive actions to counter current operational activity.

We are not paying our way in the world. Instead, imports are up and exports are down. The Budget is not a tax and spend Budget; it is a borrow and spend Budget, with tens of billions of dollars of extra debt written off balance sheets through student loans, State enterprise debt, and local government debt. The main factor underlying the current account deficit is a grossly overvalued dollar, underpinned by a borrow and spend Government.

We need to consider that the funding agreement between the Reserve Bank and this Government is insufficient in and of itself to provide New Zealanders with a good and positive outlook. This agreement does nothing to hold this Government to account. For example, look at rural towns around New Zealand and our small rural cities—the provincial cities—and see how many shops are closed and how much there is a lack of action. National members tell us that we have got growth. Yes, but when we talk about the Reserve Bank and what growth is, we have to ask ourselves what the quality of the growth is and what is happening to the people who could save this country.

This agreement serves a functional purpose. It is insufficient in and of itself. I do feel restrained in what I can say in the House today. This agreement does give rise to policy decisions and actions taken by the Reserve Bank—which I would have liked to elucidate on in more depth—but there is much more that is required. Thank you.

I rise on behalf of the ACT Party in support of this motion. An honourable former member of this House once told me to come and listen through the debate so that I can respond to earlier speakers. I have to say I feel that Fletcher Tabuteau has let me down in that regard. But, in all seriousness, we should pay tribute to him for standing up and making a contribution to what is a very serious public policy debate that we do get to address only once every 5 years. You will forgive me, Mr Deputy Speaker, if I at the very least respond to some of the remarks made by other members, whether or not you were attempting to rein them in from going off topic at the time—

💬 Mr DEPUTY SPEAKER: Order! It would be unfair to leave the member without me interjecting, bearing in mind I interjected on everybody else. They are not the rules of the Speaker; they are the rules of the House. It is a very narrow motion. If the member wants to debate the issues, such as the other members have, there is the general debate to do that in and there are other opportunities to be able to do that. This particular debate is around a motion about the funding for the next 5 years. That is all it is.

Understood.

💬 Mr DEPUTY SPEAKER: I have not yet sat a member down; other Speakers have.

When we look at the agreement, it is interesting to note that the annual funding allowance rises by approximately 0.75 percent each year—less than the current target band for the Reserve Bank. What an incentive that is for the efficient running of the bank. I think that when the House debates a motion as to whether or not we should be funding the bank and at what level, it is worth paying tribute to the institution and its governing legislation. We have heard some criticism of the way that it operates. I think we should be clear that, around the world, tributes have been paid to our model again and again. The Bank of Canada is modelled upon our bank. The first Reserve Bank Governor to operate under this Act, Don Brash, was called the central banker of the year by The Economist magazine. He was also noted at length in the autobiography of Milton Friedman, who won his Nobel Prize for his work on monetary policy. So although the world admires so much of this bank, whose funding we are debating today, there is still some confusion about what it can achieve back home.

In response to earlier calls that perhaps its funding should be higher so it could do more, I would say that there are fundamental limits to what it can achieve. For example, there has been confusion around whether or not the Reserve Bank should have a mandate of trying to control the exchange rate inside or outside current legislation. I think it is important that the House is clear on our understanding that it is not possible—by printing money faster or slower—to change the real exchange rate. The Reserve Bank might well change the nominal exchange rate, but domestic inflation will mean that that nominal exchange rate change is meaningless to those who would purchase New Zealand goods offshore.

There are those who say that the Reserve Bank should have more tools and that perhaps that would be a cause for greater funding, as raised by other members. However, we know that economic stimulus is not something that central banks can do in the long term. Indeed, monetary policy can achieve but one objective, and that is price stability and certainty for people who wish to save and invest in a country such as New Zealand. That is an objective that is well worth funding thoroughly and something that I completely support today.

Central banks that do have divergent objectives—or more tools, as some members have mentioned—create terrible, perverse incentives, and, actually, it would be bad expenditure to give the bank more money to do such things because they lead to broader economic instability. For example, the Federal Reserve, the central bank of the United States, has multiple and conflicting objectives, such as controlling employment. By reducing the price of cash in the early 2000s it has increased the value of long-term durable assets—i.e., houses—and that led to a mortgage bubble that sunk the world into global turmoil from which we are still recovering.

It would not be wise to give the Reserve Bank additional objectives other than price stability and financial stability. None the less, as Grant Robertson noted, it is being forced into a position where it feels it must act on the Auckland housing market. It was the contention of the member that, actually, the bank should be funded at a greater rate in order that it should play that role. I would respond to the member by saying that in actual fact when you are in a hole, you should stop digging. We clearly have a regulatory failure. We have evidence from around the world that it is the price elasticity of supply of housing in markets such as Auckland—those that take on prescriptive and constraining land use regulation—that led to inelastic supply, speculative investment, and a redirection of resources out of the other sectors of the economy, for which the Reserve Bank would prefer, I suspect, to lower the interest rate, and into the housing market.

So rather than going further and further down the track of having a Reserve Bank funded to use “more tools” to intervene further and faster into the housing market, we should be taking up the cudgel and fixing the regulatory environment, and therefore the price elasticity of supply in that market. Was it not ironic that Russel Norman decided to go into the issue of how cities should grow? He said that the only way to get supply was to build more apartments. I feel it should be put on record in the House that he misrepresented the governor, and he also misrepresented his own party’s position, because—I will finish this thought in two seconds—only weeks earlier one of his own colleagues had said that an expansion of the city at the fringes would be so rapid in its effect on supply that it would collapse the Auckland house price market.

It also was referenced that perhaps the Reserve Bank, with more tools and greater funding, could do something to help with diversifying the economy, which would help the tradable sector and boost exports. I think that when we fund this bank we should consider the effects of our current monetary policy settings in our current bank on what exactly has been the history of the tradable sector in New Zealand. From 1988—the year before the current Reserve Bank of New Zealand Act—right through to 1999, and resuming from 2001 through to 2004, the merchandise exports of goods and services exceeded imports for New Zealand.

Anybody who says that the Reserve Bank should be playing in that particular sandpit is not cognisant of the facts. But what happened next? Again, we could either be funding the Reserve Bank to use more tools and do more things, or we could monitor other aspects of our behaviour when we prioritise funding. What happened from 2005 on was an explosion of Government expenditure, which put the brakes on the tradable sector, put pressure on the Reserve Bank, and, ultimately, put us into a tradable goods deficit in New Zealand.

💬 Todd Barclay: A lolly scramble.

It was—it was very much a lolly scramble.

💬 Mr DEPUTY SPEAKER: Back to the motion.

The motion is about funding a Reserve Bank with very robust policy settings—a bank that is facing some other external challenges that would be better addressed through other policy settings. With that in mind, I would like to support this motion as one that funds the Reserve Bank for its proper purpose, and I refute the idea that the Reserve Bank should be pursuing multiple and divergent objectives with greater funding, because those of us who have studied the history of monetary policy in the New Zealand economy know that that would be a great disservice to all New Zealanders. Thank you.

Motion agreed to.