Motions — Reserve Bank of New Zealand—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 16 June 2020 and presented to the House on 24 June 2020.

Under the Reserve Bank of New Zealand Act, the Minister of Finance and the Governor of the Reserve Bank enter into a five-year funding agreement. This is an important instrument for maintaining the bank’s operational autonomy, in that it provides multi-year funding, and specifies—

💬 DEPUTY SPEAKER: Order! Order! Quiet for the Minister, please.

It’s a very important matter, Madam Speaker; that’s right. It provides multi-year funding—[Interruption]—you’re already short enough—and specifies the amount of revenue the bank may retain to fund its operations. The new funding agreement will apply from 1 July 2020 to 30 June 2025. The bank’s funding proposal, which underpins this agreement, focuses on addressing critical risks to the bank and the financial system. The bank considers it necessary to respond to areas of past under-investment and address critical risks to its ability to deliver its mandate. Furthermore, the scale of the downturn from COVID-19 means it will be more important than ever that the bank is sufficiently resourced to undertake the full range of activities required of it.

The new funding agreement will see the bank’s core operating expenditure profile—which excludes the cost of issuing bank notes and coins—increased from $69 million in 2019-20 to $111 million in 2021, and $118 million in the final year of 2024-25. The bulk of this increased spending will focus on expanding and enhancing the bank’s core activities, particularly investing in financial, supervisory, and enforcement capability, as recommended by the International Monetary Fund’s 2017 financial sector assessment programme review. Spending will also be directed towards the bank’s day to day operations and investing in the upkeep of its assets. This includes modernising the technology infrastructure and keeping security architecture up to date, designing a suitable vaulting and distribution system for cash, and expanding the bank’s reach to stakeholders in Auckland. The spending will also cover preparations for changes to the bank’s governing legislation. The bank’s future legislation will bring a number of changes to how it operates and significantly enhance the bank’s policy frameworks and governance settings.

The bank is a full-service central bank with a wide range of responsibilities, such as prudential supervision, monetary policy, lender of last resort and liquidity, and liquidity management. Whilst comparisons are not like for like, benchmarking against other central banks the bank’s expenses are comparatively low. Expenditure under the new funding agreement would continue to be relatively low compared to other central banks. Compared to its 2019-20 budgeted baseline of $80 million, the average annual uplift of $46 million in operating expenses is split across three areas. For people, $20.7 million: fulltime-equivalent (FTE) numbers are planned to increase from 296 FTE in 2018-19 to 468 FTE in 2024-25. The majority of these staff will be assigned to improving our regulatory policy settings, undertaking additional research, and providing more intensive supervision and enhanced enforcement capabilities of regulated entities, as well as enhancing the bank’s information technology capabilities. The second area is operational expenditure of $17.9 million. Investment focuses on modernising the bank’s technological infrastructure and investment into banking services such as settlement systems and cash systems. And the third area is $7.4 million on assets. This is driven by depreciation of financial stability data system investments and depreciation of property and security system investments.

The bank’s revenues typically exceed its expenses, with any excess revenue paid back to the Crown through an annual dividend after allowing for the bank’s capital requirements. To maintain the effectiveness of the funding agreement framework, I have agreed to the bank’s proposal to remove certain operating expenses from the scope of the funding agreement which are difficult to predict or commercial in nature. Excluding these activities is not expected to materially impact the operating expense numbers above. A statement of expenditure under each of these items will be reported in the bank’s annual report. It’s worth noting that Treasury is supportive of the substantial uplift in the bank’s resourcing, and particularly of the bank’s intent to increase its financial supervisory capability. In assessing the bank’s proposal, the advice given to me by Treasury noted that capacity constraints across the public system exist. The bank has assured me its plans are feasible, that it will draw on a number of recruitment strategies to support its FTE growth, and that it will take an all-of-Government approach to its IT investment strategy.

The bank’s actions can and do materially impact the prosperity and wellbeing of New Zealand. The Government expects the Reserve Bank to use the resources available to the best possible effect and deliver excellent outcomes when exercising its functions, taking into account their statutory objectives and the Government’s broader economic objectives. Ratification of this funding agreement will ensure the bank continues to remain operationally independent while also equipping the bank with the resources it needs to maintain its objectives of price stability, maximum sustainable employment, and financial stability. I therefore ask for the House’s support in ratifying this funding agreement.

The National Party will support this motion. We do so, however, with some misgivings, which I’ll come to later. But we certainly need a strong Reserve Bank in this country in order to perform the important roles that it has around price stability and, latterly, its focus on employment, and certainly the stability of the financial system at a time when the economy is weak and where we entered the COVID recession already in recession with a slowing economy. We now face an enormous increase in our public debt and the need for households in New Zealand to pay back that debt over the next few years—an extra $80,000 per household of debt has been signalled in Budget 2020. So we have a critical period in the economic life of our country coming up, and it certainly requires good economic management from the elected officials—and we’ll be outlining our case for that over the next couple of months—but it also requires strong financial institutions, and the Reserve Bank is one of those. So it should be appropriately funded, as it has here.

One area of concern, though, is it is a very substantial increase in spending. In the 2018-2019 year, the bank spent $76 million. So it’s increasing it 50 percent, up to $115 million as outlined in this agreement. A 50 percent increase in your spending is fairly substantial, and if that was the general pattern across the public sector we would be in a terrible financial situation. It worries me somewhat that the Minister of Finance has been so ready to agree to the scale of this increase, and it certainly behoves the Governor of the Reserve Bank to justify that carefully. We’ve seen significant increases in staff and significant increases in the social media team from five to 14. We’ve seen a substantial increase in communications, now up to 17; and the overall staff numbers are going from 250 up to 468—a colossal increase in staff numbers in the Reserve Bank. We’d like to hope that all of those are justified, but we worry that there might be an element of elephantiasis emerging.

Certainly, we would normally expect the Reserve Bank to lead by example in the public sector. If we go back to the earlier period, say, when Bill English drew up this agreement from 2010 to 2005, what was envisaged was a 1 percent increase per year. Now we’re in an era of 50 percent increases. Well, of course, what does it matter? Money grows on trees, as some people would think. But it doesn’t actually grow on trees. So, before you increase things by 50 percent, you have to have very good justifications.

Now, there is some justification in the extended remit of the bank and the further supervisory work that it needs to do. And that, again, is something that needs to be carefully watched. I mean, every year the IMF and other people will say we need to do X, Y, and Z. But it is a concern of ours, on this side of the House, that the greatest growth industry in this country in recent years has not been exports, has not been food produce, it’s not been rockets or anything like that, it’s actually been compliance. Compliance has been the greatest growth industry in this economy for a long period of time. The Reserve Bank has been very much at the forefront of that. Some of that is justified, but some of it needs to be questioned because, ultimately, it’s consumers that pay for all the compliance that is added right across the banking sector in those areas regulated. Some of it absolutely is justified, but we’d be expecting the Reserve Bank to be watching that very closely.

What we’ve also seen is the extension of the bank’s work. The Reserve Bank of New Zealand Act gave the bank enormous powers in terms of it being independent to conduct monetary policy. So it’s unusual and unique across the public sector in that it’s given a bunch of money and it is independent and doesn’t answer to Ministers in the normal way. The deal was that politicians didn’t have a control over monetary policy in the lead-up to elections, which we were worried about. There were some examples where the temptation was for Ministers of Finance to reduce interest rates, to have a short-term boom in the year before the election to get through. Now we have a similar concern around a Minister of Finance having $20 billion in a potential slush fund in an election period—that’s equally of concern. But in terms of interest rates, that’s why we had an independent Reserve Bank.

Now, the question is, if the mandate starts to expand, it’s expanded into employment under this law to focus on not just price stability but also to influence employment—that’s OK. But it does seem to be extending further and further into climate change. So this bank has substantially increased its focus on climate change and a bunch of other issues that haven’t traditionally been regarded as the core preserve of a Reserve Bank, which has been focused on price stability. I suppose the warning or the concern that I’d like to express is that the further a reserve bank goes away from a very narrow focus on price stability, the more it will start to draw into question the absoluteness of its independence as it goes into more areas where there’s much more dispute. If you talk about climate change policy, for example, there is much more dispute—the Greens will have a very strong view, we’ll have a strong view, and that’s fine. That’s appropriate. That’s democratic. But it’s not necessarily the appropriate preserve of an independent institution such as the Reserve Bank. So I’d signal that warning, and some of the extra funds that have been consumed by the Reserve Bank relate to these areas, such as climate change, which are not necessarily what people would ordinarily associate with the focus of the Reserve Bank. So I’d ask them to bear that in mind and also to focus on the expansion of the overall workforce in the bank.

So look, I’d be very keen to know and will be pressing the Reserve Bank Governor at the next opportunity about what percentage of the increased budget is necessary in terms of the price stability objective, what percentage of it’s necessary in terms of the financial regulation objective, and then what percentage relates to climate change and other activities that are not core activities of the bank in the narrow definition that I articulated earlier.

Then, in terms of the $60 billion that the Reserve Bank—of course, the topical element is that it’s moved into this quantitative easing. I would be supportive of extra resources being in place for the bank to do rigorous and proper analysis and to release that. There’s a lot of material, if you read the material from the bank—a huge amount of material about openness and transparency and the way that they go about doing business. It is important that we have real clarity around their understanding of the costs and benefits and risks of the $60 billion of quantitative easing that it’s carrying out at the moment and the bonds that it’s buying and what the timeline is and what the process is for returning its balance to pre-COVID levels. What is the plan to get it back? Now, if they put the $60 billion into the system, what is the exact plan to unwind that? If you look around the world, it’s not obvious how that works very effectively. And are there any lines in the sand that the bank won’t cross in terms of direct funding of Government debt? At the moment, it’s purchasing debt on the secondary markets, and there’s plenty of international activity of that sort. But does it cross the line further into direct funding of Government spending or, indeed, private sector spending? That is a widespread concern.

All in all, National Party supports this motion. We support a strong and independent Reserve Bank. We are worried that the country is entering a time of economic crisis. We are not confident in the overall political direction that we’re seeing. We’re seeing a Government which seems to think the economic plan is to spend whatever it takes to get its polling numbers up to the election and spending whatever it takes to get to the election and then sending the bill in terms of higher taxes. They may not necessarily agree with the wealth taxes proposed by the Greens, but we’ll wait and see. What we need is a Government that has a focus on growing the economy and enabling private sector investment, which will be the core to getting New Zealand out of the economic jam that we’re in. That party hasn’t delivered too much on that side, but the National Party will in the next few days. So thank you, Madam Speaker.

Thank you, Madam Speaker. Congratulations to Paul Goldsmith, the member opposite, on managing to politicise a motion on the Reserve Bank. I just want to make the comment that he made observations about his own skill set, and I challenge the member to put up his CV to the New Zealand electorate, because I will be putting up mine, and I would rate my CV compared to that member’s, who wrote a couple of books that we now use as bookends.

Madam Speaker, I just wanted to talk to one other point that the member made before I get on to the substantive nature of this motion. He spoke about the compliance costs. I just want it noted that the National Party called for a bonfire of compliance, but in the nine years that they were in Government, the quantity of compliance put on business and the cost of that compliance was historically unprecedented. Business have had to deal with that, and this Government is working to make sure that we can bring that down—and I thank you for your patience in letting me make those points, Madam Speaker.

Just by way of background to this motion, what we’re here debating in the House is sections 159 to 161 of the Reserve Bank of New Zealand Act of 1989, in which the Reserve Bank Governor and the Minister of Finance are obliged to come to agreement with one another on the funding of the operations and sundry of the Reserve Bank itself. Obviously, with today being the day, it was five years since this was last done, because that is the formality of the requirement under the legislation, and so the agreements have been arrived at, but we are now required as a House to ratify those agreements between those two persons.

So what we are trying to do here is ratify a 2020-25 bid by the Reserve Bank Governor, as it were, and it does have to be noted that one point that the member opposite made was a valid one: this is a significant increase in funding for the Reserve Bank—this is a lot of money. He did start and finish his speech by noting that he and his party will support the bill, but he rightly pointed this part out, and there is an element of agreement there—this is nearly a 50 percent increase. But I would note, and I’m sure the member opposite read it, maybe, when he wrote his speech, that, actually, the obligations of the Reserve Bank to actually—well, let me put it another way. The Reserve Bank does not receive appropriations through the Government’s budgetary process, so the bank’s revenue typically exceeds its expenses. So what we’re asking for today is for the bank to be able to retain more of the revenue they receive in order to fund those operations.

The Reserve Bank funding proposal highlighted that it is an efficient and relatively low-cost central bank. I think even the members opposite will acknowledge that historically, we in New Zealand have had a strong and stable financial system, and that is very much to do with the good performance of the Reserve Bank over its time. Actually, the Minister of Finance did make this point: it’s quite fair to compare the cost of the New Zealand Reserve Bank to overseas comparative banks, and one of the points that needs to be repeated for the members and the New Zealand public is that the Reserve Bank of New Zealand has actually a much larger mandate than most of the other reserve banks or central banks that we would compare ourselves to—for example, the UK, Japan, and the US. We here take full responsibility through the Reserve Bank for supervising our retail banks and insurance providers, for example.

What we are trying to do, or what the Reserve Bank Governor is trying to do and what this Government supports, is to make sure that the New Zealand public can have confidence in its operations, so we are undertaking an incredibly focused increase on protecting the wellbeing of Kiwis by stepping up the oversight of the financial sector. The previous member noted that the IMF noted that this particular section was a weakness of the Reserve Bank, and, yes, there is an element of reply to the IMF report, but, actually, it’s been duly noted by this Government and the Reserve Bank themselves previously.

The Reserve Bank has also identified that it needs greater investment in order to address the critical risk to both the bank itself and the New Zealand economy over the coming years. As has been noted, this is a period of unprecedented change in the New Zealand economy, leading to an increase in risk and uncertainty, and—with your forbearance, Madam Speaker—I’d like to quote the Reserve Bank Governor. He said, “it is a substantial and important increase, which means the Bank can address the critical risks to delivering its mandate, respond to areas of past underinvestment, and establish a long-term model to promote the wellbeing of New Zealand. The bulk of this increased spending will focus on expanding and enhancing the Bank’s core activities, particularly investing in financial supervisory and enforcement capability, as recommended by the [IMF].”

So I just close by briefly summarising what we are hoping to achieve with this agreement and what will be achieved with this agreement. It will help the Reserve Bank look into the future as well as secure the present, which is critically important as COVID-19 injects uncertainty into our economic environment, and we absolutely call for certainty as we move forward. New Zealand First believes that our country’s banking and insurance systems must work for the benefit of all New Zealanders, so it is pleasing to see greater resources set aside for just this.

The Reserve Bank is, in the international context, an efficient and well-run institution, and so we support them in their application. The Reserve Bank also focuses on protecting employment by updating its monetary policy settings and making good progress on broader review, so this agreement represents the continuation of this Government’s commitment to ensure that the Reserve Bank is a healthy institution that protects and assists all New Zealanders. Thank you very much, Madam Speaker.

E Te Māngai, tēnā koe. Tēnā koutou e Te Whare. I am standing on behalf of the Green Party of Aotearoa New Zealand this afternoon to support this motion and to have our position placed on the record along with other parties in this Parliament. I think it’s important, firstly, to respond to some of the commentary stated in closing by the spokesperson for the Opposition on finance, Paul Goldsmith, particularly in regard to a policy announced over the weekend by the Green Party, where he spoke about our taxation policy and kind of held himself out as a fantastic economic manager, but then later went on to himself admit that he had got the maths wrong.

Of course, what this agreement does, fundamentally, is provide the bank with an annual average of $115 million a year for its operations over the next five years, with a further average of $13 million a year for the issuance of currency. I’d like to join with other members of this House in recognising, fundamentally, the importance of the independence of this institution, of its advice, and of the tools that it utilises. In my contribution today, I would like to highlight the bank’s new dual mandate, which was alluded to by the Hon Paul Goldsmith. It is to set monetary policy in a way that maintains, obviously, price stability and supports maximum sustainable employment. Also, it is to bring together climate change and jobs and to say that the best way to fulfil that dual mandate is actually to address the climate crises.

I think it’s important to address the points made, particularly by the Opposition in this, because they hypothesise that, perhaps, speculating on things such as the climate crises or the environment was outside the remit of economic thinking. To that point, I think it’s really important that we actually consider, when we speak about the economy, not just in this Chamber, but within people’s lives and within society and across the world, that the economy isn’t some out there deity which we sacrifice to when it’s angry. The economy is, in fact, actually our collective resources and the wealth that all of us together create. It also is the rules that all of us place around it, and in Aotearoa New Zealand I think that we are incredibly fortunate for the price stability that the Reserve Bank plays a role in creating.

These five-yearly funding agreements sit outside of the political cycle, which helps to protect them from the politics of the day. This means that the Reserve Bank can focus on making sure that the financial system is stable and works for everybody as best as possible. And as I’m sure that most people would agree, a financial system that works is one that responds to the crises that we face. The most significant of those right now is the existential crises of climate change or global warming.

There are a number of important tools that are available to the Reserve Bank to do this. The first is understanding climate-related risk. There are two types of climate-related risk. The first is one which we’re all familiar with: that of extreme weather and its increasing severity and frequency, and it’s pretty clear what those risks are. Of course, earlier this year we saw the consequences of climate change exacerbating the bushfires in Australia. But the second and less talked about is transition risk. By this, we mean the risk that occurs when organisations fail to change the way that they do things so that we can move from where we are today to where we need to be to tackle the climate crises. Some people call this the “just transition”. In other words, it is the risk that occurs if companies do not change their business models to shift their operations to align with the sorts of change that needs to occur to bring our emissions down, and, in fact, will occur regardless of whether we engage with it.

The reason that this poses a risk to financial systems is that without the requisite knowledge of how exposed businesses are to climate change, central banks risk lending to organisations that are not changing in ways that they need to. This is what people talk about when they are talking of stranded assets: lending to businesses that are not adjusting to the reality of what we need to do moving into the future.

This is one of the things that the Reserve Bank has been concerned about recently: making sure that this information is readily available, making sure banks that lend to businesses and to other investors can be sure that the organisations that they are lending to are thinking about our collective future and acting in a way that is consistent with the direction that we in this Chamber have set for the country.

Typically, the financial system has taken a rather short-term view in its decision making, pushing longer-term problems into the long grass. But proper mandatory disclosure of climate-related risks will help to change that, and it is something that the Reserve Bank has been pushing for. That disclosure will enable risk assessment and mitigation, and incentivise investment in emissions reduction and adaptation. It means that the Reserve Bank—New Zealand’s Reserve Bank, our Reserve Bank—can consider climate risks when making decisions that affect the type of country we live in and pass on to future generations.

It will also serve to constrain the climate-related financial risk taken on by the banking sector. Climate-related financial risk would mean any activity that is not consistent with a 1.5-degree world. One of the reasons that the Reserve Bank has been calling for this mandatory reporting of climate-related risks is they know it is necessary if they are, in fact, to fulfil that dual mandate. One of the questions in all of this—a question banks will be asking themselves—is whether the Government is serious about this transition to a low-carbon economy. Of course, when it comes to this Government, the answer is yes, because we have built an enduring framework for a better future, and, in doing so, set the direction for future investment and innovation.

So what happens when we confuse price with value? Well, we end up undervaluing the very things that make us who we are, like caring for each other and for our planet. We need to redefine those kinds of concepts of value to take the action that is requisite to make life better for each other and for future generations. Financial investments will, of course, never be a substitute for ambitious climate policy and action by Governments. In fact, of course they shouldn’t be, as has been emphasised by multiple speakers so far in this debate, but these financial investments and these instruments can and should amplify those policy decisions.

Just in closing, given that other speakers have sought to reference others—other academic thinkers, others who have been engaged in economics for a while now—I think that it is most pertinent to reference Herman Daly, who hails from institutions such as the World Bank and Yale University as an economist, who said, “The economy is a wholly owned subsidiary of the environment, not the other way around.” The Greens support this motion and commend it to the House.

Motion agreed to.