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Treasury presentations at the 2022 NZAE Conference

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NZAE Conference 2022

Treasury presentations at the 2022 NZAE Conference. Credit: The Treasury

This year’s New Zealand Association of Economists (NZAE) conference again brought together speakers and delegates from academia, government and business to share the latest thinking on pressing issues facing New Zealand. Te Tai Ōhanga was well represented at the conference with a keynote speech by Treasury Secretary and Chief Executive Dr Caralee McLiesh and 13 other presentations by Treasury staff on topics including wellbeing, child poverty, climate change, housing and urban policy, firm performance and fiscal policy.

Dr Caralee McLiesh opened this year’s conference with a keynote address on “Economic policy for the challenges ahead”, where she highlighted the importance of productivity and supply-side flexibility, including regulatory agility, as key drivers of improved living standards for all New Zealanders. This was followed by a panel discussion, including Dominick Stephens, the Treasury’s chief economist.

Wellbeing

Wellbeing featured strongly among the Treasury staff presentations. This topic is timely as the Treasury works towards publishing its first Wellbeing Report (Te Tai Waiora: Wellbeing in Aotearoa New Zealand 2022).  

In his presentation, Diego Cardona summarised the findings of a background paper prepared with Tim Hughes for the Wellbeing Report. Looking at trends across the 12 wellbeing domains of the Living Standards Framework (LSF) , he showed that the picture was best for employment and air quality, but less good for mental health and educational achievement. Overall, the paper highlighted a number of concerning trends in the wellbeing of young New Zealanders.

A population segmentation analysis of wellbeing in New Zealand was discussed by Hien Nguyen. The results showed that mental health, having enough income to meet every-day needs, and trust in institutions were the characteristics that most strongly differentiated life-satisfaction. The analysis shows how the accumulation of factors explain variation in life-satisfaction across the population and provides a person-centric view of wellbeing across multiple domains.

Child poverty

The focus on the wellbeing of children continued with presentations on the measurement of child poverty. In practice measuring child poverty is not an easy task – and Meghan Stephens outlined an experimental approach that uses the available data to provide insights into the different dimensions of poverty. By applying a statistical algorithm to three poverty indicators, she identified several different categories of children in poverty. The data also highlighted the importance of thinking about other aspects of economic wellbeing, such as wealth and extra costs related to, for example, disability and childcare.

Yvonne Wang also discussed approaches to measuring child poverty and focussed on what could be learnt from data on household spending. After identifying the incidence of expenditure poverty, Yvonne discussed the characteristics of these households, including whether they would be identified as being in poverty with income-based measures. Using expenditure data could provide a fuller picture of the New Zealand child poverty situation, thus enhancing understanding and better supporting policy decisions.

Large tax-transfer microsimulation models can play a key role in helping inform tax-transfer reform. Patrick Nolan discussed the Treasury’s TAWA microsimulation model. This included a discussion of different ways of estimating poverty impacts, the role reporting should give to financial incentives to work, and the opportunities provided by improved data. This final point was particularly important for understanding take-up of benefits and tax credits and how income-based measures could be combined with expenditure and material hardship-based ones.

Climate Change and Carbon Prices

The Climate Change Response Act requires the impacts on households to be considered when setting the parameters of the New Zealand Emission Trading Scheme (NZ ETS). In his presentation, Cory Davis described early work to quantify impacts of changing NZ ETS carbon prices on the fuel and food costs faced by New Zealand households (see supplementary documents to the Climate Change Commission's advice on ETS settings). Additional household fuel costs were calculated using the expenditure component of the 2019 Household Economic Survey (HES), simple emission factors, and reported historical prices for that period. National Accounts Input/Output tables and the Greenhouse Gas Inventory were used to calculate the additional fuel and freight costs of food supply that are passed on to consumers. Distributional impacts were investigated by assessing impacts on households in different equivalised income quintiles as determined by TAWA. The expenditure impacts of increased carbon prices are regressive because low-income households spend a greater fraction of their income on fuel and food.

Inspired by Bard Hardstad’s bargaining analysis of the 2015 Paris Climate Agreement, Henry Russell conducted a laboratory experiment to test whether ‘pledge-and-review’ bargaining remains effective when the number of bargaining parties increases. Overall, he found that the pledge-and-review institution remains effective in sustaining mutually beneficial contributions and increasing efficiency. While the absolute efficiency gain of pledge-and-review bargaining over a voluntary contribution mechanism increased, when controlling for group size there was a relative decline in the efficiency gain of the institution.

Housing and urban planning

The rate of home ownership in New Zealand is relatively high by international standards. Housing is regarded as an important asset for wealth accumulation, and house price growth is an important driver of consumption. Increasing house prices in recent years have underscored the need for policy makers to have accurate forecasts of the housing market. In his study, Murat Ozbilgin and co-authors explored whether mixed frequency data sampling (MIDAS) techniques, together with forecast combinations and daily financial factors are helpful in nowcasting and forecasting monthly house prices in New Zealand. He found that augmenting monthly indicators with daily and weekly financial variables significantly improves forecasting performance.

Luke Symes looked at the relationship between house prices, the wealth distribution, and wealth inequality. Luke found that an increase in house prices increases wealth inequality between those already on the wealth ladder and those who have not reached the first rung, but also decreases wealth inequality within homeowners. This highlights the importance of looking beyond aggregate measures of wealth inequality to also consider between-group inequalities.

Urban policy and urban economics rely on concepts of urban land prices, opportunity cost, and the quantity and nature of land consumption. Chris Parker described new thinking (a new “Henry George Theorem”) on how local governments can discover the allocative efficient level of public good provision and development capacity. This helps to clarify which elements of land prices need to be increased to grow value, and which decreased to support housing affordability. The aim is to also use this work to reform how to do cost-benefit analysis of urban infrastructure, and how to fund, finance, and supply it.

Business performance

What is really inside the black box of firm innovation, and how does it relate to firm performance and economic growth? In his work Tim Ng modelled a range of reported business practices as reflecting a handful of key underlying business functions related to the “dynamic capabilities” view of innovation as a source of enduring business success. Tim found positive statistical associations between a number of these business functions and performance measures such as firm growth and longevity. This finding sets the stage for the investigation of the causal mechanisms that could underlie these empirical associations. For this work, Tim received the David Teece Prize in Industrial Organisation and Firm Behaviour and the Stats NZ Prize for the best use of official statistics.

With an estimated asset base of at least $68.7 billion in 2018, the Māori economy is an increasingly important contributor to the wider New Zealand economy. Success in the Māori economy can diffuse through the national economy and improve both Māori and non-Māori prosperity. Lucas Chen examined the performance and productivity of self-identifying Māori firms surveyed in the Business Operations Survey (BOS) relative to that of non-Māori firms using StatsNZ’s longitudinal business database (LBD). The study population used by Lucas comprised of longitudinally matched Māori firms with non-Māori firms surveyed in BOS based on their respective age, size, and industry characteristics.

New Zealand fiscal policy

Discretionary fiscal policy plays an important role in supporting economic activity during recessions, especially when the lower bound on interest rates binds and the role of conventional monetary policy has been exhausted. Fiscal multipliers provide a way of quantifying the GDP gain for a given fiscal policy intervention. In his presentation, Andrew Binning discussed his work calculating fiscal multipliers for a number of fiscal instruments, for New Zealand, using an estimated monetary-fiscal DSGE model, both at and away from the effective lower bound on interest rates.

The Treasury thanks the NZAE for the opportunity to participate in the annual conference. We much appreciate the chance to share our work, as well as learn from others’ research and help build a strong New Zealand economics community.