Former Reserve Bank chairman Neil Quigley and governor Adrian Orr (right) initially pitched for a 50% funding increase from the Government. Photo / Mark Mitchell
It has been revealed just how unimpressed Treasury was with the Reserve Bank for pitching for a 50% funding increase shortly before Adrian Orr resigned as governor.
In a briefing to Finance Minister Nicola Willis on February 13, Treasury said it had “significant value for money concerns” over the Reserve Bank’s request for its five-year envelope of funding for its operating expenses to increase by 50% between 2020-25 and 2025-30 to $981 million.
Coupled with funding for capital expenditure, the Reserve Bank initially wanted just over $1 billion of funding for the five years to June 2030.
The bank argued this would meet Willis’ request for it to cut its operating expenditure by 7.5%.
However, Treasury claimed the Reserve Bank used an unlawful method to pump up the starting point – the 2024/25 year – from which it pledged to cut its spending.
Treasury noted the Reserve Bank added $40m of underspends from previous years to what it planned to spend in 2024/25.
The bank had more funds in its kitty because former Finance Minister Grant Robertson approved its request for a funding top-up in 2023.
Going into the 2025-30 agreement, it was clarified that the bank couldn’t roll over underspends to future years.
Treasury raised “other concerns” with the bank’s funding bid.
It noted it assumed funding would need to be adjusted to account for annual inflation of 3.6% – a rate above that which the Reserve Bank itself expected inflation to sit at, given one of its main jobs is to keep inflation between 1% and 3%.
The Treasury said the Reserve Bank’s funding bid wasn’t adjusted to account for the fact that it would no longer be responsible for ensuring the entities it regulates comply with anti-money laundering/countering the financing of terrorism rules, and costs around currency issuance would be accounted for separately.
Treasury said the Reserve Bank was “not sufficiently considering reprioritisation opportunities, such as downscaling non-legislative functions”.
It said “a disproportionate number of resources” had been concentrated at the upper echelons of management as well as within the non-legislative teams.
Treasury also said the sum the bank said it needed for capital expenditure included $22m for “ambiguous contingencies”.
“Capex funding should be grounded in tangible evidence of need for further investment,” Treasury said.
It suggested the Reserve Bank’s funding total $718m over five years.
Reserve Bank board meeting minutes, released today, show the board met on February 14 – the day after Treasury gave Willis this advice.
At this point, Orr and the Reserve Bank’s management argued the bank should hold its position, but the board wanted to back down, with the chairman at the time, Neil Quigley, noting he had received “strong signals” from Willis and Treasury that the amount previously bid for would be unacceptable.
According to the minutes, the board also noted:
“The wider public sector context; RBNZ [Reserve Bank] is not alone in being asked to reduce spending to a substantial extent.
“The importance of the board now being more directly involved in the FYFA [Five-Year Funding Agreement] process, including discussions with Treasury and the minister.”
Previously released documents show that later in February, things got tense between Orr and Treasury and Willis in meetings.
By the time Orr resigned on March 5, he agreed he lacked trust in the board, Treasury and Willis.
Later in March, the Reserve Bank made a new proposal for $750m of funding.
In April, Willis decided to allocate it $776m for the five years to 2030, including $750m for operational expenditure and $26m for capital expenditure.
This equates to a 15% increase in operational expenditure from the previous five years - a smaller increase than the 50% initially pitched for.
Last month, the Herald reported the bank was working through the third and final phase of a restructure, proposed to see a net reduction of 142 roles, including 35 vacant positions.
This comes on top of a net 15 leadership roles being reduced under prior phases of the restructure.
With 660 full-time equivalent roles at the bank at the end of January, the proposed cuts will take staffing levels back to where they were in June 2023.
Quigley resigned with immediate effect last week, after Willis told him the board’s handling of affairs surrounding Orr’s departure had tarnished the bank’s reputation.
Jenee Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.