The Reserve Bank's budget doubled last month. That's quite a coup for governor Adrian Orr who's been rattling his tin cup and asking for more funds since he took the job. In the coming five years, the bank's expenditure will hit $640 million, or an average $128m a year, a whopping increase from $324m, an average $65m a year, from 2015 to 2020.
But while the funds are a win for Orr and the headhunters he's already deployed to expand his legions, it's not clear that New Zealand will receive the value he claims.
The money will buy more supervision of the trading banks and more enforcement of the rules, according to the bank, whose job it is to set both monetary policy and regulate financial institutions.
Grant Robertson, Minister of Finance, who signed off on the spending, sang from the same song sheet. The money is needed, he said, for "greater enforcement capability to deter and deal with bad behaviour."
And indeed the bureaucrats at Treasury are persuaded of the same need; a March Treasury report noted that the department supports an increase in funding, especially for the bank's financial supervisory capability.
The Reserve Bank's budget is set in five-year increments and ratified by Parliament. The money is retained from the bank's income generating activities, the remaining funds flow to the Government.
The new money will clearly buy more supervisory manpower, a word the governor and his ranks of public relations experts would never use to describe his "Great Team, Best Central Bank". They do, after all, put considerable effort into gender diversity.
The problem is that those funds might just as easily be used to spray money at any cause that takes Orr's fancy. Treasury's advice prepared for Robertson says as much.
The March Treasury report, recently released, notes it's impossible to judge the value for money in the Reserve Bank's spending proposal. The proposal provides only "high level" (ie insufficient) detail.
It also says that, during discussions, Treasury officials, "suggested the Bank provide options and scenarios of possible service levels under different funding levels." The bank, it seems, refused. The report notes, "The Bank's view is that its plans are critical and it cannot scale its proposal."
The bank's hiring plans, however, are an obvious area where cost warrants greater scrutiny. Hiring constitutes the single largest chunk of the budget increase and the plan includes adding 172 full-time roles. It's anticipated the bank's head count will hit 468 by 2025.
Seventy-four of the new jobs are in the area of financial stability, including financial supervision. It's an area that most observers agree needs strengthening. But even there, the Treasury complains of insufficient detail. In 2017 the IMF examined New Zealand's banking system and recommended some changes. One of them was increased intensity of supervision by the regulator of both the banking and insurance sectors.
The Treasury report notes, however, that it's "unclear" how the new jobs in financial stability "align with the IMF's 2017 FSAP [Financial Sector Assessment Programme] recommendations."
More opaque still is the need for 35 new roles in "digital services" within the bank's business operations, and 22 more for what is essentially the communications department.
Governance, Strategy and Corporate Relations will rise from a complement of 21 to 43 by 2025, the only department outside Prudential Supervision that will see its ranks more than double. And, despite the gathering recession, the budget factors in 3 per cent wage inflation across the bank.
Bank spending has already accelerated considerably under Orr's governorship. During the last five-year funding period, the bank underspent its budget over the first three years. From roughly the point at which Orr took the reins in March 2018, expenses increased; in 2018/19 and 2019/20 the bank overspent its annual budget. Treasury noted: "The Bank intends to fund overspends in the latter two years with underspends in the previous three years."
Whether the extra money has bought New Zealand greater financial stability or more sound monetary policy is an open question. Indeed, the bank recently admitted that it had failed to require trading banks to prepare their systems for the possibility of negative interest rates.
Deputy governor Geoff Bascand compared the problem to a kind of Y2K technology problem. The analogy, however, is ill-suited. While Y2K presented a very literal deadline for updating systems and software, the possibility of the need for negative interest rates has existed for years, and its hallmark is that it will likely be necessitated by a surprise event or shock to the financial system. Readiness is paramount.
Orr also spent much of last year immersed in a combative bid to force banks to hold more of their own money (capital buffers) against the risk of a financial shock. The plan was finalised at the end of 2019, but it remains suspended because it will be expensive for banks to achieve and the regulator has now changed tack in the face of the current recession. It is exhorting banks to lend "courageously" rather than cautiously build up their own funds.
Robertson, however, was unmoved by this checkered record and the possibility that huge budget increases at the bank might be spent inefficiently. His June press release to announce the funds suggests why.
"Financial stability is an area that we are not prepared to cut corners for, particularly during a global recession" it trumpeted.
Substitute national election for global recession and the sentiment rings true. It's a tidy message for the campaign trail, which is no venue for delving into messy details that blur a narrative.