David Schnauer: What Pharmac has in common with the Reserve Bank

It was once unilaterally agreed that politics had no place in agencies such as Pharmac and the Reserve Bank. So what has changed? Photo / Mark Mitchell, File

Opinion

OPINION

What do Pharmac and the New Zealand Reserve Bank have in common? Answer: they both represent failed attempts to keep politics out of parts of this country's governance.

Let's start with Pharmac. There is limited money New Zealand can afford to spend buying drugs. There will always be someone suffering an unfortunate illness, who seeks access to new, expensive pharmaceuticals. Unquestionably these are tragic situations. If I was ill, I too would want the best drugs.

The country has a dilemma. Realistically it cannot afford every drug which its citizens wish to have funded for them. Drugs have to be rationed, in circumstances that, at times, can be matters of life and death. How to carry out that extremely difficult rationing process?

Politicians could decide (or play a part in deciding) which drugs Pharmac will fund. Not a good method of rationing, one would think.

Campaigns would be launched by sick people in key electorates. Politicians have no knowledge whether a new drug really will cure an illness. Doctors, not politicians, should surely decide which drugs should be funded by the State.

In a creditable decision in 1993, Parliament passed these difficult pharmaceutical rationing decisions over to an independent new body, Pharmac. It was given two tasks.

First to bring down the cost to the country of buying pharmaceuticals - which it did very successfully. And secondly, to decide which medicines to buy, within its fixed budget.

Pharmac made these difficult drug rationing choices through clinical committees of experts. A sensible structure, which worked well.

To the extent there were issues around Pharmac, these were mainly because politicians unduly constrained its overall funding.

Now a review committee has found Pharmac has delivered inequitable outcomes for Māori and other minority groups. The Health Minister says Pharmac can no longer remain independent, and it will become part of the new Health NZ - i.e. back under political control after 29 years of independence.

Turning to the Reserve Bank (NZEB), parallel considerations apply in regulating interest rates and inflation.

Lowering interest rates stimulates the economy about 12-18 months later. When rates were controlled by politicians, rate cuts tended to occur 18 months before an election.

David Schnauer. Photo / Supplied

Running the economy for political rather than economic advantage, was not ideal. Far better to leave decisions on interest rates to expert economists, rather than politicians.

Credibly in 1989, New Zealand set up the Reserve Bank as an independent central bank, which was required to set interest rates free from political involvement. Rates were to be set at a level that kept inflation in a target band.

In its early years, the NZRB was highly successful. Then, change started.

Japan's central bank adopted major monetary interventions in the 1990s. In 2008, the world suffered a major economic downturn.

Central banks, led by the US Federal Reserve, adopted aggressive measures to expand the money supply and drive interest rates to zero.

These were supposedly to stop inflation from falling below its target range. But increasingly central banks were trying to manage the business cycle. The NZRB followed their lead.

The slide by central banks away from their original role of independently setting monetary policy continued when they received "dual mandates" from governments, to target contradictory objectives of low inflation and high employment. The NZRB was given this political additional target in 2018.

Then Covid saw the NZRB and the Government working together. The NZRB was no longer independent.

The Government indemnified the bank; and the bank bought around $50 billion of government stock, thereby funding the Covid fiscal stimulus.

The Economist magazine called this "free money" that central banks provided their governments.

Zero rates inflated house prices. Limiting house prices is politically difficult, so the Government asked RBNZ to restrain house prices. The NZRB reimposed Loan-to-Value restrictions.

By now, the NZRB was deeply embedded in political issues.

In the final step of the re-politicisation of NZRB, the bank is now seeking public submissions, to make its Monetary Policy Committee more "democratically accountable".

Submissions may include house prices, climate change, and distributional outcomes - all very political topics.

Experts at the RBNZ independently setting monetary policy have metamorphosised into a politicised bank. This means questions now exist whether the NZRB will single-mindedly battle inflation if rising rates create political angst in election year 2023.

What New Zealand has done, with the changes at Pharmac and the NZRB, is forgotten history. And those who forget history, have to relearn it the hard way.

Some decisions are better put in the hands of experts. Then politicians should stand back and leave those experts to do their job.

• David Schnauer is an economist, retired lawyer and the author of Covid, Catalyst for Change.