• Robert MacCulloch

The NZ Treasury isn't a fit economic adviser

The news today is: "Treasury's admission that officials use 'professional judgement' to predict house prices, rather than a solid economic model, has shocked Green, National & ACT MPs, who are demanding answers. Green MP Chlöe Swarbrick says it's important because in 2020, Treasury predicted a house price fall, which informed Government & Reserve Bank decisions that, instead, saw house prices increase an historic 25 percent in one year. "We literally have it on the record, quite explicitly, that they're using their 'professional judgement'. That isn't giving us any form of insight into the variables used to predict house price forecasts, which in turn inform Government policy," said Swarbrick.

Our MPs are discovering what has been an open secret amongst many of us in the Kiwi economics profession for years. Namely the NZ Treasury doesn't have the technical expertise to do the state-of-the-art forecasts which Swarbrick had expected it to be doing. Why? Since it has had an explicit policy of NOT hiring economists who have done the high level degrees and research which are a necessity for learning the skills required to do those forecasts. Instead Treasury has favored a more "holistic" approach to hiring, particularly of folks from non-quantitative backgrounds. Look at the Secretary's "leadership team" - not a single Masters in economics to be found, let alone a doctorate.

It's even worse at the Reserve Bank of NZ. Whereas at the Reserve Bank of Australia, the Governor, Deputy Governor and Assistant Governors in Financial Markets & Economics all have PhDs, three of the four from MIT, the best economics department in the world, not one of the equivalent people has anything like that kind of qualification at the RBNZ. Its' Chief Economist has a BCom. And we do have the talent here in NZ - they're just not hiring it.

So no wonder Treasury officials have been making guesses about future house prices - they just can't do the maths and stats and econometrics which are needed to do proper forecasts. As a result, they wrongly forecast a fall in house prices in 2020 .. which was one of the reasons the RBNZ embarked on its $100 billion quantitative easing program .. which ended up exploding house prices .. which has priced first home buyers out of the market and exacerbated homelessness. Treasury officials sit on the RBNZ's Monetary Policy Committee so there is direct link between their failed forecasts and the RBNZ's mistakes.