Value for money – what to do when fiscal constraints come to bite

Improving the quality of spending

Government agencies will be looking harder than ever before at how they can demonstrate they are providing value for money.  

Simple in concept, it can be hard to quantify the ‘return on investment’ on the types of functions and services that government agencies provide or fund. But that is not a reason not to try.  

Start by being clear on the why, the intended and actual results, what evidence exists on effectiveness and efficiency, and what the key gaps in knowledge are. This can be the basis for filling the information gaps, tracking relevant cost and outcome measures, and economic evaluations.

A new normal

The new coalition government’s priorities include improving the quality of government spending and reducing core Crown spending as a share of the total economy.

Over $1b worth of immediate savings are sought from reduced spending on back-office bureaucracy (~$600m) and contractors (~$400m), plus a further $500m+ from stopping various programmes.

Further cuts can be expected as the government seeks to return to surplus. It will also reprioritise spending to initiatives that are proven or expected to have greater impacts.

The same demand for value for money will apply to new services and regulations – the coalition agreement’s Ongoing Decision-Making Principles state that government decisions should be based on evidence and rigorous cost-benefit analysis.

This discipline is also embedded in the revival of the social investment approach: decisions driven by data and evidence, effective commissioning with a focus on outcomes, a whole-of-life return-on-investment standard, and evaluation.

Where to start

The requirement for agencies to advise on the costs and benefits of government proposals is nothing new:

• Cabinets of various stripes have set out requirements for regulatory impact analysis in the past.

• Government agencies employ, or commission, economists to undertake economic modelling and cost-benefit analyses of proposals for new services or regulations (and, less frequently, evaluations of existing services).

What may be “new” is the heightened expectation that agencies can articulate whether their existing stock of functions and services is delivering value for money.

The $1b savings target is an immediate test. Agencies will need to quickly identify the lowest value-for-money activities to stop. Not all agencies will be set up right now to do so at speed or with the rigour expected of them by Ministers.

Based on our experience in advising local and central government agencies on value for money, a rapid but useful analysis is feasible even considering time and consequent information constraints.

Key points to cover in a rapid assessment

Strategic fit	Do the activities promote stated priorities or legislated objectives, or mitigate key risks? Do they address a clear market or regulatory failure? If not, their time may have come.
Cost	How many resources are dedicated to each activity and are the quantities and costs ‘right-sized’, for example, compared to local or international benchmarks?
Efficiency	Is the agency getting the most outputs from the inputs, or is there excess capacity or an opportunity for a different mix of outputs that would better meet clients’ needs or preferences?
Effectiveness	Are the activities and services resulting in the desired outcomes; what does the available research evidence say about likely effectiveness and cost-effectiveness?
Ongoing value	What processes does the agency have in place to learn about the impact of its activities, or to do things better over time in light of new information and changing technologies and preferences?

Building momentum

A qualitative analysis of the dimensions set out above is a good jumping-off point, including to:

• identify how to fill gaps in knowledge to better answer value for money questions in future

• use as a prompt to consider if things could be done or structured differently, or are best left to or done with others, to get better results for clients and taxpayers, or should simply be stopped.  

Ultimately, however, agencies will have to go further, drawing on data and evidence to evaluate impact and whether the return on investment justifies keeping, expanding or stopping spending.

#valueformoney

The NZ-US trade & investment relationship is thriving

Economic linkages between NZ and the US are growing and deepening rapidly despite the lack of a trade agreement.

The NZ-US Council engaged Sense Partners to collate the latest trade and investment data on the economic relationship between NZ and the US. 

The US is NZ's third most important trading partner, with bilateral trade in goods and services of $27.6 billion - only 10% lower than NZ's trade with Australia. NZ's average export growth to the US has been 8.5% per year over the last decade, almost double that to the rest of the world.  

As well our traditional pastoral products, NZ is increasingly exporting high-end consumer products such as wine and cosmetics, capital items like fruit sorting machines, hi-tech services, and uniquely Kiwi products like kiwifruit, Manuka honey and green-lipped mussels. The US is the source of much of NZ's imports of advanced transport and manufactured goods, and an important source of foreign investment. 

Overall, the report shows that NZ and US economic linkages are thriving, and that while a trade agreement would be highly beneficial, its absence need not define the relationship.      

Improving NZ's resilience to trade shocks

If I had a dollar for every time I’ve heard “we should diversify away from China”, I’d be a wealthy man.

There's much talk about how Kiwi exporters should be preparing for trade disruptions. To inform this discussion, we surveyed almost 100 firms on behalf of the Ministerial Strategic Advisory Group on Trade.

We found firms are more worried about logistics and domestic infrastructure resilience than they are about market access disruption. They are addressing immediate and actual business risks before devoting scarce resources to mitigating potential risks related to market access disruption.

That said, 90% of firms said they were “considering” diversification. But only 26% consider diversification an immediate priority. 30% said it was a short- to medium-term priority.

We suspect firms are more focused on getting through a tough economic time post-Covid, post-floods, dealing with slowing demand and high input costs.

Diversifying is not a simple or costless task, especially for smaller firms, and it may just be that firms are parking it in the ‘important but not urgent’ quadrant of their risk registers.

Future of trade policy

NZ’s last comprehensive trade strategy was released 30 years ago in 1993. We think it’s high time for a new one that recognises the challenges of the modern trading environment and directs scarce negotiating resources to where they will make the biggest difference for Kiwi firms and households.

Amongst our ten recommendations are:

• Re-evaluate whether NZ needs to retain its existing tariffs any longer, given the costs they impose on households and businesses.

• Beyond existing FTA targets, just say 'no' to potential partners unless they come forward with an ambitious, comprehensive and quick deal.

• Use the expansion of CPTPP as the main way to access new markets.

Devote more resources to 'open plurilaterals', which can test novel approaches to modern trade issues with coalitions of the willing. Inititaives on non-tariff measures, mutual recognition, carbon border adjustment mechanisms and a refreshed digital agreement might be good starting points.

We hope this paper will spark greater discussion between businesses, researchers, politicians, officials and other stakeholders as we look towards shaping NZ's trade policy over the next 30 years.

Double-whammy creates uncertain times for firms

Economic uncertainty is creating a tough environment for New Zealand firms

The outlook is filled with uncertainty for businesses.   

After two years of no international visitors, a ski season with open borders holds the promise of Australian skiers and the opportunity to bring in additional staff. But a worrying plume of steam at Te Wai ā-moe, Ruapehu’s crater lake, brings uncertainty to tourism firms in the region.

Layered over the top is the abhorrent war in Ukraine. It’s a double whammy. And after COVID-19 balance sheets are stuffed – firms have no wiggle room to get it wrong. 

Expect lower investment 

When the outlook is uncertain, firms take bets off the table. Hiring those extra workers gets left to the following season. Purchasing the kit to start that new plant becomes hard to justify. Uncertainty reduces not just economic activity today but future activity too. 

Our New Zealand Uncertainty Index (NEU index) shows that uncertainty peaked in March 2020, when New Zealand first went into level 4 lockdown. Uncertainty has waned, but remains about 22% higher than normal, largely because of the Ukraine war. 

Figure 1: NUE Uncertainty Index - % of NZ media articles referencing uncertainty and the economy

The war in Ukraine is increasing global uncertainty

It’s not just New Zealand businesses that are impacted. Uncertainty is elevated globally. The head of the IMF is worried:  

“The potential shock that worries me most is the danger of multiple shocks hitting us simultaneously and our proven inability to deal with them. We need to build that capacity to anticipate and build resilience and respond.” – Managing Director Kristalina Georgieva 

Figure 2: Overall uncertainty. Source Ahir, Bloom and Furceri (2000), rescaled

Figure 3: Drivers of the NZ Economic Uncertainty Index

For the first quarter of 2022, the Global Uncertainty Index is 15 percent higher than New Zealand’s index. The Ukraine war accounted for over a third of the uncertainty registered in the global index in March, and about one-quarter of the New Zealand index (see Figure 3).  

 Policymakers here will need to tread carefully  

But New Zealand firms won’t get off lightly. Global demand is starting to wane. Inflation pressures make a precarious path for central banks. Keep interest rates low and inflation becomes a permanent feature. Hike interest rates into existing headwinds and risk recession. 

The Reserve Bank’s Monetary Policy Committee will face tricky decisions in the coming weeks. Interest rates need to move higher. But steering a course that keeps New Zealand from recession is tough: the “fog of war” clouds the outlook. Policy will need to move decisively and may need to move quickly as conditions re-emerge. Keeping an eye on uncertainty will help.  

Government too will have a role to play. The hangover from COVID-19, including consumer spending induced by wage subsidies and new-found housing wealth and government spending is adding too much heat to the economy.  

Firms will be cautious on investment plans despite the low cost of financing.  

For more information, contact Dr Kirdan Lees at kirdan@sense.partners

Inaugural Dr Ed Hearnshaw Prize for FlexiWork

Sense Partners’ Rosie Collins was awarded the inaugural Dr Ed Hearnshaw Prize for Economics and the Environment for her essay, FlexiWork.

This is a new prize for young economists writing on environmental economics, co-sponsored by the Hearnshaw family. She presented the winning paper at the February GEN2021 conference in front of Ed’s peers and family.

The question set for the essay was: Nudging us: How can government policy interventions encourage Kiwi consumers to make choices that result in lower greenhouse gas emissions? 

On Rosie’s essay, the judges noted: “Rosie articulated her ideas to the conference in a clear and compelling presentation. Her proposal is elegant in its simplicity: flipping the default in employment law towards flexible working, to reduce demand for transport. Rosie delved into the legislative framework, leading to a proposal to reframe the default to working two days a week from home.  She calculated the resulting emissions reductions, acknowledged the potential distributional impacts and considered implementation.”

Rosie with Alice, John and Vickie Hearnshaw.

Key points are:

• There is a striking opportunity to reduce New Zealand households’ carbon emissions by about 2% per year, or 192 CO2kt if more people worked from home more often.

• While 4 in 10 New Zealand jobs could be done remotely without a loss of productivity, only 10% actually work from home.

• Behavioural barriers – fear of stigma, ruffling feathers and status quo bias – stand in the way of employees requesting to remote work and employers approving such requests.

• ‘FlexiWork’ is a nudge proposal to tackle this problem. It shifts onto employers the responsibility of formally justifying when work cannot be achieved remotely.

• This nudge would not mandate remote work, but slows down the process of defaulting to office-based arrangements. It changes power dynamics in workers’ favour.

• It could save about 96 million car trips each year, assuming a quarter of those who ordinarily travel by car switch to remote work at least two days a week.

Daily Tracker to 2 September 2020

• Auckland shifted down to Alert Level 2.5 on Monday 31 August. The indicators we monitor have rebounded; job ads are particularly strong. Businesses appear to have fared better compared to initial restrictions in April and May. The full dashboard is here.

• Economic activity remains solid outside of Auckland. This shows up in retail spending and electricity use (which is up this week from last year).

• Auckland spending on cards fell by 43% during increased alert levels , and rest of NZ rose by 2%. We don’t have data for this week yet.

• We estimate working from home is still up around 25% from pre-Covid levels. So, economic disruption may be smaller than implied by lower traffic congestion, mainly related to people going to and doing work.

• Traffic in Auckland remains around 25% below last year, Wellington is a touch lower, and other cities we track (Hamilton, Tauranga, Christchurch and Dunedin) are all up.

• Job ads strengthened further with reduced restrictions. The job market appears to have fared much better through the latest heightened restrictions. Employment fell in the first week of restrictions but is starting from much better levels than Australia for example.

Weekly employment indicators from Statistics NZ (data to 23/8) and ABS (data to 8/8).

Daily tracker to 26 August 2020

In the second week of heightened restrictions (Alert Level 3 in Auckland, 2 elsewhere) to 26 August 2020, the economy continued to slow, but showed surprising strength in job ads. This suggests some businesses may be coping better than previous similar restrictions. The full dashboard is here.

• Consumer spending has fallen sharply, as expected. More details here.

• Traffic congestion has fallen in Auckland, down about 60%. Other regions have fallen by 10%-20%.

• Internet use is up significantly. We estimate working from home in Auckland has increased by 80%.

• Electricity use is down a touch, consistent with previous experience of Level 2/3 restrictions.

• Job ads have been surprisingly resilient. Rebounding over the past week, including in Auckland. The strongest industries have been construction, trades and manufacturing.

• There has also been no spike in google searches for unemployment in Auckland (available in google trends), which correlated very closely with the previous spike in job losses.

Tracking Auckland's Level 3 restrictions

We updated our economic tracker to Wednesday 19 August - a full week of the new restrictions (Level 3 in Auckland and Level 2 elsewhere). The full dashboard is here.

Household spending fell sharply in Auckland but rose in most other regions. You can see detailed regional data on MBIE’s excellent tool here.

Activity has fallen during the restriction, but business and economic activity seem to be holding up better under current restrictions than last time:

1) Job ads on Trade Me are 18% higher than previous Level 3/2 experience

2) Traffic volumes - a good proxy for people going to and doing work - are 15% higher

3) Working from home is up significantly seen in internet data use up 16%

4) Electricity use remains a little ahead of this time last year. Suggesting less impact on commercial and industrial activity.

Daily Tracker to 15 June - Final

This is the final Covid-19 Economy Tracker dashboard update. 

When we started the dashboard on 8 April, there was no easy way to track the economy through the Covid-19 health response.

Now that we are in Alert Level 1 most indicators are back to normal, except for flights and lower traffic volumes in Auckland and Wellington due to job losses and working from home (up about 15% from before lockdown). You can see the full dashboard here.

We are still expecting economic weakness due to business failures from the stringent lockdown and the recession proper because of job losses, reduced private sector investment and trade disruptions. But these will unfold over weeks and months, not in the ‘sudden stop-start’ of the health response, which required a more frequent read of the economy.

There are several reliable sources to help you track the economy:

1) Treasury's weekly updates: https://treasury.govt.nz/information-and-services/new-zealand-economy/covid-19-economic-response/commentary

2) MBIE's consumer spending tool: https://mbienz.shinyapps.io/card_spend_covid19/

3) MSD's weekly welfare statistics: https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/statistics/covid-19/index.html

4) Statistics NZ's tool: https://www.stats.govt.nz/experimental/covid-19-data-portal

Thank you for your interest in our dashboard.

Daily Tracker to 4 June 2020

Most indicators continue their improving trend. Alert Level 1, when implemented, will finally show us the ‘new normal’, particularly for many retail segments still affected by restrictions.

• Consumer spending is back to pre-Covid levels. But some segments are still 20% below pre-Covid levels.

• Businesses are gradually recovering confidence and job ads are rising. Encouragingly, job losses have slowed. Jobseeker benefits rose by 702 people in the last week of May, but up 43,539 since late February. Elevated google searches for unemployment mean we are still carefully watching for another wave of job losses.

• Electricity use is slowing. It may indicate some slowing in activity. Because it is affected by weather patterns, we need to be watch the data for a little longer.

• Traffic volumes continue to improve. They are largely back to normal in Christchurch, Dunedin, Hamilton and Tauranga. But remain 20% lower in Auckland and 25% lower in Wellington. Part of this is working from home, but that is also easing according to internet data use.

• Air travel continues to gradually improve and is now back to 40% of normal.

The full dashboard is here.

Daily Tracker to 28 May

Economic activity continues to improve. But indicators are still pretty volatile, as we grope towards a new normal.

We are showing the tracker data on a weekly average basis to better show trends. The full dashboard is here.

Electricity use is running at around 3% ahead of last year, suggesting businesses are back up and running.

But 30% lower traffic volumes suggest we are still working differently. Auckland and Wellington are most affected. We can also see people going to work later in the morning, and coming home earlier. Working from home – according to internet use – is still running about 30% ahead of pre-Covid levels. Overall internet use is down.

Businesses are cautiously getting back towards normal. More businesses are listing new job ads on Trade Me, and is now back to around 80% of normal.

Job searching is above normal – unsurprising given recent job losses. Encouragingly, Jobseeker Benefit numbers rose by just 384 in the week ending 22 May, the best since mid March. The first wave of job losses is over (around 45,000 cumulative increase in Jobseeker benefits). But the second wave may be starting, reflected in ‘unemployment’ rising in google trends and spate of job cutting announcements from high profile businesses over recent days.

Despite job losses, consumer spending has rebounded to normal. Although a big chunk appears to be catchup spending still. 

Google search trends suggest another wave of job losses may be coming.

Daily Tracker to 21 May 2020

The economy has rebounded strongly in Alert Level 2. Traffic data to Thursday suggests there are still big shifts taking place in the economy. Commentary below and the full dashboard is here.

Spending back to normal: We are pleased to report on consumer spending again. In the first five days of Level 2, consumer spending at shops is back to pre-Covid levels. But there are wide variations across segments, RNZ reported. Retailers are waiting to see whether the current level of spending is sustained, or if it is catchup spending from the lockdown.

USA experience to date suggests caution: Spending in Texas, USA, fell by 30% during ‘shelter in place’ orders. But 10 days after restrictions were lifted, spending remains 12% lower, according to an economic tracker. Health and job security fears matter a great deal for household spending. NZ is so far tracking better in the post-lockdown phase but had a bigger reduction during the lockdown (50% fall). The cumulative success of respective strategies will tell over time.

Industry normalising: Electricity use is back to normal, suggesting industries are back operating. But activity is likely still below normal. Businesses are cautious. Job advertising has improved to about 75% of normal. But job ad views are above the pre-Covid levels, suggesting there are more jobless looking for work. Those still hiring will have more choice.

Working from home still: Working from home is still apparent in upstream internet data, which is now 30% higher than pre-Covid, down from 90% in Level 4 and 75% in Level 3. Overall internet data use is back to normal, suggesting we may have exhausted all that online streaming.

Travel still low: Traffic congestion levels remain around 30% below normal; even lower in Auckland and Wellington. This confirms many continue to work from home, and there have been many job losses. MSD data show the pace of job losses have slowed (from over 6,000 per week to 1,606 in the week of 15 May). Although we suspect a new wave of job losses is coming, as the wage subsidy runs out and business adjust to the current economic reality.

Spending at shops has rebounded to pre-Covid levels in the first 5 days of Alert Level 2.

Daily Tracker to 15 May 2020

The first two days of Alert Level 2 show a rebound towards normality. Electricity use is back to normal (up a touch from last year) and flights are edging up.

During Thursday and Friday, traffic volumes continued to build. Returning to half of normal by Friday. The morning peak is still much lower, but this will likely lift once schools open again.

Internet use is just 2% above normal, versus 15%-30% higher during lockdown. Suggesting working from home has reduced substantially.

Saturday traffic was 90% of normal - this will be a much needed boost for retail and hospitality sectors. Christchurch. Hamilton and Tauranga are back to normal – in terms of weekend traffic. Auckland, Wellington and Dunedin are still below normal.  

Spending data in the Treasury’s dashboard will be a key gauge to see how spending is tracking. This will tell us if people are just enjoying getting out, or also spending - and how much the new restrictions on space and distancing is affecting spending.

The full dashboard is here.

Traffic volumes picked up gradually through Alert Level 2. Weekend traffic was back to 90% of normal, although there are variations across regions.

Daily Tracker to 10 May

The data to the weekend show Alert Level 3 was an improvement. Businesses are less pessimistic. Job postings on Trade Me recovered from 40% of normal to 60% of normal. More are also searching jobs. Views of job ads on Trade Me are at 85% of normal, compared to 45% during the lockdown.

The full dashboard is here.

NZ and Australia have followed similar successes in arresting the spread of Covid-19. But the health system was less prepared in New Zealand and the control measures stricter. The economic impact so far has been mixed. The true cost will take months to unfold.

• Spending has been harder hit in NZ: Retail spending in Australia had fallen 20% at the worst point so far (CBA) compared to around 50% in NZ (Treasury Dashboard).

• Job losses have been much bigger in Australia (The Guardian) than in NZ to date. USA has also had more job losses, which hires and fires more easily.

Source: MSD, Federal Reserve of St. Louis, DSS, The Guardian

Daily Tracker to 7 May 2020

Activity is picking up across the board in Alert Level 3, but still well below pre-lockdown levels.

The full dashboard is here.

Electricity use is back to normal, but that may have been boosted by cold weather.

Internet use suggests people are still working from home. Confirmed by traffic volumes at around half the normal levels.

Job ad listings and views are climbing back towards normal. There have now been nearly 40,000 job losses since mid-March - there were around 80,000 job losses in the entire recession a decade ago.

We are tracking a lot of different data. Below is a weekly summary since Feb.

Sources: OxCGRT : Hale, Thomas, Sam Webster, Anna Petherick, Toby Phillips, and Beatriz Kira (2020). Oxford COVID-19 Government Response Tracker, Blavatnik School of Government; Electronic card spend: Treasury charts of DataVentures; Job ads listed & Viewed: Trade Me; Traffic: Tom Tom; Electricity Use: Electricity Authority; Internet: Chorus; Number of flights: flightradar24; MSD: Covid-19 reporting; Apple Mobility; Google Mobility. 

Daily Tracker to 3 May 2020

Activity levels have increased a touch in Level 3. But it is very gradual. Encouragingly, labour market indicators are rebounding. More businesses are listing jobs on the Trade Me Jobs site, and more people are viewing them.

Traffic volumes have increased a little, but remain well below pre-lockdown levels. We are also tracking daily Apple Mobility data, available here. Google mobility data around shops will show how non-essential shops are faring, released weekly here.

Our full dashboard can be found here.

Daily Tracker to 30 April

The first three days of Alert Level 3 has shown a small return towards normality.

Across our suite of measures, Alert Level 3 has taken us 5%-15% back towards pre-Covid levels, but are still at very low levels.

For example, our traffic index has improved by 4%pts (from 27% of normal to 31%) and broadband use has fallen by 6%pt (from 117% of normal to 111%).

The full dashboard is here.

The government announced a much needed new SME lending package (Under 50 employees, that also received the wage subsidy to a cap of $100,000). By our workings, this will be helpful for businesses with fewer than 10 staff. But for larger firms, borrowing will still be challenging, and the Business Finance Guarantee Scheme will need further changes.

Daily Tracker to 26 April 2020

On the morning of 28th April, the first day of Level 3, we estimate traffic volumes have increased by around 5% in Auckland, Tauranga and Hamilton, and by nearly 15% in Wellington from last week. This suggests more people are heading back to work, but perhaps has at different speeds across sectors and regions.

Our dashboard will be useful to track how much activity rebounds in Level 3 and beyond. The full dashboard is here.

What happened during Alert Level 4?

• We used roughly 25% more broadband internet as we worked from home and entertained ourselves.

• We used 15% less electricity. While we were home more, many businesses were closed.

• Number of flights across our three main airports were down 85%.

• Job ad listings fell by two thirds as not much work could happen during lockdown, and people searching for jobs halved. But both have trended higher since mid-April.   

• When we had the data, spending on electronic cards had halved.

Jobseeker benefits already at GFC highs – after just one month

The number of jobseeker benefits has increased by roughly 30,000 (25%) in just four weeks. It took six months for a similar increase during the Global Financial Crisis (GFC). There has never been a bigger monthly increase in our data back to 1960.

Job loss is an easily understood and ‘real’ economic indicator. Jobseeker benefit numbers are one indicator of job losses. The Ministry of Social Development (MSD) is releasing weekly Jobseeker Benefit numbers. There had been around 145,000 Jobseeker beneficiaries in the lead up to COVID-19. Four weeks later, on 17 April 2020, it had increased to nearly 175,000. 

The number of Jobseeker benefits, relative to population, is now just above the peak during the 2008-09 GFC recession, when the unemployment rate peaked at 6½%. The speed of labour market deterioration is unprecedented in New Zealand’s history.

FIGURE 1 THE NUMBER OF JOB SEEKER BENEFITS RELATIVE TO POPULATION HAS ALREADY RISEN TO LAST RECESSION’S HIGHS

Sources: Sense Partners from Lattimore & Eaqub (2011), “The New Zealand Economy: An Introduction”, Statistics New Zealand, MSD

What these numbers do not show is that many employed will be working fewer hours. There is more spare capacity in the labour force than indicated solely by unemployment numbers. More people are looking at job ads on TradeMe in recent days, as our activity tracker shows.  

We will face further waves of business closures and job losses in coming weeks and months. This recession will surpass anything in living memory.

FIGURE 2: THE LATEST ‘EXCESS’ INCREASE IN JOBSEEKER BENEFITS IS 31K, AFTER ACCOUNTING FOR THE LEVEL OF WEEKLY BENEFIT APPLICATIONS THIS YEAR BEING 13k HIGHER THAN LAST YEAR.

Source: MSD

FIGURE 3: JOB LOSSES ARE WIDESPREAD, BUT LARGEST IN THE PROVINCES

Source: MSD