CB Operations

Q & A

How exactly does the monetary payments and clearing system work in New Zealand?
Same as everywhere else, the government marks-up bank accounts using a computer when it spends, and marks-down your bank account when you pay the tax due.

Our central bank, the RBNZ, mediates inter-bank payments clearing, so your local supermarket does not have to care your bank is different to theirs.

Is it signifantly different to other countries system?
No.

Does anyone at the RBNZ understand this?
Yes. A few.

Does anyone in leadership power understand this?
No. Or mostly no.

Does anyone at NZ Treasury understand this?
No.

Do local councils and government departments really need accounts at Westpac or ANZ?
No. They could have accounts only at the RBNZ. It would make no significant operational difference, since they’d still be on a budget constraint. Just the pretense of being constrained by real ‘gold’ or ’tax payer counterfeit dollars’ goes away.

Do local councils still need to impose rates and levies?
Yes. For now, since the NZ central government is not block grant funding the councils, They should be block grant funding the councils though — to remove all the waste of effort fighting the rate payers who are being gutted in order to fund scorepoint impoverished councils — to eliminate the need for local council fees, fines and levies, which serve no useful public purpose.

Longer Discussion

This is from an email with Otago University researcher Morgan Edwards. It’s got the appropriate irreverence, but is perfectly accurate.

I asked Morgan about where I could find more “software layer” details. It is easy enough to read the Public Finance Act and other public banking statutes, but they do not explain how the software works. My complaint was that I’d come across “very left-brain types” who like to point out the NZ Treasury always has a positive account balance before it spends. Hence, the very left-brained person may say, the government is always getting the NZD off the tax payer or the private banks through bond operations. The very left-brain creatures are dead wrong!

Here is Morgan’s response: —

I’ve attached Callaghan 2023, How the Reserve Bank Implements Monetary Policy and the LSAP Review Note that the review is just a crock of shit (as you’ll see) and that Karen Silk’s speech (Monetary Policy Implementation in New Zealand) is good too.

Frazer 2004 is the best you’ll find on ‘software implementation’ (i.e., mechanics of government finance) — although I think there is a slight mistake in the settlement cash box (box 2, p. 6). Primarily, the end of day balance of the Treasury’s ESAS account (equivalent to the daily sum of consolidated cash flows in accounts at Westpac Government Branch minus whatever else NZDM has in it for other cash management purposes — ESAS accounts cannot be overdrawn) indicates whether there has been a net injection or withdrawal of settlement cash which represents the government cash influence. This triggers reflexive bond issuance (if the GCI is negative) to ‘fill the spending gap’ (in other words, replenish the CSA adherent to the cash management strategy in place — amongst other things, the $15 billion NZD ‘liquidity buffer’). Department/Crown bank accounts cannot be overdrawn as is stipulated in Treasury instructions (although sub accounts may be overdrawn, but the net position must remain positive). Note here too that departmental and Crown bank accounts at the Westpac Government Branch are on the Treasury’s balance sheet — not Westpac’s (I’ll come back to this soon).

The CSA are the Crown Settlement Accounts.

Our left-brain-only friends have been duped by New Public Financial Management — they’re ignoring the complicated institutional processes that underlie the numbers they read in those reports. Honestly unbelievable and frustrating how people can be ‘progressive’ and ‘critical’ but still adhere to the NPFM lunacy (or fail to recognise that there’s more to life than accountancy). Another thing to note here for our left brain only type friends is that the overdraft in respect of the CSA has probably been used far more than what has been let on. One person who works in the Financial Markets Team at the RBNZ (who operate the CSA at the RBNZ) said to me ‘yes it has been used before COVID and if you look at our annual reports you’ll see us reporting on it’ to which I replied ‘there was no mention of the use of the overdraft before 2020’. She looked pretty surprised! Now, we know that all spending starts from 0 (i.e., every dollar the government spends is a new dollar) and that the overdraft facility really indicates an inability of NZDM to do its job effectively (which is likely why cash management isn’t mentioned (barely at best) in any Treasury Annual Reports), but the use of the overdraft facility to meet bond maturities and other spending obligations proves – even in the left brain only logic — that the government is always able to meet its payment obligations. That’s worth keeping in mind and pointing out to people.

I’m going to surprise you here and tell you that the RBNZ Building at 2 The Terrace is probably not filled with monetarist soldiers. In fact, in my meetings with RBNZ types (managers etc), there is actually a lot of frustration with the status quo. Namely, people are frustrated with the perception that monetary policy is the only game in town and want fiscal policy to enjoy a more prominent role in economic management. Paul Conway has actually been quite open about this in webinars/MPC Decision pressers etc, but it does run deeper than that within the RBNZ. My suspiscion is that they are worried to rock the boat — coming out and saying that monetary policy is ineffective would get them in trouble with their ideological stewards across the street at 1 The Terrace (although, the ineffectiveness of MP has been noted to me privately by RBNZ people in the past). It may be naïve, but I do think that the RBNZ could be allies in shifting the dial on economic management in New Zealand (i.e., from monetary dominance to fiscal policy supporting the economy — which is exactly what me and my RBNZ manager contact were talking about).

I kept the name Paul Conway in here, since Morgan says Conway’s views are a matter of public record.

On your first question Bijou, it depends what you are looking at and how you view things. Do interest rates actually result in price stability in the first place? The MPIF (MP implementation framework) stuff is very mechanical and is consistent with how they currently implement their mandate — and it’s the closest you get in the mainstream paradigm to understanding how government spending actually works. When it comes to stuff like the NAIRU however, we know that that has nothing to do with price stability and is only a reflection of the neoliberal dominance of capital over labour (and the full employability framework — i.e., employees should be able to adapt to market conditions).

On your second question, I don’t know anyone at IRD, but I can almost guarantee that none of them would know anything about mechanics of government finance/MMT (though they do have an OIA that refers to the fact that they don’t retain the tax they collect — not much but it is a start, I guess).

I’m going to come back to what I promised I would before. I have had a few chats with a guy who used to work at the front desk at NZDM (so, managing disbursements from the CSA) and he told me that any bank balances in Departmental and Crown bank accounts are swept to the CSA to avoid Westpac default risk.

This isn’t the case at all. Departmental and Crown bank accounts are on The Treasury’s balance sheet — not Westpac’s. There is no solvency risk for the government. So NZDM’s rationale for ‘sweeping’ departmental and Crown bank account balances to the CSA is completely false — which bemused Westpac’s senior manager of Government banking operations (who I had a 2hr chat with last Friday). From that — and this is the point of this particularly long and drawn out tirade — we were talking about the general lack of understanding at how settlement cash (including the banking system and, of course, government spending) operates.

You might be wondering — what’s the rationale then? Well, the RBNZ pay the OCR on overnight deposits in the CSA, so that’s it.

My point is that there’s no (broad) knowledge on how these processes work even (especially) at NZDM and RBNZ — let alone IRD.

Hopefully this is useful.

Chat soon!

Cheers, Morgan

NB:* I had asked Morgan if it was worthwhile trying to speak to IRD (New Zealand’s tax department) people to get them to change the mere wording on their website, which makes it out they are the Robin Hood heroes grabbing our Sheriff of Nottingham tax dollars in order to keep the starving government peasants going!

It’s not that they are not civil services heores, they’ve just got it the wrong way around, they’re the Sheriff of Wellington spending tax credits when they spend their salaries, which gives us peasants the scoreponts with which we can pay the tax.

That’s all for today, just this note, but I hope it is useful to you, it was for me. Even if you lose in an ear drum bashing contest, called a “debate” with a hihgly left-brained economist nerd, you cna sleep ok at night knowing you were right, and just have no debating skills. It sucks to have no debating skills, but the upside of it could be that it means you are an empathetic person. That’s not a bad consolation prize.