Reserve Bank's budget to be slashed by 25%

The Reserve Bank's operating budget for the coming year has been slashed by about 25 per cent.

The reduction in spending, which appears to be driven by increased staffing levels, has been agreed to by both the central bank and the government.

It follows Adrian Orr's abrupt resignation as the Reserve Bank's governor last month.

Unlike most other agencies, which receive annual funding through the Budget process, the Reserve Bank's board negotiates five-year funding agreements with the Minister of Finance, who receives advice from the Treasury.

In a statement on Wednesday, Finance Minister Nicola Willis said the bank's board and Treasury were of the view the new expenditure limits were appropriate.

"The new five-year agreement reflects the need for all government entities to identify cost savings and demonstrate value for money,"

"The bank initially sought funding of $1.03 billion for the coming five years, but the Treasury advised me that that amount did not represent good value for money."

The new agreement allocates the bank operating expenses of $750 million and capital expenditure of $25.6mfor the five-year period.

"That equates to average operating expenditure of $150m a year, 25 percent less than the bank's $200m operating expenses budget for the current financial year," Willis said.

The minister said the central bank had "grown hugely" in recent years, with full time equivalent staff numbers rising from 255 in 2017/2018 to 660 in January this year.

"Benchmarking analysis performed by the Treasury shows that several of the Reserve Bank's non-legislative functions, particularly in the People and Communications teams, appear overstaffed,"

"The new agreement will ensure that the Reserve Bank has adequate resources to fulfil its legal responsibilities while promoting heightened cost efficiency," Willis said.

The Reserve Bank has recently come in for criticism over a sharp increase in staff numbers.

However, economists say whether it has the right number of people is not a straightforward question to answer.

'Costs are still skyrocketing'

The Taxpayers' Union has slammed the central bank's new funding agreement as "spin", saying despite talk of "funding reductions" the deal locked in a major increase compared to the previous period.

"Slapping the Reserve Bank's ludicrous $1 billion funding request down to $775.6 million isn't restraint - it's just stopping them coming back for seconds," Taxpayers' Union spokesman James Ross said.

"$775.6 million is 21 per cent higher than the last five-year agreement back in 2020, and 139 per cent higher than the one before that in 2015. Costs are still skyrocketing."

"Headcount has exploded by 2.5 times since 2018, and yet the Reserve Bank still managed to fuel New Zealand's worst economic downturn in thirty years. Too many cooks have clearly spoiled the broth."

Ross said the funding boost was a bad omen ahead of the upcoming 2025 Budget.

"If this is the kind of 'restraint' the Finance Minister is banking on for the Budget next month, New Zealand is in serious trouble."

'An appropriate compromise'

Willis said Treasury advised her the Reserve Bank's annual operating budget could be $720 million, $6 million less than the Reserve Bank's revised proposal.

The bank's chair then advised the Minister this figure would "put at risk the Reserve Bank's delivery of current and incoming statutory requirements" due to the significant change required to step down from current funding levels.

"I discussed the Reserve Bank's concerns with the Treasury, who then advised me that agreeing a figure of $750 million with the Reserve Bank would be appropriate on the basis of the risks indicated by the Chair in agreeing the lower amount," the funding agreement says.

"In part, this is due to the limited information that the Treasury had available to it at the time that it provided me with its recommendation for operating expenses of $720 million."

Willis said the group had struck "an appropriate compromise".

Responding to criticism from the Taxpayers Union that the central bank's reduced spending was just "spin", Willis said the agreement was negotiated robustly.

"The starting position of the Reserve Bank was that they wanted more than a billion dollars for the coming five years and we've negotiated an agreement of $750 million for the next five years.

"So I'm satisfied that we have done a good job of driving value for money for New Zealand taxpayers, who I know are keen to see their dollars spent wisely."

Willis said the higher budget Cabinet had agreed to meant the Reserve Bank could give her "complete confidence" it could deliver on its functions.

Asked if the smaller operating budget had led to Adrian Orr's abrupt resignation as governor, Nicola Willis said she hadn't been advised that was the case.

"The matter of Adrian Orr's resignation was between him and the Reserve Bank board and the negotiation on the funding agreement has quite properly taken place between the Treasury and the Reserve Bank board.

"Matters relating to the former governor's resignation I see as separate."

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