MBIE's bad numbers lead to bad policy

We're calling for an apology from the Ministry of Business, Innovation and Employment after bad numbers provided to the Government caused them to approve mandatory insulation requirements for rental properties thinking that the requirements would result in $640 million of economic gains, when in reality they will result in $430 million of net losses for New Zealand households.

A report by Ian Harrison of TailRisk Economics uncovered that a basic error in calculations by MBIE means that the cost-benefit return on the Government's new insulation requirements for rental housing was just 28 cents, not the $2.80 reported by MBIE.

Mr Harrison's calculations are not based on different interpretations or assumptions. Rather they have identified a basic mix-up in the figures that MBIE plugged into its cost-benefit modelling. This mistake lead to a completely fictitious result.

TailRisk Economics is the same consultancy that first blew the whistle on the Department of Building and Housing's analysis of earthquake prone building risk. Since then the Government has completely changed course, thanks largely to Mr Harrison's advice being accepted as correct. It looks like the Government has been caught short again on basic economic calculations.

It seems highly likely that the Government would not have plowed ahead with the new insulation requirements had Minister been in receipt of the correct figures. Their decision last year imposes costs of $430 million even after the benefits of the scheme are factored in. MBIE's bad numbers have in effect imposed an enormous regulatory tax on New Zealand landlords and renters at a time when housing is becoming increasingly expensive.

We have called on MBIE to explain how it is that this sort of blunder could have happened, and whether they are looking to hold officials accountable over this expensive error.

Our question for Minister Joyce is this: why aren't systems in place to prevent these sorts of expensive errors?

You can download the MBIE advice here, and the TailRisk report here.

UPDATE: Government stands by numbers, but our advice is that TailRisk is right

Fairfax is reporting that the Government is standing by its numbers, so we had our Research Fellow, Jim Rose, take a look.

According to Mr Rose, in a nutshell, the wrong number was put into table 22 (page 48) of the MBIE report, which gives the annual benefits per household. $439.95, the net present value of lives saved, was transferred from page 39 rather than $127.92 from page 38, which was the annual benefit of lives saved. 

So MBIE used five years of $127.92 benefits to calculate a net present value ($439.95) but then used the latter figure to calculate a new net present value based on $439.95 of benefits every year for 30 years.