Daily Bulletin


The Conversation

  • Written by Norman Gemmell, Chair in Public Finance, Te Herenga Waka — Victoria University of Wellington

May 14’s budget will surely be remembered as the “pandemic budget”. It might seem like the worst possible timing – economic uncertainty rages, Treasury has had to abandon its usual economic “forecasts”, and the pandemic’s viral economic spread is far from over.

On the contrary, this may be very good budget timing. With the government’s swift lockdown and border actions, we all hope coronavirus will soon be “eliminated” in New Zealand. The government also rightly took immediate action to support an economy forced into hibernation.

So now the budget arrives just as we are ready to move into phase two of recovery – when government spending and tax policies need to change from preventative medicine to patient care.

So what budget action is needed? Despite some clamouring for a new “pandenomics” to guide policy, there is nothing different in principle about the post-elimination recession about to hit New Zealand, even if it turns out to be bigger than the unprecedented recession caused by the 2008 global financial crisis (GFC).

moving New Zealand from critical care to long-term recovery Finance Minister Grant Robertson: his budget will be well timed for phase two of the recovery. David Rowland/AAP

Time to end universal subsidies and support

Negative economic shocks can be supply-driven, demand-driven or both. Each requires different policy responses.

The current crisis started as a (self-imposed) supply shock: firms had no choice but to scale back output while their costs persisted. This is why the government’s supply-side wage subsidies and small business support were the right call (even if reasonable people can argue over their size and detail).

Read more: The ghosts of budgets past haunt New Zealand's shot at economic recovery

But as firms come out of hibernation, widespread wage subsidies should be mostly withdrawn. The government cannot possibly provide current levels of wage support for the next one to two years of economic fallout. Nor would it be desirable, as the economy adjusts to a longer recessionary phase. Keeping unsustainable businesses going through this would only undermine the needed adjustments.

Looking ahead, weak demand is more likely as unemployment rises, some businesses fail during this second phase and real wages fall. That is why this budget’s timing is helpful. It is time to pivot away from sensible but unsustainable supply-side support, to combating the expected demand contraction and its consequences.

This doesn’t depend on Treasury forecasts. We already know that output has dropped massively, with more to come. So preparation for stimulating fiscal policy – such as expanding some government spending programmes (though much of this will happen automatically as tax revenues fall and welfare spending rises). Looser monetary policies should help, with the central bank injecting more liquidity into the economy.

This year’s pandemic budget should, however, look to redirect spending towards immediate support for those businesses and households that will now suffer most. Since total spending will inevitably rise, cutting back longer term and low impact projects needs to form part of this.

A good place to start would be the Provincial Growth Fund, the result of little more than expensive political horsetrading among the government’s coalition partners. But somehow I doubt this option is what finance minister Grant Robertson meant last week when he signalled that certain pre-COVID-19 budget priorities will be “put on ice”.

Stay flexible and plan for steady debt repayment

In my view, two guiding principles should inform budget initiatives.

First, flexibility. Uncertainty around who will be worst affected, for how long and how severely, suggests that flexible support packages make more sense than widespread, predetermined handouts. Let’s see where the economic recession bites, with packages in place to respond quickly, rather than trying to predict where the worst effects will be.

moving New Zealand from critical care to long-term recovery 2019’s Well-being Budget: who really remembers what it contained now? AAP

Direct government-to-business loans, for example, that can be applied for and granted subject to conditions, would ensure more targeted support. And with interest rates set close to government borrowing rates, they are a relatively low risk, low cost option. Those needing short term help and are able to recover will repay in due course. Those without a long term future would not be well served by delaying the inevitable at taxpayer expense.

Read more: Past pandemics show how coronavirus budgets can drive faster economic recovery

Secondly, plan a future debt trajectory. Much current debate surrounds the eventual taxpayer cost of massive public debt increases, perhaps rising from 20-50% of GDP. As with the post-WWII debt response, this will need to be brought back down, but more slowly than after the GFC, for example.

Public debt increases are global, and New Zealand will not look like a bad international credit risk for the foreseeable future. Plus, with interest rates almost certain to remain low for years, the government’s debt servicing costs have never looked better. Nevertheless, a credible plan towards lower debt is essential if we are to be well prepared for the next crisis – as we were for this one.

Some are suggesting this year’s budget initiatives will be pivotal for the economy. Maybe. Mostly, budgets are like yesterday’s news. Who remembers the 2019 budget beyond the slogans? It was the “hacked budget” (which wasn’t actually hacked, but prematurely revealed due to Treasury slip-ups). Or the “Well-being Budget” (the official title that was little more than political spin with a smiley cover photo; what were Bill English’s social investment budgets about if not well-being?).

So, good luck Mr Robertson – we hope your pandemic budget (or “recovery budget” as you are calling it) delivers more than a catchy strapline.

Authors: Norman Gemmell, Chair in Public Finance, Te Herenga Waka — Victoria University of Wellington

Read more https://theconversation.com/the-pandemic-budget-moving-new-zealand-from-critical-care-to-long-term-recovery-138294

Writers Wanted

The Best Android tools and Utility Apps

arrow_forward

How to Find the Best SEO Services Company That Offers Guaranteed Results

arrow_forward

The Conversation
INTERWEBS DIGITAL AGENCY

Politics

Prime Minister Interview with Ben Fordham, 2GB

BEN FORDHAM: Scott Morrison, good morning to you.    PRIME MINISTER: Good morning, Ben. How are you?    FORDHAM: Good. How many days have you got to go?   PRIME MINISTER: I've got another we...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Kieran Gilbert, Sky News

KIERAN GILBERT: Kieran Gilbert here with you and the Prime Minister joins me. Prime Minister, thanks so much for your time.  PRIME MINISTER: G'day Kieran.  GILBERT: An assumption a vaccine is ...

Daily Bulletin - avatar Daily Bulletin

Did BLM Really Change the US Police Work?

The Black Lives Matter (BLM) movement has proven that the power of the state rests in the hands of the people it governs. Following the death of 46-year-old black American George Floyd in a case of ...

a Guest Writer - avatar a Guest Writer

Business News

How to Find the Best SEO Services Company That Offers Guaranteed Results

As a business owner, you have to be strategic about how you’ll be able to reach your target market. That is why entrepreneurs implement various marketing tactics to reach their goals. With today...

News Co - avatar News Co

Top Reasons Why Your Business Needs SEO

SEO is crucial for the ranking of a website. You may think that SEO offers greater searchability while it can do more than this. The most cost-effective tool for the survival of smalls businesse...

News Co - avatar News Co

Nisbets’ Collab with The Lobby is Showing the Sexy Side of Hospitality Supply

Hospitality supply services might not immediately make you think ‘sexy’. But when a barkeep in a moodily lit bar holds up the perfectly formed juniper gin balloon or catches the light in the edg...

The Atticism - avatar The Atticism



News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion