Budget 2020: A massive spend-up but not transformational

Friday, 15 May 2020, 10:56 am
Article: RNZ

Opinion - Budget 2020 has been delivered in the inferno of the Covid-19 public health crisis. It is also an economic crisis, with a global recession, spiking job losses and lost confidence. Few will be spared.

Budgets are usually staid affairs. But 2020 is different. There were big spending promises to save businesses and jobs, prepare for a surge in unemployment, retraining, and investment, including social housing.

These spending promises take New Zealand to the top of the spending league tables (as a share of the economy) for the Covid response. Prudently, the government hasn't rushed into picking 'shovel-ready' projects and there is a $20 billion spending buffer to help navigate the uncertain months and years ahead.

The Budget lacked transformative change - as was expected in the midst of a crisis - but it made up for it in sheer size and the promise of more action in coming weeks and months. It is a Budget fit for the times.

Starting line for the slog

The lockdown was relatively easy: a clearly defined and time-limited remedy to a health threat. It was easy to band together, to look after each other, as we all faced the risk equally.

But the exit strategy, the primary theme of the Budget, is much less clear. That's because the recession and recovery each of us experience will vary. Some will bounce back easily. Others will lose jobs, businesses, homes and relationships, and will need a lot of help.

Choices we make now may pit some groups against others. These social divisions will also be reflected in our typically adversarial political discourse.

The Budget is the starting marker of the exit from lockdowns, and the messy slog out of an unprecedented slump in the economy. It is also the starting point of the election later this year.

Government in driving seat

We typically manage the economy through the Reserve Bank.

Monetary policy's job is to create an enabling and stable economic environment.

The government largely focuses on delivering public services and institutional settings (rules and regulations).

But monetary policy is currently impotent. Interest rates are already very low. There is already too much private sector debt. So, we can't use lower interest rates and urge more borrowing to revive the economy.

Fiscal policy is the main tool. And it looks like we are going to spend and borrow a lot - although the RBNZ still has a big role to play by printing money (quantitative easing) and keeping the cost of borrowing low for the government.

The government really spent up.

The new initiatives (excluding expected spending on welfare and the like) take the Covid-19 related spending to 13 percent of gross domestic product (GDP). For comparison, Australia has so far spent 11 percent of GDP, Japan 10 percent, the US 7 percent, Canada 5 percent.

Government net debt is set to increase from 20 percent of GDP to a peak of just over 55 percent, the peak during the painful economic restructuring of the late 1980s.

Compared with global peers, the level of borrowing remains modest - especially given all governments will be borrowing large sums of money.

The chart below shows our debt and its likely increase, using a slightly different measure, gross government borrowing, which is easier to compare cross country.

The government had three broad areas of focus: wean us off the crisis measures of recent weeks, prepare for the recession, and plan for the recovery.

Weaning the country off open ended support

As we entered lockdown and a relatively quick opening up seemed likely, it made sense to provide generous, open-ended support to try and save as many businesses and jobs as possible. It allowed us to have a successful lockdown. But the cost was enormous.

Prepare for recession

From now on, we cannot afford to support every part of the economy. Rather, we need to be realistic that many businesses will fail because, faced with the biggest recession in generations, people (here and abroad) are more cautious and will spend less.

This will mean fewer dollars to go around. Better to have some businesses fail, so the rest may survive.

Zombie businesses which are over indebted, cash-strapped and on state life support, would slow the slump, starve other businesses who may have coped better, and also throttle an eventual recovery. Brutally, this 'creative destruction' is necessary in a recession.

The Budget did this by extending the wage subsidy for another eight weeks. It requires revenue drops to be even more severe (50 percent, compared to 30 percent in the initial scheme) and is time limited.

After this, businesses are on their own. By that, it tapers the support, and hopefully supports many businesses to survive until the new lower 'normal' of consumer spending and business activity settles.

A $400 million tourism fund is acknowledgement that the industry is ground zero of this recession. It may help, but I fear much of this money will be spent on trying to do the impossible.

Support those hardest hit

The recession so far has already claimed 40,000 jobs. Half as many as the entire recession of the global financial crisis of a decade ago. The strain on our welfare system will be enormous.

Thousands of New Zealanders will also face the harsh reality of our welfare system. Recently unemployed will face income losses of 25 percent to 80 percent.

Budget 2020 did not provide any additional support in this area.

It will become a big issue heading into the September election, by which time another 100,000-plus New Zealanders will have experienced the welfare system for themselves.

However, there was a significant additional programme of social housing announced - 8000 additional houses on top of the previous target of 6400 will almost meet the current social housing wait list of 15,000.

There was also additional support for education and training. Targeting some of this funding directly to trades and apprenticeships will start to answer long-standing skill shortages in many industries.

Pleasingly, there was additional funding for free school lunches, increasing from feeding 8000 to 200,000 children. The outlook for unemployment means this will be welcome, but a modest salve to rapidly rising child poverty.

Drive the recovery

The government will have to drive the recovery. During any recession, the biggest slump is in private investment activity, followed by household spending.

The government can help by increasing investment in public projects.

There is a long list of shovel ready projects ($3 billion). The projects have not yet been decided. This is welcome, as rushing into bad projects will saddle us with bad outcomes.

We will need to ensure the projects create jobs now, are good for New Zealand (the benefits outweigh the costs), and are consistent with the Zero Carbon legislation.

Pleasingly, social housing is a significant beneficiary ($5b), as was conservation jobs ($1.1b) to clean up waterways, weed and pest control, and other conservation efforts.

The spending will not be enough to offset a private sector recession. For example, if private sector investment shrinks by 15 percent like the last recession, then public investment needs to increase three-fold.

Debt and the future

The huge spending comes with a predictable increase in borrowing.

Borrowing will rise because of all the initiatives, and because during a recession tax revenue falls and welfare spending increases. That is as it should be. But the current shock will increase our debt (net debt) from 20 percent of GDP towards 55 percent.

The Budget is silent on how we will pay it back. We have a few choices, but none easy:

• Fatalism: Just carry the debt and let future generations pay for it.
• Spread the burden: increase taxes on high income earners and wealth (most likely land), but not yet because that would just scupper the recovery.
• Spend less on public services (although the lesson of the last recession was that austerity hurts the recovery): There will be a focus on cost cutting. Ultimately, some government will need to address the fast growing costs in areas like superannuation with means testing, housing support payments with fundamental reforms of housing.
• Target higher inflation, as government borrowing is in nominal terms. If prices of things rise, then the economy and tax revenue are relative larger, making it easier to pay off the debt.
• Do a one-off direct money injection from the RBNZ (money printing) to the government, which will effectively mean everyone in New Zealand, scaled by their New Zealand currency denominated wealth, pays for the Covid-19 cost without burdening future generations. There is a risk that such an operation will lead to inflation, or a loss of trust in our monetary system, which could devalue our currency and make it difficult for us (both government and private sector) to borrow money in the future.

Verdict: a flexible budget

The $16b of new spending and forecast increase in borrowing means our Covid-19 response is world class.

Importantly, there is still capacity to do more over coming months and years, with $20b set aside.

Given the uncertainty of the recession here and abroad, and uncertainty around when the pandemic will subside, this Budget delivered a careful balance of doing a lot to wean us off an open cheque book, blunt the recession, and lay the building blocks of a recovery.

There is still a need for transformative change. That chapter belongs to the election and whoever governs the next term of government.

* Shamubeel Eaqub is an economist at Sense Partners.

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