Budget 2020: While the cost of Covid-19 means crown debt will increase dramatically, setting the right priorities means the economy can recover sooner.

The government should have two priorities in this budget. First, and most importantly, the health system needs to be ready for the medium-to-long term changes that the pandemic has forced on the country. Second, the government needs to ensure the temporary measures necessary are in place for all of us to deal with the current mess.

Those two priorities lead to one unavoidable consequence. Permanent spending increases – increased spending on matters unrelated to the pandemic that are locked in and hard to reverse – means less room for dealing with the pandemic.

Why is that the case? The government will need to take on debt to deal with the current crisis. Tax revenues will be down and spending will have to be higher. But while the Public Finance Act allows this kind of response to emergencies, it also requires the government to think about the path back to prudent debt levels. This requirement makes a lot of sense: we just cannot know when the next crisis will hit; the Alpine Fault is overdue. We will need room to deal with the next crisis too.

Returning to prudent debt levels after this is all over will be much harder if the government locks in increases to baseline expenditures; that would limit how much debt the government could afford to take on now. An adequate response to the current crisis requires fiscal discipline about matters unrelated to the pandemic response.

On the current response, I desperately hope that some of the money allocated to the district health boards earlier this week will be directly put to pandemic response – and particularly into the offices of the Medical Officers of Health.

While we can hope for normal-looking travel between New Zealand and places like Taiwan, whose pandemic response is even better than ours, entry from other places will have to be under quarantine restrictions for a while. That requires quarantine facilities. The government does not have to provide those facilities but it’s unlikely that the government would accept visitors from Canada without those visitors going into quarantine facilities it knows are trustworthy.

The investment is trivial in the grand scheme of things, but the government’s failure to sort that out is costing billions of dollars in international student revenue. And who knows what other work could shift to New Zealand, if we had credible quarantine provisions? Film productions without risk of Covid-19 interruptions might be attractive enough to not even need film subsidies any longer. International sporting codes could shift to an Australia-New Zealand bubble to maintain their television contracts. But it all requires sorting out quarantine.

Contact tracing also has to be built up and maintained so that any future outbreaks can be handled through rapid tracing and quarantine of cases and contacts. Again, an investment of millions will save tens of billions, easily.

Disruption in the short-to-medium term can justify greater targeted support for households facing substantial income losses. Extending the student loan scheme to non-students and allowing people to borrow against lost income this year up to a cap would not be a bad way of handling things. For every dollar that the government might hand out to everyone as “helicopter money”, it could afford to lend out about $4.75 through the student loan scheme if it were targeted to those losing income.

Finally, I hope that whatever infrastructure investments the government hopes to make are checked rigorously to ensure  they pass a reasonable cost-benefit assessment, and that the country has the capability to get them built. High unemployment rates do not necessarily mean easy availability of the skills needed for those projects.