The government has announced a huge $12bn economic plan aimed at cushioning the impact of Covid-19 on New Zealand workers and the wider economy. We asked a range of commentators for their reaction.
Arthur Grimes: NZ’s history of fiscal surpluses might just save the day
The Covid-19 pandemic is the biggest economic shock to hit New Zealand since the 1930s Great Depression. It is bigger than the global financial crisis, the Asian financial crisis, and the two oil shocks of the 1970s. It is driven both by a global downturn, as firms shut down internationally, and by health-driven policy decisions in New Zealand. The latter mean that international tourism exports – some 6% of GDP – have virtually disappeared.
I am no expert on public health, so have no comment on whether we are following the correct health-related policies. I instead consider how economic policy should react.
First, there is very little that monetary policy can do to alleviate this crisis. Families are not going to splurge on an extra restaurant meal just because interest rates are low! Cutting interest rates to virtually zero does alleviate cash-flows of indebted businesses a little, but the underlying problems due to the pandemic remain.
So we must rely on fiscal policy to act as the main economic cushion. Apart from the 2010 post-GFC/Christchurch earthquakes period, when we ran a fiscal deficit of 7% of GDP, New Zealand has maintained fiscal surpluses since the Rogernomics era. That means we have very low public debt and plenty of room for highly expansionary fiscal policy.
Today, as in 2010, we see a massive fiscal response. The government has announced a package of wage subsidies, benefit support, sick-leave support and extra expenditures on public health. The wage subsidies mirror those that the last government put in place after the 2011 earthquake which had a temporary effect on employment retention within hard-hit firms, and had a longer term benefit for Christchurch employment.
Today’s fiscal package – put together in a rapid timeframe – is an appropriate response to the crisis that we face. Inevitably, the fiscal deficit will be much greater than the 4% of GDP that this package comprises, as other social support expenditures rise and as tax revenues plummet. So expect a fiscal deficit larger than the 7% in 2010. Given the debt situation, that is fine, provided it is short-lived.
The government can respond credibly in such a massive manner owing to the fiscal reforms of Roger Douglas and Ruth Richardson. Spare a thought for the two of them who enabled the current government to support the wellbeing of New Zealanders so effectively during this crisis.
Arthur Grimes is senior fellow at Motu Research and a professor of wellbeing and public policy at Victoria University of Wellington. He was NZ Reserve Bank chair from 2003–2013.
Susan St John: Smartly targeted tax credits and benefit increases
This very welcome stimulus package and the coming budget offers a unique opportunity to move away from the outdated features of welfare and transform the income support system to make it resilient to the shockwaves of the 21st century.
It is clear that the punitive features of benefits and tax credits do not fit with the evolving nature of work and have well and truly had their day. In a pandemic, people whose hours of work are reduced or who are forced onto a benefit are clearly affected by events outside their control. They and their children must be protected.
So it is very welcome parents longer be required to meet rigid paid hours of work to get the in-work tax credit. This is worth at least $72.50 per week for the support of children in a low-income family. But many will also require a benefit. It is time for the government to build on today’s announcement and allow all parents on benefits or part-benefits to also have the full Working for Families package. They need this to keep their children well and safe.
The increase of $25 a week to core benefits is also welcome. But the budget must build on this by individualising benefits and giving the $25 to each person on a benefit, not just $25 per couple for partnered people. Beneficiaries must be allowed to keep much more of what they earn.
The winter energy payment is a de facto benefit increase and doubling it, while welcome, is expensive. To contain costs, superannuitants could be asked to choose to opt in if they need help. The community needs to band together, share resources and take only what we need. Contributions to the NZ Super Fund could also be suspended to free $2 billion per annum of taxpayers’ money for more focused assistance. That way, the winter energy payment could even be extended to include all families on low incomes.
It is good that the government has not been seduced into income tax cuts. A tax-free threshold is only worth $1470 per annum for low income people earning $14,000 or more, and between $0-1470 for those earning under this threshold. As a one percentage point drop costs $420m, cutting the 10.5% tax rate to 0% would have been huge and ill targeted.
The package today gives us hope that the pain of this unprecedented event will be more fairly shared.
Susan St John is the economics spokesperson for Child Poverty Action Group and a professor of business and economics at the University of Auckland.
Eric Crampton: Where are the incentives?
The only sour note in finance minister Grant Robertson’s speech announcing the government’s response to the Covid-19 pandemic came when he deviated from his prepared speech. The government’s response hits the right notes. It has learned from some of the better examples abroad not only to provide support through the current crisis but also to lessen its effects.
But Robertson’s contrasting of his $12 billion spending programme with ‘neoliberal’ austerity from the prior government was simply odd. The point of maintaining fiscal discipline in normal times is to provide room for sensible responses in time of crisis. And whatever ‘neoliberalism’ might be, it certainly has room for the kinds of responses today announced.
Paying people to stay home during a pandemic when they are likely to pose a risk to others is important not only to provide support for those affected but also to provide the right incentives.
Staying home from work can be costly for a lot of workers. Singapore has provided an excellent model. There, employers can receive payments from the government if they continue to pay workers who are required to stay home in isolation. New Zealand’s model similarly compensates employers whose workers are either ill or in self-isolation.
And New Zealand’s scheme also does not reward people for taking an overseas holiday; workers who have travelled overseas since 16 March will not be eligible.
The government’s wage subsidy scheme will encourage smaller employers to keep staff on where possible. This too can help to ease the constraints that will face many small businesses needing facing sharp reductions in custom over the next few months. Larger employers will be ruled out by the rather low cap on the maximum amount that can be offered to any employer under the scheme – the maximum payment would hit for an employer claiming for about twenty full-time workers. Meanwhile, Air New Zealand is facing thousands of redundancies.
The assorted tax measures could ease cash flow for smaller businesses while bringing forward some investment.
But more important will be keeping lines of communication open with the district health boards and hospitals. Really, the health system should be facing something close to a temporarily open chequebook for dealing with the coming health costs. Nickle and diming purchases of protective gear, ventilators and respirators would be a mistake.
Eric Crampton is chief economist at the New Zealand Initiative in Wellington
Murray Brewer: A focus on people and health first
At 4% of GDP, this is pretty significant. We know this is bigger than what other countries have offered, and overall, I really like Grant Robertson’s approach. He was realistic. People will lose their jobs and some businesses will fail. His focus on people first and health first is good to see – and I also liked his plan to not only cushion the blow for businesses and workers, but also to put ourselves in a position for recovery.
The wage subsidies, the increase in the benefit and the winter energy payments are all critical, and it’s really encouraging to see how immediately they’re coming into effect.
The wage support package will be vital to the tourism industry and will help to stem the tide as income in that sector plummets and jobs are put on the line. The aviation package must be implemented soon – it’s essential to support the supply chain in and out of New Zealand.
For business owners, it’s good news. The targeted support package with a $150,000 subsidy cap will make a substantial difference to small and mid-size businesses. The changes in Inland Revenue rules will really help those people who have tax due on trading results that predate the impact of Covid-19. They may no longer have the money to pay their tax and it’s possible they’ll be facing a period of losses in the year ahead, so the IR changes will help. The ability to immediately deduct the cost of an asset purchased for up to $5,000 will be critical for small businesses investing in the recovery and being able to depreciate commercial buildings in the 2021 year will help all those businesses with larger infrastructure. There are other tax changes that will also support businesses, so business owners should be talking to their accountants. I expect we’ll see plenty of unusual tax situations considering how the markets have taken a hammering.
We’ve had positive announcements from the big four banks: they’re passing on the official cash rate cut where they can. Customers should be talking to their banks early and focus on their working capital positions. The Reserve Bank has also come to the party in a serious way – I think that both Robertson and Adrian Orr are pretty well prepared mentally for the fight ahead. The indication is that May’s Budget will deliver a second round of support, and that will be very welcome.
Murray Brewer is a partner and board chair of accounting and business advisory firm Grant Thornton New Zealand
Samantha Murton: Keep rural GP practices in mind
One of the great concerns with Covid-19 is ensuring a sustainable frontline of general practitioners; we just can’t afford to have health workforces and businesses falling over.
I look forward to seeing the detail of these measures but am optimistic that what I’ve heard today will support general practices in New Zealand in unprecedented times.
We are particularly mindful of small, sole-operated practices in rural areas where there is no back-up if those doctors need to self-isolate.
Additional support like improving video conferencing and telehealth consultations and boosting the winter energy payment for beneficiaries will likely also support GPs to keep manageable workloads as New Zealand hits wintertime.
Dr Samantha Murton is the president of the Royal New Zealand College of General Practitioners.
Jim Boult: This package could be a lifeline for Queenstown
Grant Robertson and his government colleagues are to be congratulated for recognising the pain that Covid-19 has bought to industry in New Zealand generally, but in particular to our district. We applaud this and thank government for their swift intervention.
Following the Reserve Bank’s recent announcement to cut interest rates, this government package offers a level of reassurance, particularly to small businesses and to workers in our district.
The outbreak has the potential to have a significant impact on our local economy given the dramatic slowdown in visitor numbers, and the high reliance on the visitor sector for so many in the district. I am personally very concerned about the long-term effect that this will have for local businesses and for our residents’ financial and mental wellbeing.
This package will help smaller businesses significantly but larger businesses will be eagerly awaiting the results of continuing government investigations into support for large or complex businesses – a number of whom are significant employers in our district. Also, these same entities will be anticipating further support as a result of officials’ investigations into working capital support and collaborations with trading banks.
Given our district’s almost total reliance on the tourism industry in the Queenstown Lakes District, I am advocating for additional support from central government for local business.
Jim Boult is the mayor of Queenstown Lakes.
Jarrod Kerr: We’re in a recession, and while this is a great start more will need to be done
It’s larger than we thought and better than we thought so it’s a positive, and the markets have reacted to confirm that. We’ve seen equities lift and we’ve seen interest rates lift and steepen so it’s been seen as a really positive development.
Four percent of GDP is a significant package. We knew they were going to do wage subsidies, like they did with Kaikoura [post-earthquake] but they’ve also announced a bunch of other measures particularly on tax that can help short-term.
It’s not a package that’s done and dusted. I think they will need to do more, I think things will need to be extended, and I think that the ultimate end game that we’ll end up seeing is term funding being provided from the RBNZ through the banks, to businesses that need help.
Subsidising wages is one thing but if you’re a small business with zero income and you’ve literally been shut down because of the virus you’re going to need more support and I think that’s what will ultimately happen.
We’re in a recession. I think you can say that definitively now. It’s just a matter of how deep and how long it lasts and how many people or companies hit the wall. But I tell you what, the government made a really good step in the right direction today.
Jarrod Kerr is the chief economist at Kiwibank
Shamubeel Eaqub: Better than I hoped
This package is huge, and entirely appropriate for the scale of the challenge faced by our country.
It’s a world-leading response. Packages announced by other countries so far have been much smaller, at 0.5% to 1.5% of GDP. This package is worth 4% of GDP. This the urgency and boldness we needed to see.
It balances a complex list:
– Boosting spending in health capacity to deal with an inevitable increase in cases and health sector needs (ICU, primary care)
– Averting job losses, lost incomes and business failures (wage subsidies, sick leave pay, redeploying workers)
– Getting cash to low-income households who will spend it (welfare payment increase, winter energy payment boost)
– Financial support to protect aviation supply chains, which is critical for our health sector (medicines, etc)
The package is bigger and more impressive than I hoped.