Coronavirus: Budget 2020 may be time to look beyond Covid-19 'relief' and towards recovery

Friday, 24 April 2020

Budget 2020 may start to look to the future.

With the best of luck, the country will be enjoying its third day out of level 3 lockdown when Finance Minister Grant Robertson delivers his third Budget on May 14.

Kiwis will have dutifully abided by the nagging appeals not to become complacent during the final three weeks of level 4 and 3 alerts, and that will have paid off, with no new coronavirus cases reported for many days.

People will be blinking their eyes in the autumn sun as life returns a lot closer to normality under alert level 2.

Most businesses will be open, people will be able to travel freely within their region, and it may even be 'game on' again for some competitive sports.

Awkard questions about whether the Government was too slow to close the country's borders will have been forgotten, and ministers will be basking in international adulation as examples of how to manage a crisis.

* Business and Government will need to join hands

Budget 2020 is likely to see a record spend-up.

* Reserve Bank plonks down another $3 billion on quantitative easing**

But even under that optimistic scenario, the country will be closed to tourism, the international economy will be reeling, insolvencies rising and unemployment tracking up towards a forecast peak of about 10 per cent.

So Robertson will have another tough choice.

He will still have about half of the $52 billion that Parliament authorised the Government to spend on mitigating the economic impacts of the pandemic up his sleeve.

Should he focus the Budget entirely on dishing out more band-aids to help struggling businesses and Kiwis?

'Helicopter money' has been suggested as one way to boost the economy, but other economists argue Budget spending will need to be better targeted.

Or should he start to shift the conversation to recognise not all industries will enjoy a return to normal.

That could mean directing some of Budget billions towards the 'winners' rather than the losers, to-fire up the sectors of the economy that might be able to take up the slack.

A third option being promoted by Kiwibank chief economist Jarrod Kerr, among others, is to drop 'helicopter money' into the hands of consumers and let that flow through the economy where it will.

Kerr has suggested New Zealanders each be given a payment of $1500 to stimulate the economy.

National Party finance spokesman Paul Goldsmith agrees there will come a time in the second half of this year when the focus should shift to supporting business where it is going to be, rather than where it has been in the past.

But he suggests it is still a bit early to make that adjustment now.

Fairness comes into his thinking.

The Government decided 'for better or worse' to be cautious about moving out of lockdown, and the focus at the moment should be on business relief, he says.

'When you are in a position where for public health reasons the Government has reduced the revenues of a bunch of companies to zero, then I think there is a strong argument that all of that pain shouldn't fall on a relatively limited section of the community,' he says.

But Infometrics economist Brad Olsen sees the Budget as an opportunity to at least get the conversation started about 'recovery'.

'The way I would see the Budget is it sets down what that path looks like.

'It might not be that every policy is hammered out, but I'd like to see some direction-setting.'

Olsen suggests grant to support growing businesses.

Even a signal from the Government that some such support might be in place early next year could give businesses confidence to invest in new opportunities, he says.

Reserve Bank governor Adrian Orr has opened the door to the central bank directly funding government spending, but also said there was 'no free lunch'.

Eric Crampton, chief economist of the New Zealand Initiative, says there's a case for the Government providing more relief in the form of credit to cash-starved businesses.

But he believes ministers are still deliberating whether to extend wage subsidies, which notionally apply until June 30.

'Wage subsidies were designed to keep employers tied to their employees so those businesses could restart really quickly, when circumstances changed.

'But I suspect that when we are coming out of lockdown, the case around this will start shifting a bit,' he says.

If it is going to be a year before international tourism becomes feasible again, then wage subsidies to that sector 'start making a lot less sense', he says.

Olsen makes the same point.

He also believes the time for additional short-term support for businesses may not be over, suggesting they could get some assistance with rates and rents, or a 'targeted GST cash-back scheme'.

But he says there is questionmark over whether the Government should try to sustain some level of activity among businesses in the tourism, hospitality and retail sectors that find lower alert levels a challenge.

National Party finance spokesman Paul Goldsmith feels it may be too soon now to shift the focus away from 'relief', given struggling business owners have been required to make sacrifices for the public good.

'Maybe it is better to say to them 'we need you to go properly dormant for 18 months, but when you come back we will give you a shot in the arm then'.'

That will be one of Robertson's toughest calls, he says.

Turning to 'recovery', Olsen believes the Government could do something quickly to help people re-equip themselves for new jobs.

'When you look at occupations in tourism and hospitality, those people have got fantastic skills but they may not quite fit some other sectors.

'Do you have 'micro-credentials' courses that you offer them?

'Do you somehow change fees-free education and make sure there is an opportunity for those who have lost jobs to claim that?'

Like Olsen, Crampton has also begun to turn his thoughts towards economy-building.

He suggests the Government could try to help rebuild the international education industry while visitors are still required to spend two weeks in quarantine.

'It is utterly implausible that someone would come here on a short holiday and spend two weeks in lockdown quarantine.

'But for a student who is planning to be here for a year, two weeks is a doddle.

'So long as universities can put people into quarantine and ministries can check that is being handled properly, you could reboot 'export education'.'

The case for wage subsidies that tie businesses to employees will 'start to shift a bit' once lockdown ends, says New Zealand Initiative chief economist Eric Crampton.

Crampton says the industry could even come out stronger than before if New Zealand was 'a basically Covid-free place'.

'We could be really desirable to students who might have passed New Zealand over for prestigious schools in the United States or Canada.

'Imagine a reinvigorated tourism business based on these longer-term visitors.'

The think-tank has also floated the idea of extending the existing student-loan system to provide zero-interest loans to the newly-unemployed to bridge the gap until they found a new income.

'JobSeeker support is great in normal times when people could expect to find new work quickly,' Crampton says.

But the economic dislocation caused by the pandemic could be different, he says, requiring large numbers of people to switch industries.

'We already have the student-loan apparatus in place. You don't start making repayments until your income is more than $20,020 a year.'

Crampton shoots down the idea of 'helicopter money', which some economists argue should be created by the Reserve Bank and dished out to all by the Government to provide a fiscal stimulus.

'There has been a lot of talk about helicopter money and cash grants but that will always do too much to support people who don't need the help,' he says.

Olsen has another objection.

'A tax rebate or one-off payments could well be a way to get the economy going again.

'But it can't be for at least the next 18 months as it would just be a waste of money now,' he says.

'Helicopter money is saying to people, 'here is some funding, go out and spent it'.

'If you give it to them now when people are worried about their jobs, they are much more likely to sit on that money.'

Also yet to be seen, is the extent of any non-government-fuelled post-lockdown splurge, as people still in work spend cash they have been unable to spend on 'non-essential items' during the lockdown.

Billions of dollars of spending on roads will go ahead, Transport Minister Phil Twyford says, despite fewer tourists and suggestions more people may continue to work from home.

Robertson has not ruled cash payments, but a mixed focus on targeted relief and some targeted spending on recovery options may be more on the cards.

A separate question facing Robertson is whether the pandemic may provide good reason for the Government to revise its pre-coronavirus spending plans.

It stuck doggedly to its guns in raising the minimum wage in April, despite howls of protest from business lobby groups.

It had earmarked what may in the current context seem a rather paltry $3b for new Budget spending, with a focus on 'wellbeing' initiatives such as mental health, tackling child poverty, and skills and training.

Depending on what exactly it had in mind, some of that spending could be recast as a response to the coronavirus pandemic.

The crisis has taken a toll on people's mental health, threatened more families with poverty and raised the importance of re-training.

But Crampton says the Government needs to maintain tight fiscal discipline over the parts of its Budget that are not related to 'this mess' or to paying for long-term infrastructure.

'If the Government starts doing things like locking in new benefit programmes or putting in a guaranteed annual income – anything that increases its baseline spending in ways that are unrelated to this crisis – it is going to make it way harder to get back to fiscal prudence later without a big increase in tax rates.'

Pippa Chang, Dunedin co-convenor and national spokeswoman of youth activist organisation Generation Zero, would like to see the Government reconsider the $6.8b infrastructure spending plan it set out amid fanfare in January, which was mostly earmarked for roading developments.

Youth organisation Generation Zero wants to see the Government use the Budget to 'lock in' climate gains and deliver 'intergenerational justice'.

With more people working from home and fewer tourists travelling the country the case for some roading investments may have weakened, and Chang questions whether roading will provide the best bang for the buck in terms of employment.

She would rather see the Government lock-in the silver-lining that the pandemic has provided in the form of lower carbon emissions 'so future generations don't have to stress as much about the climate'.

'We definitely want intergenerational justice, making sure young people are supported.'

Transport Minister Phil Twyford indicates there will be no reprioritisation of spending away from roading, though.

'We aren't considering changing any of the announced projects.

'Now more than ever, the construction industry needs a fully-funded pipeline of infrastructure projects to create jobs and provide certainty, which the 'NZ Upgrade Programme' does,' he says.

'In fact, we are considering new 'shovel ready' projects on top of the NZ Upgrade Programme to support the post-lockdown economy and cushion the blow from the pandemic.'

Twyford says the Government will have more to say on this 'in the coming weeks'.

'It's too early to say what impacts Covid-19 will have for transport spending in the long term,' he adds.

A third question facing Robertson is what, if anything much, to say in the Budget about how increased government spending will be paid for.

Reserve Bank governor Adrian Orr surprised some in the financial community when he told an online meeting hosted by the Trans Tasman Business Circle on Tuesday that he was 'open-minded' about the central bank 'directly monetising' government debt.

To be clear, that is jargon for the Reserve Bank creating new money on its computers and giving that straight to the Government to spend, rather than increasing the amount of money in the economy through quantitative easing.

'I know direct monetisation has been heresy and taboo for a long time,' Orr said.

'With it comes as many risks possibilities because blurring that monetary and fiscal policy together can lead to very relaxed fiscal policy.

'Likewise it can lead to very high inflation if there isn't that operational independence to tighten when the economy is back on its feet,' he said.

'But you shouldn't rule any option out.'

Orr also said, though, there was 'no free lunch'.

To the extent that the Government borrows to support the living standards of people and business owners while they are rendered idle because of Covid-19, then some time down the track there will need to be an equivalent sacrifice.

The conventional, if not the only way, to offer up that sacrifice is through taxation.

A higher top marginal rate of income tax, a wealth tax such an inheritance tax, or a further gradual tightening of the noose on previously untaxed capital gains are the obvious options.

Whether Robertson feels the Government has the 'political capital' to start that conversation by Budget time – like almost everything else – may come down to those daily coronavirus numbers.