Unemployment could be low by 2024: Treasury

WELLINGTON: A fouryear path back to low unemployment and preCovid19 levels of economic growth are possible under scenarios published by the Treasury.

However, to get there, the Government would need to spend between $20 billion and $40 billion more than the $20 billion it has already committed to try to save as many jobs and businesses as possible.

The Treasury scenarios have been prepared against the backdrop of ‘‘extremely uncertain’’ global economic conditions and do not constitute either predictions or forecasts.

‘‘The magnitude and duration of the downturn and the subsequent pace of the recovery depends on many unknown factors, including the course of the virus, how long activity restrictions are in place, how quickly the global economy will recover, how behaviours and production might change, and how successful government policies will be in supporting households and firms.

‘‘Economic forecasting becomes less about predicting likely outcomes and more about illustrating . . . possibilities,’’ the Treasury said in a document that underlines how uncertain the future is by producing five scenarios that assume various degrees of economic lockdown from very long to relatively short, and stronger and weaker global economic conditions.

The Treasury expected ‘‘severe and longlasting effects’’ from the global recession caused by the response to Covid19.

However, the most fullydeveloped scenarios all envisage unemployment returning to low, preCovid19 levels by 2024, an economy that is the same size or larger by mid2022 than it was before the pandemic, and strongly recovering growth rates by 2024.

All scenarios assume a huge leap in unemployment in the three months to June this year and a large economic contraction in the year to June 2021, followed by economic recoveries, the paces of which are mainly influenced by how much money the Government chooses to throw at the problem.

Implicitly most favoured, and therefore most likely to inform Government thinking as it approaches the May 14 Budget, are scenarios 1 and 2.

Under scenario 1, the current Level 4 lockdown lasts only four weeks, another four weeks is spent at Alert Level 3, and Levels 1 and 2 apply for another 10 months.

Under scenario 2, Level 4 lockdown is required for three months — not necessarily all at once, but over the course of the next year — while nine months are spent at Levels 1 and 2.

The Treasury then assumes that the Government spends an additional $20 billion to offset the impact of the more benign scenario 1 recession, and assumes $40 billion of additional spending to combat the severe effects of spending three months at alert Level 4 under scenario 2.

Every month spent at Level 4 reduces economic activity by 40%, the Treasury estimates, compared with 25% at Level 3 and between 5% and 15% for Levels 1 and 2.

Without more Government spending, scenario 1 unemployment rises to 13.5% in June this year, then falls back to 8.5% in a year’s time, before returning to a preCovid19 level of 4.5% by mid2024. The Treasury estimates that spending an extra $20 billion would flatten the unemployment curve to peak at 8.5% in June, falling to 5.5% in June next year.

Under scenario 2, unemployment would spike to 17.5% in

June with no additional spending. However, with a $40 billion package of extra Government assistance, the jobless peak could be kept just under 10% this year and fall to 6% by June next year.

Under all scenarios, the economy recovers by mid2022 to be larger than it was in June last year, although it plunges in size during 2020 and 2021.

While the Treasury assumes the full impact of the greater Government spending immediately reduces unemployment levels by saving jobs and firms, the impact of the additional spend makes no difference to the sharp drop in economic growth in the year to June 2020, which will reflect the severe impact of the current lockdown, no matter how long it runs for.

Under scenario 1, with a fourweek lockdown, the economy shrinks by 4.5%. Under scenario 2, with a longer lockdown, it shrinks by 8%.

However, in scenario 1 with $20 billion of additional spending, the economy contracts by just 0.5% in the year to June 2021, instead of a 2.5% contraction with no additional spending, while under scenario 2 with $40 billion of extra spending, the economy grows by 1% in the year to June 2021 rather than contracting by 3% without the additional spend.

Inflation is not a problem under any of the scenarios and yesterday’s announcements make no estimate of the impact of large additional spending on levels of Government debt.

The Treasury simply notes that Crown debt was low preCovid19, and that ‘‘the economy enters this challenging time on a solid footing’’. — BusinessDesk