Weighing the Wage subsidy

Government support saved jobs from Covid-19. But did it really need to cost $14 billion, asks Kate Macnamara

New Zealand’s $50 billion response to Covid-19 doled out millions for everything from apprenticeships to bird sanctuaries. But its centrepiece was the $14b wage subsidy which, in the dark days of April and May, underpinned the pay packets of more than half the country’s workers.

It eclipsed new provisions for health spending and border control, including managed isolation, and remains the single biggest line item in the extraordinary costs of 2020.

Proponents of the scheme laud it as the lynchpin that kept employees attached to their employers through a massive economic shock that would otherwise have produced a wave of redundancies.

Such job losses are brutal in the short term but grimmer still as they calcify into long-term unemployment and what economists call “scarring” – effects that range from lower future earnings even after re-employment, to poorer health and life circumstances.

Critics, however, are less generous. The subsidy does appear to have averted job losses and it helped convince people to comply with enormously restrictive new health rules.

But the question of policy success does not lie simply in assessing whether its stated aims were met. Importantly, success resides in the question of whether the same result could have been bought more cheaply. After all, $14b has been added to the nation’s government debt and must be repaid. And the opportunity to spend that money on other public goods is gone.

Afewdays inmarch

The wage subsidy was conceived over just a few weeks. On March 2, a month after New Zealand closed its border to travellers from China and a handful of other hotspots, fearing the spread of the novel coronavirus, Kirk Hope had a high-level meeting in Wellington.

The chief executive of New Zealand’s largest business advocacy group, Business New Zealand, and a handful of his colleagues sat down with officials and politicians. Prime Minister Jacinda Ardern, Finance Minister Grant Robertson and Economic Development Minister Phil Twyford were all in the room.

Foot traffic in the tourist centres of Queenstown and Rotorua had already fallen by about 30 per cent and hospitality and tourism businesses, plus a swathe of the retail sector, were in trouble.

Hope’s group stressed the need to act and argued that a wage subsidy, modelled on the scheme deployed following the Christchurch earthquake in 2011, could serve as a template.

Two weeks later, the Beehive announced that all employers (including sole traders and the selfemployed) “significantly impacted” by Covid-19 could apply for a subsidy. The terms were generous. The payment covered a 12-week period. It paid $585 a week for a fulltime employee (20 hours or more) and $350 a week for part-timers (less than 20 hours). It flowed to employers, who were required to pass it on to employees, and it reduced payroll costs significantly, especially for small companies.

The key criterion for receiving payment was that employers either had suffered, or anticipated suffering, a drop of at least 30 per cent in revenue for any month in 2020 from January to June (compared with the same month in 2019). If the anticipated revenue drop failed to materialise, the funds were to be paid back (criteria varied slightly for two later iterations of the subsidy).

At an estimated $5b, the plan was expensive. But it had an important limit: the most any one employer could receive was $150,000. That meant the subsidy’s value was far more meaningful to small and medium-sized firms.

It was a feature largely in keeping with the previous earthquake-related wage subsidies. In those cases, nationwide firms and multinationals were excluded. As then-prime minister John Key told Interest.com in 2011, “we believe they’ve got the financial wherewithal to look after their own staff”.

Thecap blows off

In mid-march, New Zealand (following the example of many other countries fearing the spread of Covid19) quickly lurched from roughly “business as usual” to a system of alert levels that throttled the economy, banished ordinary life and limited social contact in order to stop the spread of the little-understood virus.

On March 21, just days after the wage subsidy was established, the Government announced its alertlevel system and immediately put the country into level 2. Cabinet papers show that frantic plans for full lockdown were in train but the parameters were not yet set.

Emphasising a precautionary principle, bureaucrats, and ultimately the Cabinet, determined that New Zealand’s lockdownwould have startling and comprehensive breadth. And it would shutter economic activity according to a designation of essential service, without regard for risk. The wage subsidy’s $150,000 cap was removed to match that “go hard” response. It pushed the estimated cost to $8b to $12b.

“There were obviously a lot of moving parts, but that date also marked a turning point for the NZX; shares were down 25 to 30 per cent, and removing the cap on the wage subsidy just happened to usher in a most remarkable rally,” observes Robert Macculloch, professor of business and economics at the University of Auckland. “The value of that policy to business was not lost on the market.”

Indeed, opening the wage subsidy to wider use by big firms wasn’t the only expensive revision of those hectic March days. Ian Harrison is principal at consultancy Tail Risk Economics and regularly casts a critical eye over government policymaking. He maintains that the construction and forestry sectors could have continued to operate through level 4 lockdown with little additional health risk.

“The Cabinet made a panicked decision on March 23,” says Harrison.

“It was hyped up and essentially encouraged to go as hard as it possibly could. There was no analysis. No advice that considered work in relation to the risk that it posed through spreading the virus.

“If they had the advice that said ‘look, here’s construction, most of the jobs are outside, it’s relatively easy to socially distance, most of those people don’t use public transport’ . . . well, the wage subsidy would likely have been cheaper.”

Indeed, a Cabinet paper of March 23 anticipated construction would continue at level 4 as essential work. However, when ministers made the final decision only a tiny part of the sector was allowed to operate.

Harrison isn’t the only observer to suggest that “outside work”, including forestry and construction, could have safely continued at level 4. Murray Sherwin, outgoing head of the Productivity Commission, also made the observation. And, indeed, at the time of the August resurgence of the virus, Treasury advice to the Minister of Finance repeatedly asked whether the ministry should provide further advice on softening the stringent alert level provisions, especially for level 4.

“Outside work” generally, and construction and forestry in particular, as well as segments of high-tech manufacturing, could all be considered at level 4, advice to the minister suggested. Treasury also offered to provide further advice on allowing “economically-significant” businesses to operate. It’s not clear, however, whether the minister ever requested the advice on offer.

Ministry of Social Development data show 213,000 unique construction jobs (14 per cent of the total for all sectors) were paid a wage subsidy, most in the policy’s first phase. Harrison says the figures imply a saving of more than $1b had construction been deemed essential.

Kirk Hope, however, suggestion. Meatworks, rejects the he notes, were deemed essential but still suffered a 40 per cent drop in productivity because of distancing and other rules. Even if construction had been allowed to continue, firmsmight still have suffered enough of a revenue reduction to claim the subsidy (though it is also noteworthy that meatworks, unlike construction, involve notoriously close, indoor working conditions).

Payouts totheprofitable

The wage subsidy has certainly copped the most criticism for its payouts to large, profitable companies, some of them multinational and many of them publicly listed.

Of the 1.5 million unique jobs (not including the self-employed) covered across its three iterations, some 442,000 (29 per cent) were in large companies with more than 100 staff. And 138,000 (9 per cent) of jobs covered were in firms of more than 1000 people.

Not everyone views those figures as problematic. Oliver Hartwich, executive director of the business oriented think tank the New Zealand Initiative, says he has no objection to the subsidy flowing to large companies; the subsidy was needed to avoid scarring to the economy and to the people thrown out of work.

“There had to be a way to push the pause button on the economy that would maintain links between employers and employees through a period of no work or very little work. That was the really important thing, not whether those employees worked at big companies or small companies, or whether those companies had been profitable,” Hartwich says.

And New Zealand’s unemployment rate bears out the success of the subsidy on those terms. In the September quarter, unemployment hit 5.3 per cent. It was a whopping 1.3 percentage point rise over the June quarter, but it still reveals a job market that is, so far, much less bleak than feared.

Still, some observers say the government help, designed as a “high trust” scheme, should have come with more strings. Jilnaught Wong, accounting professor at the University of Auckland, has been a staunch critic of some big companies.

“Many companies are doing very well and have chosen to pay the subsidy back. But we still have large companies, listed companies, some posting big profits, some paying dividends to shareholders, and holding on to taxpayers’ money. That behaviour is appalling and greedy.”

Wong cites the Warehouse Group in particular. It drew $68m from the wage subsidy. The company was forced to close during level 4 lockdown, but benefited from a surge in demand thereafter, both in stores and online. Cash from operations in 2020 more than doubled from 2019, to $408m, Wong points out.

Structuring the aid as a forgivable loan, he says, would have made it easy for the Government to claw back funds in such situations. He also objects to the likes of Ryman Healthcare; the company drew $14.2m from the wage subsidy despite paying a shareholder dividend from substantial retained earnings.

The company this week said would repay the subsidy.

Wong also points out that rules for the subsidy stipulated that a “business must have taken active steps to mitigate the financial impact of Covid19. This could include: drawing from your cash reserves (as appropriate).”

However, it’s not clear that companies could be forced to draw on cash first.

In presenting the company’s halfyear result last month, Ryman chairman David Kerr was asked to explain the decision to pay a dividend, given that it had drawn the wage subsidy in the same six-month period.

Kerr explained it this way: “We felt that the wage subsidy was a great initiative by government that we were, as a result of it, able to continue to employ all our staff and redeploy staff and engage new staff to enable the villages to stay safe. So effectively, we kept and grew jobs and so when you look at the other side of it in terms of what we have spent to keep our villages safe and our staff safe, we’ve probably spent about three times the wage subsidy.

“So we felt that the whole thing balanced out. That it was appropriate to pay a dividend.”

It is also important to note that, as of November 27, $525m has been paid back across the wage subsidy and leave payment schemes.

The list of those paying includes many large corporations, including Mainfreight, Napier Port, Metlifecare and Briscoe, as well as large law firms including Bell Gully and Simpson Grierson.

it

Returning, for a moment, to the frenzied days of March, a piece of advice that landed with the Minister of Finance on the 22nd remains pertinent. Treasury warned of the risk of “waste” and “fraud” in lifting the cap on the wage subsidy.

One aspect of the scheme seems to echo that warning. Ministry of Social Development figuresshow that fully 103 per cent of unique food and accommodation jobswere supported by at least one wage subsidy. The figure is 106 per cent for the construction industry.

The data largely strips out the selfemployed and means a subsidy was paid for more construction and food and accommodation jobs than are documented by Inland Revenue.

In a written statement, Fleur Mclaren, general manager system performance, ascribed the discrepancy to different agencies’ handling of data.

She said data “has been used [drawn] from multiple agencies, which has resulted in a higher proportion of jobs supported by at least one wage subsidy.

“Overall, there is a high level of consistency between different sources of information but, there are some inconsistencies whenmatching applications to employers and employee details.”

Theministry says it has completed 10,560 pre-payment and postpayment audits; 942 cases had been referred for investigation, with 355 underway and 387 resolved by November

27.

Furthermore, says, “across our auditing,

We still have large companies, listed companies, some posting big profits, some paying dividends to shareholders, and holding on to taxpayers’ money. That behaviour is appalling and greedy.

Professor Jilnaught Wong, University of Auckland

it

complaints, and investigation work streams” 2077 repayments have been requested. “In the vast majority of cases,” the agency says, “employers are doing the right thing.”

While MSD is not concerned that misuse fuelled the construction and accommodation overshoot, others are more wary.

John Tookey, an AUT professor with expertise in engineering and construction, calls the figures, “troubling and concerning” and says they

“may indicate activity in the black or grey economy, the amount of people who would have been paid cash in hand, under the table.

Offering free money gives them the opportunity to formalise what they’re doing.

“There’s no question there’s likely an element of fraud in there. But there’s also the matter of incentivising people,” Tookey says.

“A lot of what’s gone on is going to be insidious and hard to prove. It’ll be like working the offside trap in football, working the referees, just companies and people reorganising themselves in order to make the most of the rules and the system.”

Wong also worries about “opportunistic accounting gymnastics” like delaying revenue recognition (through delayed billing and by holding back processing invoices) to satisfy the revenue decline criterion. It’s the problem of paying the subsidy and other big 2020 bills with debt that concerns independent economist and writer Tony Burton. Over the next four years, Crown debt is expected to nearly triple to 53 per cent of GDP. But Burton admits that, with interest rates at an all-time low, it isn’t an issue that animates politicians or the public.

Ironically it’s New Zealand’s good news – a strengthening economy and often better-than-expected company profits – that has focused criticism of the wage subsidy.