Stopping the bleeding
Forget longer term, Budget will be about surviving Covid-19
FHamish Rutherford
comment
inance Minister Grant Robertson may well be planning a Budget to reset New Zealand’s economy for a post-Covid world. But he won’t be delivering that this week.
Today Robertson will present his third Budget, one which was to be the culmination of a trilogy of wellbeing Budgets. All talk of that is gone. Budget 2020 will be about keeping the lights on. About stemming the bleeding caused by the disruption of Covid-19.
“This is about economic survival,” former Prime Minister Sir Bill English said in a warning delivered as the country first went into lockdown, one that has aged better than most since.
For weeks Prime Minister Jacinda Ardern has fended off questions about the impact on the economy of the lockdowns and the disruption caused by Covid-19 internationally.
In a pre-Budget speech yesterday, she maintained that the best health response was also what was best for the economy, but made it clear that the problems are still big.
“Let me be clear, the coming months and years will be some of the most challenging our country has faced in a very, very long time.”
Businesses will fail and unemployment will rise. How far is to be seen, but the Reserve Bank yesterday predicted its baseline scenario was 9 per cent, which suggests well over 100,000 jobs more could be lost.
The numbers in the Budget are likely to be huge, with the Treasury expected to report a deficit of more than $20 billion, and possibly more than $30b, this year.
It may get worse. BNZ predicts the deficit in 2021 could ultimately be far larger than this year’s one, as the Crown faces higher costs and lower revenue. Despite the lockdown ending, the impact is not over.
Economist Cameron Bagrie told MPs yesterday that at an income and expenditure level, even at alert level 1 economic activity was being hit by about $3b a month.
This was worse than the hit seen at the height of the Global Financial Crisis, Bagrie said, even after the lockdown may have caused a much larger hit over April and May.
“Just because life is becoming less unpleasant, that doesn’t mean it is getting better,” Bagrie said.
This will lead to some tough choices. Right now is not the time for cutting spending or raising taxes, but even if the Budget does not show the books returning to surplus in the next few years, it has to show spending being brought under control.
“We will run the ruler over every line of expenditure,” Ardern said. She also noted that while usually the Budget “sets out the Government’s economic plans for the following year in detail”, this year will be different.
Whatever the books show today, the working assumption is that there will be further rounds of support for the economy. More billion-dollar announcements, targeting sectors or regions. Or whatever else it takes.
There is likely to be a significant focus on retraining and redeploying displaced workers to cater for mass unemployment at a time when we still have skill shortages.
An extension to the wage subsidy of some kind seems to be on the cards, possibly aimed at those sectors which are still unable to operate, or which are seen to have taken the biggest impact. A boost for New Zealand Trade and Enterprise may help our diplomats help New Zealand’s businesses now that they cannot jump on a plane every time there is a problem in a distant market.
Calls for major reform though, such as major shifts in our investment in transport, for the tax system to be reformed or for the retirement age to be raised are for later.
Next year, or possibly even in the half-year update in December, whoever is Finance Minister will have a clearer picture of how the country’s finances (public and private) have deteriorated and how to chart a course forward through the new economy. For now though, the Government faces a difficult choice of when not to act.
Ardern said that a “relentless focus on jobs, economy and businesses is what’s required now for the wellbeing of all New Zealanders”.
At some point the emergency measures must stop. National’s finance spokesman Paul Goldsmith expressed concern that while a focus on jobs was good, it could not come at any cost. There was a risk the Government simply spent money to delay the impact of Covid-19.
Kirk Hope, chief executive of BusinessNZ, said if more taxpayer money was to be spent on the response, it needed to be targeted and evaluated. “It will be important that the Government moves from directly supporting business to providing the supporting legislative and economic framework for growth.”