Hamish Rutherford Red ink to the rescue
We need to spend up but whether it helps or hurts next generation unclear
Although the cover is dominated by the strange blue-green of Lake Tekapo, Finance Minister Grant Robertson’s “Rebuilding Together” Budget is a sea of red.
Three years of massive deficits ($85.1 billion over three years) leading debt to climb higher than it has been in a generation.
In dollar terms, net debt climbs from just under $60b in 2019, to more than $200b in 2024.
In relative terms, it peaks at 53.6 per cent of gross domestic product.
This is below the peak New Zealand saw in the early 1990s and is well below the levels seen by some of the countries we like to compare ourselves to before they saw the impact of Covid-19.
But it is still well above what New Zealanders have grown accustomed to.
The huge deficit comes from a programme of spending which, including both measures announced so far and still to come, will exceed $50b.
The aim of all of the spending is to cushion the impact of the blow. As Prime Minister Jacinda Ardern highlighted on Wednesday, although Budget 2020 would be unusual, it was all about jobs.
In the lock-up yesterday, Robertson shot back at questions on whether it was fair to burden future generations with such debt.
“Think about the damage done to young people because we didn’t invest the kind of money that we’re investing now,” Robertson said.
“It’s all very well talking about the burden of repayment on young people in the future, but if those people are growing up in houses where there isn’t enough money, in a family where their parents don’t have jobs, that is a massive scarring that I am not prepared to weather.”
One welcome aspect is that international interest rates are now so low that the relative cost of repaying all the debt is expected to be about the same when it peaks as it was before the crisis.
But all this spending does not make the problem go away.
According to Treasury’s forecasts, unemployment peaks at 9.6 per cent later this year, implying about 150,000 jobs will be lost in the coming months.
Incredibly, Treasury then has unemployment falling to 4.2 per cent in just two years.
Robertson’s political document is even more rosy-eyed, describing the situation as “up to 140,000 jobs saved”. But there will be much debate about whether even this magnitude
of job losses, or the wider hit to the economy, properly captures the impact of Covid-19.
Treasury assumes that, in nominal terms, the economy in the third quarter of 2021 will be larger than it was before Covid-19 reached New Zealand.
Even Robertson conceded the “V-shaped” recovery this implied — code for a sharp fall followed by a sharp recovery — would be the subject of much debate.
Other economists who have made more recent forecasts predict it could take longer for the economy to return to pre-crisis capacity.
But there is little debate about the need to spend big.
The question is, even after saddling New Zealand with a significant debt, will that be enough to save New Zealand from a sharp economic contraction, rising unemployment and all the associated scarring which Robertson fears?
The relative cost of repaying all the debt is expected to be about the same when it peaks as it was before the crisis. But all this spending does not make the problem go away.