Everything should be on table to get us out of this
It’s well known among climbers that getting to the top of the mountain is the easy bit – it’s getting down that’s the trouble. Government finances are much the same. Shoring up the economy with costly wage subsidies and business guarantees is brave, but ultimately easy – the difficult part is still to come.
Future governments will have to sip the electoral arsenic of tax increases and spending cuts to get the books back in shape for the next crisis. And there will be a next crisis. However unprecedented this crisis may seem, it hasn’t stopped the seas from rising any more than it’s stopped the tectonic plates beneath our cities from moving.
Last year then-Treasury Secretary Gabriel Makhlouf cautioned that, even in a crisis, the upper limit for net core Crown debt should be 50 to 60 per cent of GDP – anything above this and ‘‘the marginal cost of debt is likely to exceed the marginal benefit’’.
Some economists caution that net core Crown debt is likely to reach 50 per cent by the end of this crisis, near the upper limit of that window – an increase of 30 percentage points.
The Government will need to put forward a plan for resetting the clock and eventually getting debt back to roughly 30 per cent of GDP, a level Treasury believes is low enough to absorb future shocks. This will require some novel thinking.
The economic settlement following the global financial crisis now looks like a 21st-century Treaty of Versailles. The positive consequences of better, more rigorous financial sector regulation were not enough to make up for the manifold follies of low interest rates and relative austerity. Historians of our era will argue over the extent to which it made things worse – no-one could claim it made them better.
Whatever emerges from this crisis will not only need to be more effective, but the political turmoil of the last decade suggests it will also need to be more equitable, reflecting disparities of wealth across generational and class divides.
Our politicians may need to reacquaint themselves with policies they’ve firmly kicked to touch. Former prime minister Bill English has indicated that everything, including a capital gains tax, could be on the table.
Labour could look at the hitherto banned policy of raising the age of superannuation eligibility, currently touted by National. Treasury’s superannuation forecasts last year showed the number of superannuitants will increase by almost 150,000 by 2024 to just over 900,000 people – a fairly ominous milestone considering the current umbrage over the cost of the 1.3 million claiming the Government’s wage subsidy.
Even if unemployment hit 26 per cent – Treasury’s gloomiest forecast – this would still equate to just 690,000 people, well below the number of people currently collecting NZ Super.
The state won’t retrench completely. Already we’re hearing whispers of a Government-led housing build. This is necessary.
The last government relegated the role of housing minister to little more than a sinecure for well-meaning loyalists. During the last crisis, house-building ground to a standstill as private investment dried up. Some months fewer than 1000 homes were consented in the whole country.
It looks like a similar crisis will be averted this time. Despite the speed bumps, this Government still considers itself to be a builder of last resort.
Another question the Government needs to answer is what flavour of taxpayer will shoulder the greatest burden. Already, young salaried income earners get a raw deal at the hands of those who’ve enjoyed the largely untaxed wealth of rising property values.
It will look unjust if the Government opts for the easy solution of jacking up tax rates for these Kiwis, especially after so many of them bravely sacrificed their own economic wellbeing for the older and more vulnerable.
The Government could look at wealth or land taxes. Wealth taxes aren’t new. They were proposed as equitable taxes by mainstream political parties in Britain, France and Germany in 1919 to help repay their enormous war debts.
Land taxes would encourage less speculation and more investment in productive businesses – investment we’ll need to draw on if, as a result of Covid-19, we bring more manufacturing home to protect it from supply chain disruptions.
The efficacy of these complex taxes, which sometimes yield low revenue, will need to be balanced against the political importance of their equity. GST is the most effective tax of them all, but it’s also the most manifestly unfair.
It’s slowly dawning on New Zealanders that ‘‘normal’’ as we knew it is gone for good.
Nostalgia for times before Covid-19 shouldn’t stop us from remembering the pre-Covid political economy was itself far from perfect – we shouldn’t let that same nostalgia guide our thinking as we prepare for a future beyond the current crisis.
Our politicians may need to reacquaint themselves with policies they’ve firmly kicked to touch.