Time for big spending is over — now policy decisions get tough
We have reached the limits of fiscal and monetary policy stimulus. In other words, cutting interest rates, printing more money and splashing cash through the economy aren’t going to help the Covid recovery much from here.
That’s because the New Zealand economy’s problems are increasingly on the supply side, not the demand side.
Outside of the obvious border-restricted sectors (tourism and international education), businesses aren’t complaining about a lack of customers.
As the NZEIR Quarterly Survey of Business Opinion (QSBO) showed last week, firms are complaining about rising costs, supply restrictions and labour shortages.
The QSBO showed that it isn’t just the construction sector being constrained by these issues — it is also manufacturers and retailers. And it is expected to get worse. New Zealand’s economic growth has slowed as border restrictions have dragged on into the peak of the international tourist season.
But let’s take the revenue hole that puts in the economy as a given.
With exports booming, the property sector still hot and consumer demand holding steady there should be more than enough going on in the economy to keep us out of recession.
If we do get stuck in an economic slump this year, the real issue will be the capacity constraints preventing the strongest parts of the economy from growing as much as they should.
This is a different kind of pandemic problem to the one New Zealand faced last year as the lockdown crunched economic demand.
The good news is that this isn’t a problem we need to throw money at to solve.
There is little point stimulating demand when supply constraints mean that demand can’t easily be met.
All that’s going to do is stimulate inflation.
The bad news is that it is a more complicated and more difficult problem to solve.
That’s not to underplay the epic response of our policy-makers last year.
That required bravery . . . bravery and billions of dollars.
The unpicking of the capacity constraints on the New Zealand economy will require detailed, nuanced and nimble policy-making. And that’s a lot easier said than done.
Actually, it’s not even that easily said.
This is new territory for both fiscal and monetary policy.
The pandemic risks are still live and dangerous so it’s not a case of simply reversing course.
It is certainly too early to be panicking about debt and worrying about balancing the books.
There isn’t a government in the world looking seriously at austerity measures as a way out of this crisis.
So I’m not suggesting the Reserve Bank should be changing direction yet.
It made a good case for a “wait and see” approach in its Monetary Policy review this week.
Nor am I suggesting that there aren’t plenty of deserving sectors in need of attention in the Government’s Budget next month.
It’s not a question of whether we can afford to deliver more stimulus. We can.
Finance Minister Grant Robertson still has $10 billion in the Covid recovery fund that is accounted for but unspent.
On top of that, the Crown accounts are running about $2 billion ahead of the half-year forecasts on the revenue side.
But from here, any spending should be underpinned by real need and economic value.
The bigger challenge Robertson and the Government faces will be in policy decisions that address economic roadblocks.
Some of these decisions will be high profile. Like how we manage the relaxing of border restrictions to let
more specialist workers in.
Reformatting a post-pandemic immigration policy is going to be one of the biggest policy calls in of the next two years.
Other decisions will get into gritty industry regulation issues.
How do we free up the supply of building materials and head off shortages in vital sectors?
As has been the case with much of the post-pandemic fiscal and monetary policy making, some of these problems may require unorthodox solutions.
Should the Government get
involved, for example, in restricting exports of things like timber, where the local industry has a short fall?
I hope that business is listened to on the specifics of these problems.
But I’d also hope that business groups and government critics have realistic expectations about the policy solutions they’ll get.
These will inevitably lean to the left of what business wants.
For starters, this is a Labour Government with a large majority — unshackled from coalition restraints.
But beyond that, the economic
parameters of left and right have shifted.
In the US, President Biden is spending trillions forging his version of a “new deal”.
In the UK, even the Tories are hiking corporate tax rates and getting their hands dirty with interventionist policy.
Complaining that this Government won’t conform to the neo-liberal consensus of the past 40 years is political equivalent of grumbling that rap isn’t real music. That boat has sailed. Political debate in the next year needs to be focused on the specific. It needs to tick off all the key policy issues one by one.
What’s needed from the Government now is swift decisionmaking, action and delivery.
We need to let the ideological battles of the past lie for a while.
Opposition — both parliamentary and from the broader business sector — should first and foremost be about holding the Government to account on competence.
As the border debacles of the past few weeks have shown, there is plenty there for critics to work with.