Marlborough Express - Weekend Express
The risky road to post-Covid recovery
TALKING POLITICS
OPINION: Now that Election 2020 is history, the Covid-19 recession will take centre stage once again.
For months, economists have been predicting that job losses will accelerate before Christmas, with a second wave of redundancies due in February, as firms prepare for the challenges of the coming year. At that point, government will be looking hard at its own revenue streams in the light of, say, the GST it collected during the holiday season.
Over summer, politicians will continue to argue about the extent of government debt. Almost certainly, further borrowing will be needed to keep the economy afloat. Allegedly, this will place an intolerable debt burden on future generations.
Such concerns are not unique to New Zealand. The pandemic has caused almost every developed nation to take on additional debt to stave off economic collapse. However, since interest rates are likely to remain at historically low levels, it is being argued that there will be no crushing future burden – mainly because much of the debt will be repaid from the economic growth that the borrowing will sustain.
This is more than wishful thinking. After being burned by adopting austerity measures in response to the Global Financial Crisis, few countries seem keen to cut back government spending in any headlong rush to ‘‘balance the books.’’
Quite the opposite. Last month, the consultancy firm Deloittes told its Australian clients that the path to normality depended on more federal and state spending: ‘‘That combination gives us the best chance to get back to the Australia of February as fast as we can. And it underscores a key point: the need to let growth in the economy shrink the debt, rather than letting attempts to shrink the debt hold back the economy . . .
‘‘In ordinary times we would worry about the debt. Yet these aren’t ordinary times. And although the increases in debt are very large, the falls in interest rates are even larger. That’s a game changer.’’
Little of this debate managed to cut through the noise of our election campaign.
In general terms though, the parties could be divided into those that saw the shrinking of the debt as a pressing priority (National and the ACT Party) and the members of the coalition government that advocated using debt to underpin growth that would eventually reduce the debt.
Even National quickly abandoned as unrealistic its own initial target of getting debt back to 30 per cent of GDP.
By world standards, of course, our government debt is still comparatively low. Even in the worst case scenario of growth flatlining for the next few years, there will be breathing space thanks to the savings in debt repayments arising from the fall in interest rates.
In Australia, for instance, the net cost of borrowing (once the savings from interest charges have been deducted) is forecast to be only $1.6 billion by 2022/23, which comes out at only $A2.66 a week for every Aussie taxpayer.
At roughly the cost of a sausage sandwich at Bunnings, Deloittes concluded, that’s a bargain.
Here, the road to debt repayment will not be risk free. But arguably, no valid case exists for rushing into selfharming cutbacks in state spending, either.