$12.1b support package is a good start

Agood start. Thankfully, there’s more to come. That’s the almost universal reaction to the first phase of the Government’s Covid-19 support package announced yesterday. Like many other countries, New Zealand has gone with a multi-faceted approach to the crisis, but one that still leaves room for more support.

At $12.1 billion, the mix of wage subsidies, tax breaks, increased welfare support, and targeted spending in health and aviation is bigger than similar programmes in Australia, Britain and the US.

Yet clearly it’s still a business support package rather than a broader stimulus package — and a temporary one at that.

Finance Minister Grant Robertson didn’t mince words when presenting what was essentially a special Budget. “I cannot and must not sugar coat this,” Robertson said. “A recession in New Zealand is now almost certain, with the advice that we are receiving that the shock will be larger than that seen during the global financial crisis.”

But he was optimistic too. “We will fight this virus. We will cushion the blow for businesses and workers. We will position for recovery.”

So this is phase one. More announcements will be made in coming days, leading up to what is now being termed a “recovery” Budget in May.

The challenge for governments around the world is finding ways to safeguard people’s health while also protecting businesses from financial damage caused by responses to the outbreak. That is no easy task and will come at considerable cost for a small country like New Zealand.

The financial response will push the budget further into deficit this year and in subsequent years when surpluses were expected, Robertson noted. It will also stretch borrowing beyond the Government’s self-imposed 25 per cent of GDP limit.

But without the fiscal package the economy would contract by 3 per cent through March 2021, instead of the 1 per cent the Treasury now predicts.

The focus on small business’ cashflow and jobs is critical as they face an almost unprecedented level of uncertainty. The financial support offered will bring them much-needed relief.

Unfortunately that relief may not last. Markets remain extremely volatile and the longer this goes on the more aid businesses will need. There are also calls from some sectors such as tourism that mid-sized and larger businesses have missed out.

But in concert with the Reserve Bank’s move to slash official interest rates to 0.25 basis points and delay new capital requirements for the banking sector, the move is in the right direction.

A week ago, which is a long time in this coronavirus world, the Government was coming under fire for an apparent lack of action to the crisis.

The overall size of this economic response is bigger than most expected and the fact it’s just the start is positive. The Government support buys small businesses some breathing space.

But businesses and their workers will remain under huge stress, and there will be many things they need to work through in the coming days.