MINISTER OF WHATEVER IT TAKES
Suddenly, Grant Robertson's job has transformed, reports Hamish Rutherford: From keeping a lid on debt, to dishing out billions to save the economy from Covid-19. We are in an incredible period of change and shock and I cannot see us returning to the [d
In the space of a week, the job of being Finance Minister changed.
Since taking up the Treasury purse strings, Grant Robertson has increased Government spending and wanted to do more, but he could never have imagined the task in front of him now, as recently as when he released his initial Covid-19 fiscal package on March 17.
That was a $6 billion package dressed up as a $12 billion package. That $6b will be spent many times over by the time this is done.
Just like its predecessors, Robertson’s Government has been obsessed with the precise level of Government debt to gross domestic product (GDP).
The Wellington Central MP had taken to describing it down to the nearest tenth of a percentage point (19.5 per cent at the end of January) to illustrate just how low our debt levels were.
How high New Zealand’s debt may now balloon, Robertson will not say, but it will go much higher.
“Quite clearly in order to cushion the blow economically, we’ve had to undertake some very significant spending programmes,” Robertson tells the Herald. “And therefore that is going to have a major effect on our debt-to-GDP ratio.
“Those numbers are getting finalised as we head towards the Budget, and they’re not far away, those forecasts, but quite clearly it will have a significant impact.”
Already we have had wage subsidies, more wage subsidies, even more wage subsidies, Government loans and vague promises of more support.
“I’ve said it before but I think it is worth reiterating, going in at 19.5 per cent means that we do have room to move here. And if you look at countries all around the world, with trillion-dollar programmes, in this kind of area, we’re feeling like that fiscal headroom we’ve got puts us in a good place.”
New Zealand’s debt may rise profoundly while the economy recovers from the immediate hit, to whatever it looks like afterwards.
Parliament approved $52b in spending last week. It may need to spend more yet.
But if it spends exactly that, all else being equal, net Government debt would almost double to $111b.
At the same time, a contraction in the economy will mean there is less activity to pay back that debt.
Robertson declines to say how high he believes the debt ratio will get, but is hardly playing it down.
“I’m not putting a number on where we are or where I think we’ll get to until I get those confirmed forecasts,” he says, referring to Treasury’s forecasts as part of preparation for next month’s Budget.
“The full impact of Covid-19 is still to be understood, both because of its length of time, and its depth of impact. I just look at the US [last Thursday]. Three million people in a week going on the unemployment benefit.
“That is an extraordinary number, and so right around the world, governments are facing the fact that debtto-GDP ratios, unemployment rates, levels of spending are moving into territory that nobody in our lifetimes has seen.
“I do not underestimate the significance of what we are doing, but it has to be done.”
There will come a time when all that borrowing has to be paid back, but that is not on his mind.
“My views on the way the New Zealand economy should work are, going into this, the fact that we’re a country that generally speaking is more susceptible to global shocks, environmental shocks, natural shocks [ means] managing our debt carefully is important.
“But I do think for an extended period we have to understand that debt levels will be elevated, above where we have seen them in New Zealand in recent years. From my perspective, we need to continue to carefully manage that, but we are in an incredible period of change and shock and I cannot see us returning to the levels we are in in the foreseeable future.”
Stopping the economy
Robertson says New Zealand is faced with a similar situation to the rest of the world, in that governments are spending like never before.
But the strategies are different. Westpac NZ chief economist Dominick Stephens called Australia’s approach of providing stimulus in an attempt to boost demand “futile”.
New Zealand, meanwhile, is not trying to speed up the economy, but to stop it as much as possible, protecting people’s incomes while we endure a total lockdown. The better it does this job, it argues, the better we emerge.
Robertson used the phrase “whatever it takes” last week, but given that he acknowledges he cannot insulate the economy, what is he trying to do?
“[The] ‘whatever it takes’ reference is very much . . . keeping people’s incomes going, keeping their attachment to their workplaces going, and supporting businesses to remain viable.”
Robertson says his primary object is to ensure that as many people as possible have incomes through the shutdown period, to “put food on the table, pay their bills and look after their families”. At the same time, the Government is trying to keep as many companies as possible on life support and connected to employees.
Changes announced last Friday, clarifying that businesses had to pass on wage subsidies even if they planned to make people unemployed, was not only about getting the money to the intended recipients, but keeping them connected to the workforce.
“In relation to the wage subsidy scheme [the objective] is to keep the attachment between workers and employers.
“Even if you’re in a situation where the business you work at has effectively stopped working, what we’re saying for the wage subsidy scheme is that is still there for your business, so as much as possible when we come out the end of this we’ve got businesses that are raring and ready to go.”
Robertson says a new scheme guaranteeing loans is to further encourage business owners to continue, even in a dormant state, to keep the economy intact.
“So there’s a level of confidence that they can ride this out and get through it.”
The loans of up to $500,000 will see the Government put in $4 for each $1 a bank is willing to lend businesses with $250,000 to $80 million in revenue.
“It won’t be for everybody. And that’s the nature of any arrangement like this, but it’s been welcomed by business, by people who are looking, and thinking ‘well, I did have a really good, functioning, viable business going into this, and an outside force has come along; I can finance my way through this’.
“It’s going to be challenging for people. We believe that there are a number of businesses who will take that up, who see the opportunity on the other side of this, and need the bridging finance that’s available.”
How do we emerge from this, so we can quickly respond?
Beyond keeping the economy largely intact, Robertson is also considering how it can be brought back up to speed.
Economic Development Minister Phil Twyford and Provincial Development Minister Shane Jones have been tasked with “work on industry, infrastructure and the regions”, Robertson says.
“Starting to think about, could we fast-track some infrastructure work or get into some infrastructure work that’s job-generating as we’re moving out into that recovery phase.
“And then starting to look towards medium and long term, or regions that are especially affected. The likes of Queenstown and Rotorua, where we know tourism isn’t coming back to what it was any time soon.
“And then that broader industry planning, what shape do we want New Zealand to be in as we go into that longer term [recovery]? How do we make sure we don’t repeat the mistakes we might have made, get the focus onto looking after the clean energy needs, the housing, new industries we want to be going into?
“Thinking a bit more about what we need to do here in New Zealand, as well as continuing to work out how we export products to the world.”
The loans Robertson came up with for business are designed so that not all businesses will get them. If a bank is not willing to take a risk, the
Government will put no skin into the game (the wage subsidies, meanwhile, are for all).
‘Businesses do come and go’
“Businesses do come and go, in normal circumstances. We do have to bear that in mind. That reality of business life. So some businesses won’t survive, but maybe they weren’t going to anyway. Then there are other businesses, that actually are good and viable, but actually there’s no activity there for them at the moment. We want to be able to support those businesses, particularly.”
The Government has already completed a deal with Air New Zealand, promising it the opportunity to borrow up to $900m in a loan which could later be converted into shares, which would likely mean the Crown’s stake in the company would rise sharply.
The exact terms of the loan are not clear, with some capital markets figures speculating that Air NZ may simply use the guarantee as a backstop, which could make private banks more willing to continue to fund it, knowing that a supportive majority shareholder is standing behind them.
Robertson has hinted that more assistance could come, describing “conversations” with large companies, but declines to get into specific proposals.
“When it comes to the larger businesses . . . myself and officials and private sector contacts, we’ve gone through looking at those larger businesses and assuring ourselves firstly that the strategic ones” are in contact.
“The utility-type companies, telecommunications-type companies, they’re all fine and good. Dealing with heavy loads, but as businesses, they’re in pretty good shape,” Robertson says.
“Banks, large food retailers, they’re obviously doing all right.”
Robertson says large retailers are generally in good shape, but appears to point to changes in that sector being common.
“Then you get into sectors where you know, retailers fall into those ones where there’s just no activity but they’re by and large good. You’d certainly see in that sector, some of that high turnover of business in normal times, you’ve got to bear that in mind.”
Officials are still assessing what to do in tourism-exposed sectors such as aviation, and parts of the hospitality sector.
“In those large businesses, we’re just working through each of those. Getting all of the material clear. Having some very specific conversations with one or two of them.”
Last week Auckland Airport seemed hesitant to describe itself as solvent; no doubt other companies are in precarious positions. Robertson confirms that direct talks are under way.
“Myself and others have been talking to the airports. We’re taking that step by step. They remain an important part of New Zealand’s infrastructure. We need people and goods to be able to move around New Zealand when we move out of level four, in terms of people.
“While we’re in level four, we still need goods to be going, and airports are an important part of that,” Robertson says.
“Clearly they’re in an industry that will be changed, if not forever, then for a very long time. And so their business models will need to be looked at. It’s also important, because we’re shareholders in some of these [companies], then I need to be a little bit cautious about specific details.”
Robertson says if the Government provides assistance to airports or any other private companies, the interests of taxpayers will be front of mind.
“If, and it’s an if — I’m not saying we are giving assistance to the particular group you’ve identified — but if we were going to go down that path, there are a number of different mechanisms. It might be commercial loans. You saw with Air New Zealand, it was effectively a convertible loan. So there are a number of different ways that can be looked at,” he says.
“Absolutely, while we’re spending a lot of money to support New Zealanders, I’m also aware of the responsibility on me, on behalf of New Zealanders, to also protect the economy of New Zealand as well.”
Assistance for major companies is likely to emerge over time, he says, and is likely to depend on how long New Zealand’s economy is effectively shut.
“I think that will emerge over time. I don’t think it will emerge necessarily, for most of the companies, that quickly. Because you’ve got to remember, by and large they’re got pretty strong balance sheets.
“And so it’s not like they’re going to fall over tomorrow, kind of thing. They’re starting to think about . . . ‘Can we refinance? What do we need to do here?’ So I think it will be a bit more of an iterative conversation in that sense.”
Asked directly, will critical companies be allowed to fail, Robertson simply points to conversations with businesses.
“When it comes to large companies and network-critical companies, I said that within the first days of this, that was a significant early concern for me, and I continue to talk to those firms to assure myself that they will be part of our future.”
Is he happy with what he is seeing from the banks?
“It’s a challenging time for every business, and banks are a business as well as being the lenders into other businesses. We had a good discussion and negotiation around the loan guarantee scheme and the mortgage deferral scheme, and I was pleased with how we were able to get through that.
“In terms of individual behaviour with individual customers, by and large, yes, you’ll always get the odd report here and there. Actually I think those conversations have been going well. And there’s been a period of unprecedented co-ordination between ourselves, the Reserve Bank and trading banks and I am really pleased we’ve been able to do that. “These are organisations that are used to competing pretty heavily with one another and they have found themselves in a position to talk together with us, and I think that has been particularly positive.”
On Friday, Robertson indicated that the Government would examine elements of company law around insolvency, and whether it is appropriate for the current conditions.
A large number of directors had raised concerns about the rules on trading while insolvent, at a time when businesses that were ordinarily extremely strong were under unexpected pressures.
“They need to be talking to the people who finance them, and making sure everybody’s sure of the particular situation we’re in . . . We are just taking a look at insolvency law, just to satisfy ourselves where that sits in a situation like this. It’s been raised with me by a number of directors, so I think it was worth looking at.
“But clearly, in the first instance this is about everyone understanding the extraordinary circumstances that we are finding ourselves in, and making sure that they’re having conversations that reflect that. So we’re taking a look at those issues, just so we can be confident about where the law sits in a situation like this.”
If you look at countries all around the world, with trillion-dollar programmes, in this kind of area, we’re feeling like that fiscal headroom we’ve got puts us in a good place.