The $12b question
As Covid-19 loomed, the wage subsidy scheme became the largest unplanned government line-item in this country’s history.
It quickly mushroomed to cover most of the country's workers, at a cost of $1b a week.
Matt Nippert and Keith Ng dive deep into the data and investigate just what $12b bought New Zealand.
The signs were ominous in February. In a bid to stop Covid-19 reaching our shores, New Zealand closed its borders to China at the start of the month. At the time it was a controversial move, as it cut our tourism industry off from one of its largest markets.
But the contagion was spreading, and arrivals for the month were down across the board. In an industry used to long-term growth, 14,800 fewer visitors from America passed through New Zealand arrival halls in February compared to a year earlier. And arrivals from Germany and Malaysia were also each down by more than 10,000.
“The canary in the coalmine was tourism,” says BusinessNZ chief executive Kirk Hope.
Off the back of these foreboding numbers, Hope arranged a meeting with Prime Minister Jacinda Ardern and Finance Minister Grant Robertson on March 2.
“I told them ‘We think this is going on, and that there’ll be some challenges for businesses. You might want to think about a wage subsidy,’” he recalls.
Hope said he pointed to packages delivered after earthquakes in Canterbury and Kaikoura where company payroll offices were effectively commandeered to fortify employment links and rapidly deliver welfare.
“We knew it was already designed,” Hope says. “And that it worked.”
The advice was passed on to policymakers, who — after conferring with other stakeholders such as the Council of Trade Union — unveiled within three weeks the first iteration of the wage subsidy scheme.
On March 14 the Covid crisis dramatically deepened when the New Zealand Government began closing the borders entirely, and the wage subsidy was the centrepiece in a miniBudget announced by Robertson on March 17 which marked the first significant attempt to brace the economy against an emerging global shock.
Broadly, it paid $7000 per employee to companies facing Covidrelated declines in revenue. At this point it was targeted at small businesses — largely in tourism — through a cap of $150,000 on individual claimants. It was then anticipated to cost $5.1b, but would soon more than double in size.
Hope says that cap made sense — at the time. “We said ‘That looks about right’. But we weren’t looking at lockdown then.”
Deloitte tax partner Robyn Walker says the initial announcement was met by many of her clients with bewilderment. “People were saying ‘What’s the big deal with Covid?”’ she recalls. “Then the world changes on March 21st.”
On that day Ardern addressed the nation and outlined our brand-new alert level system and raised the prospect of tens of thousands of casualties if our nascent Covid outbreak was allowed to take hold. Cabinet documents on March 23 said a move to the highest alert level — level 4 lockdown — was “inevitable”.
Cabinet documents make it explicit that a dramatic drop in economic activity was not an unfortunate consequence of the lockdown, but was part of its primary purpose.
“International experience suggests that shutting down parts of the economy is a key tool for slowing the transmission of Covid-19,” say briefing papers from March 26.
The wage subsidy scheme effectively morphed at this point into a furlough scheme, as large swathes of the economy — anything deemed non-essential, or activity unable to be performed remotely — would shut down for weeks. Many targeting criteria, including the cap, were removed.
Walker says the policy — rapidly changing and operating necessarily under broad principles for speed — created some confusion. Larger companies with a variety of business units, which were suffering different effects under Covid, found themselves wondering if parts — or all — of their operations were entitled to support.
The constantly evolving definition of what was deemed an essential service also played havoc with predictions.
“In the heat of the moment, you’d veer on the side of being grim and saying you’d expect a 30 per cent drop in revenue and would definitely be shut during lockdown,” she says.
“But there was movement around that whole period, where people thought they’d be closed, but were then allowed to open. And things haven’t been as bad as predicted: which is not so great if you end up only 29 per cent down.”
But the infusion of billions in payments helped fill an economic hole, says Hope: “What the wage subsidy did was essentially allow our economy to both stop and continue at the same time.”
And who did the wage subsidy end up paying? Most of the private workforce, it turns out. The Weekend Herald used a register provided by the Ministry of Social Development to build a spreadsheet containing 87,725 subsidy recipients.
The dataset accounts for 1.2m employees, and 73 per cent of the $12b spent on the scheme to date (the remaining 27 per cent are entities with two or fewer employees, largely sole traders or individual contractors, who MSD elected not to put on their register due to privacy concerns) and provides a compelling snapshot of an economy in crisis.
Claimants, particularly large ones, are from industries whose problems under Covid have been well-canvassed. Air New Zealand ($71.1m to cover 10,254 employees) is the largest single recipient. Construction firms Fletcher ($67.7m, 9694), Downer ($38.2m, 5479) and Fulton Hogan ($34.4m, 4883) all make the
[The wage subsidy scheme] provided a hell of a floor, frankly, and not only prevented us from that massive, cataclysmic drop, but it will allow us to economically recover much more quickly.
Kirk Hope, BusinessNZ chief executive
top 10. As do retailers The Warehouse ($52m, 8596) and Bunnings ($27.2m, 4277).
But, strikingly for an economy under considerable stress, the number of outright business failures to date appears minimal.
While mass redundancies have filled headlines — with 15,000 reported to date — the number of firms which claimed subsidies but later assessed their problems as terminal and entered administration amounts to just 37 out of more than 88,000.
While the timing of some of the business failures is suspicious (some claimed the subsidy and then entered liquidation before lockdown, and the Weekend Herald understands MSD is investigating) the size of this problem is marginal.
Just 0.07 per cent of wage subsidy payments, or $5.7m, went to companies that failed by the start of June.
Hope admits if you told him in January he’d be singing the praises of a rushed government policy that cost $1b a week, he would have been “quite surprised”, but says the wage subsidy scheme has been an economy-saver.
It bought businesses time to plan, and not make rushed decisions over their futures when clouds were darkest in March and April. While the economy may still have to undergo a crash-landing, this is vastly preferable to exploding in mid-air.
“Those decisions were made without having the benefit of knowing Covid would be eliminated in June. The rest of the world was going to hell in a handcart and we thought we’d be next,” Hope says.
“It provided a hell of a floor, frankly, and not only prevented us from that massive, cataclysmic drop, but it will allow us to economically recover much more quickly.”
What the recovery looks like is still an open question. The next stage — as businesses gauge what the new normal looks like ahead of the expiry of the extended wage subsidy scheme on September 1 — is shaping as another crucial period in a year of repeated drama.
Hope says the return to level 1 has, thanks to pent-up demand, seen more optimism than perhaps is warranted.
“As we’ve come down alert levels we’ve seen big peaks in activity, but it tails off quite quickly. Discretionary spending is taking a pretty big hit, such as fashion and retail. International tourism isn’t coming back anytime soon, either. You’ll see a range of businesses start to make these types of decisions, and they get to the point of assessing what demand levels are,” he says.
Walker says the extended wage subsidy scheme may be only delaying the inevitable for many and creating what she refers to as “zombie businesses” who have no future beyond the subsidy. This is particularly the case for parts of the tourism sector most reliant on international travel.
“A lot of businesses just need to stop and think: should I actually continue? And should we be supporting businesses that really should be in hibernation, with their people going off to do something different until the environment has improved?”