The Government is throwing the kitchen sink at its response to the COVID-19 crisis. Of course it is only able to do this because of the fiscal restraint shown in the prior decade as the fiscal buffers were rebuilt following the Global Financial Crisis and the Christchurch earthquakes.
There have been repeated calls over the last few years for the Government to spend a bit more and take advantage of low borrowing costs. We have argued continued restraint lest the Government find itself needing to respond to a fresh crisis: welcome to Budget 2020.
The Government has committed $62 billion (20% of GDP) towards both supporting the country through the crisis and to the subsequent recovery. Some has already been spent, with $26 billion already committed to various response measures while $16 billion of new measures were announced in the Budget. That leaves the Government with a further $20 billion up its sleeve for future initiatives.
The downside is the upside in the debt profile. Net core public debt rises from 20% of GDP to 53.6%. Debt at that level is not unprecedented but you have to go back to the mid-1990s to find a comparable number. Debt issuance rises to $190 billion over the next five years.
Many of the new initiatives were focused on jobs, firstly continuing to help firms retain their employees through the crisis via an extension to the wage subsidy. But the government can only continue to support vulnerable firms for so long. Some businesses will inevitably fail leaving the unemployment rate elevated for some time.
It is also the case that a disproportionate number of jobs will be lost in the low-skill sectors, including hospitality and tourism. Tourism will be one of the sectors that takes longest to recover as it requires the re-opening of borders for full recovery. That makes a $1.6 billion commitment to trades and apprenticeship training an important part of the response to support productivity-enhancing skills development as the recovery evolves. It also helps build resiliency for the next crisis.
It is important for the Government to focus its initiatives not just on the immediate crisis but also to move it towards its longer term goals. Some of the jobs support is targeted specifically at environmental projects.
As expected, infrastructure and housing were big winners on the day with a $3 billion commitment. With the collapse of net migration, and a likely slow recovery, some pressure will come off the housing market. But there is still a significant housing deficit. The Budget included funding for 8000 new homes.
Overall the Budget was more stimulatory than the market was expecting.
Over recent days the market has been anticipating the prospect of the Reserve Bank on New Zealand cutting interest rates into negative territory. The size of the fiscal response may see some retreat from those expectations. Given the size of the bond programme, a more effective response from the central bank would be to further extend its asset purchase programme to help avoid bond market indigestion.
It’s hard to critique the Treasury’s underlying economic forecasts too voraciously. At the moment it’s a bit like forecasting the unforecastable. But at a high level, the Treasury is projecting a deeper contraction in activity with a subsequent faster recovery. We think the recovery will be harder work. We also have the unemployment rate moving higher, and taking longer to come down as firms seek to lock in productivity gains that have emerged over the lock-down.
Finally, we have never been remiss in raising our concerns about New Zealand’s long-term fiscal sustainability, especially in relation to New Zealand superannuation. Long-term fiscal sustainability just got harder. At some point all of this needs to be paid for.
It took the best part of a decade to get the Crown’s finances in order to enable the Government to respond so effectively to this crisis. Once we are into recovery the same fiscal restraint will need to be shown by the Government of the day so we can be ready for the next crisis.
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