The Minister of Finance spoke

I’m writing something on economic policy options and challenges for New Zealand as it eventually emerges from the shadow of Covid-19, and in doing so was prompted to pull out and reread the speech the Minister of Finance gave to Business New Zealand little over a week ago.

There was even a welcome touch of apparent humility in the Minister’s speech –  without ever quite specifying where the government might have mis-stepped, he did state that

I am not saying for a minute that we have got every single action as a government 100% right

Sadly, I don’t suppose he meant the permanent erosion in the fiscal position –  in an economy that will be poorer –  in his economic package last month, the one dressed up as an emergency coronavirus-response package.

But the main thrust of the speech appeared to be intended to about the path ahead.

What I want to do today is further fill out the detail our plan for the response and recovery from COVID19, through the first wave of the immediate response, to the second wave of kickstarting the economy and the third wave where we reset and rebuild our nation from this once in a century shock.

Which sounded good, although it immediately put me in mind of the three scenario model he was taking to the coronavirus risks not much more than a month previously, which in practice proved to be a justification for not really focusing much at all on the biggest threat just about to overwhelm us.   But set that past to one side for now; on paper the Minister’s three “waves” might be a sensible way to organise thinking.

Unfortunately, as the speech went on there still proved to be not much there, and what was there was really quite concerning.  It seemed of a part with a Minister of Finance who, from the start, hasn’t had a compelling framework for thinking about the issues, the risks, the appropriate responses, and the longer-term challenges.  In that, he probably isn’t helped by the weakness of The Treasury, but their analysis/advice such as it may be, has been largely invisible to outsiders so far (one hopes that in time the OIA will help remedy that).

We’ll take the issues in the same order as the Minister.  First, what he calls “Fight the Virus and Cushion the Blow”.

Here we learn that the Minister would like us to think that they have operated this way

In doing so, we have applied three key principles to our economic approach: First to act swiftly with no regrets. Second to improve cashflow and confidence. Third to act in coordination to secure and support our financial and business sector.

Count me a little sceptical, but in some respects they haven’t done badly at all. It is quite impressive how quickly the wage subsidy money has been got out the door, even if unfortunately it is a scheme that still looks more attuned to the China-shock it was originally conceived for than for what we have since faced.  Thus, you can get a full 12 week payout even if you only had a 30 per cent actual/projected drop in revenue for one month, and there is surely scope for some businesses at least to alter the timing of their revenue flow to ensure they legally qualified.  It is water under the bridge now, but something that needs to be taken a lot more seriously as the government thinks about what comes next, since the wage subsidy covers only the period to June.  Given the need to provide whatever certainty is possible, perhaps they will have those details in next months’s Budget.

For the rest, there has not been that much there.   We’ve had isolated bailouts  (Air New Zealand), contentious sector/firm specific handouts (yesterday’s media package) but little or nothing systematic to instill much confidence or willingness to stay the course.   For example, even though the Governor keeps reciting that “cashflow and confidence” mantra too, he’s refused to cut interest rates very much at all (barely changed in real terms this year), and the Minister of Finance seems unbothered by that.  There is scheme that will allow SMEs under which

Our tax loss carry-back scheme will allow a large number of businesses to access their previous tax payments as cash refunds, at an estimated benefit of $3.1 billion.

That will be a pure gift to the owners/creditors of firms that eventually fail, but simply a loan to firms that somehow survive.    Seems like rather skewed messages/incentives.

There is the business loan guarantee scheme, which seems sensible enough in its way, but really only deals with the subset of businesses for whom taking on more debt actually makes much sense.

We keep hearing talk about the tailormade solutions they are looking at for big firms, but (a) that offers no confidence and certainty, and (b) seems set to reward lobbying/connections/public profile.

And several of their measures will rely on retrospective legislation because the government chose to suspend Parliament –  and its lawmaking capabilities –  through the peak of the crisis.

I remain of the view that the government would have been better to have conceptualised the immediate economic response mainly with a “national pandemic insurance” frame of thinking.   Doing so, in the way I suggested, would have cost more than they are now spending –  a merit in my view, given the scale of the slump –  but would have offered much more certainty, more transparency, and less of sense of favours being granted to individual firms and sectors (eg singling out particular parts of the media for help sends out unfortunate messages that more-generous across the board support would not do).

Perhaps my pandemic insurance approach isn’t the right way to frame things. but it isn’t clear that the government/Minister has an alternative framing at all.

What about the second stage, what the Minister calls “Wave Two: Kickstarting the Economy”?

It is here that the concerns really start to mount.  After all, given the virus management measures not much else governments do make much difference to economic activity right now (indeed the goal in lockdown was to shutdown as much as possible, but get people through).

But if there is a framework for thinking about things beyond that immediate crisis point it appears very statist in orientation and, mostly, quite inward-looking.  That isn’t, historically, a recipe for productivity and prosperity.

Thus we hear quite about the the efforts of two Cabinet stars

Phil Twyford and Shane Jones have tasked the Infrastructure Industry Reference Group to prepare a list of infrastructure projects and programmes from across central and local government, and the private sector, that are shovelready. These could be deployed as part of a stimulatory package as soon as the construction industry returns to normal.

And then we get this list

Phil Twyford and Shane Jones have also continued to work on redeployment support, especially in our regions and they will have more announcements to make about that in the near future.

  • Megan Woods as Housing Minister is working to bring forward projects that will drive not only jobs, but also deal with our long term housing issues.
  • I have asked Chris Hipkins to lead the work on the critical training and employment support programme that has to take place from here.  Thousands of New Zealanders are going to need to retrain, gain new skills and support the kickstarting of our economy.  This work is in partnership with business, with unions and with training providers.
  • The Prime Minister, drawing on advice from her Business Advisory Group, has called for the creation of the world’s smartest border.  Using technology and our ‘natural moat’ as she calls it, to give us not just protection against the virus but a window to a future where we can move people and goods safely again.
  • Winston Peters and David Parker are charting a new course for trade and diplomacy in a radically changed world.  We need to continue to trade, and look again at our relationships to see how we can leverage our natural advantages and excellent progress on controlling the virus.

In every sector of our economy and society we have a need, and an opportunity, to come through the other side of this with a strong recovery plan. We have tasked all Ministers with reaching out to their sector to help develop these plans.

Every sector a plan……isn’t exactly reassuring, in a climate that will inevitably be characterised by extreme uncertainty.   And whatever “the world’s smartest border” means it isn’t clear what it has to do with kickstarting the economy.  And when the Minister talks about “we need to continue to trade”, that is certainly true, but seems barely aware of how dismal our foreign trade was (shrinking share of GDP) through the peak years of that wave of globalisation.   We need a much more outward-oriented economy than we’ve had –  not simply taking in each others’ laundry in the form of inward-focused government “infrastructure” projects.  That inward-focus (in effect, and despite the rhetoric) has been the underwhelming way of the New Zealand economy this century to date –  a century in which the gaps to the rest of the advanced world have kept widening.

What of the Minister’s “Wave Three: Reset and Rebuild”?

Hard to disagree with this

We must also make this the opportunity to reset our economy, to take account of the massive disruption to some sectors, but also to address some of the long standing challenges we face.  In doing so we also must chart a course to return to a sustainable fiscal position.

Although I would observe that most of the fiscal deterioration has been either one-off (specific coronavirus response) or cyclical –  revenue drops when the economy does –  and that getting back towards full employment remains the main salve for any fiscal challenges (and a balanced budget –  not even material surpluses –  for 20 years thereafter will secure big reductions in debt to GDP ratios).

But what the Minister has in mind is this

We must answer the big questions about our economy in these unprecedented times.  What should we make and do here in New Zealand to ensure our sustainability; what institutions do we need to support our economy; what is the role of the State; how do we trade with the rest of the world in this new environment; and how will the financial system, both here and globally, cope?

Climate Change will continue to be a major challenge long after the effects of this pandemic have been mitigated. As Rod Carr raised yesterday, our economic recovery needs to be one where emissions continue to reduce and more sustainable technologies are invested in and taken up.

New Zealand has had a long-run problem of low productivity. We need to look at our uptake of new technology and new ways of working to ensure that this problem does not again become baked into the New Zealand economy through our recovery.

Underpinning all of this, as the Prime Minister said yesterday we must also not allow inequality to take hold in our recovery. In fact we need to take this opportunity to improve the prospects of all New Zealanders and tackle those long standing divisions.

We’ve seen through this virus what happens when sectors and industries are overly reliant on certain markets for their export revenue. New Zealand must always remain a trading nation, but we will need to look at greater diversification of our export markets to make sure we are prepared for any future shocks to trade networks.

The importance of the role of the state has been underlined by this crisis. I hold a strong personal belief in the power of the state to do good. It is through a well-funded, highly functional public service, that we have had the ability to coordinate and provide leadership for New Zealanders, guiding both the public health response and the economic response to this crisis.

I believe it is of the utmost importance that the state continues to play an active part in the economic recovery, providing leadership and direction as we move forward through the challenging times ahead.

I didn’t find any of that encouraging –  no, not even the bit about not being overly reliant of “certain markets”, given that Covid-19 has long since become a global shock.  And while it is fine to talk about “greater diversification” the milk powder demand is where it is, and actually even the availability of potential foreign students is where it is too.   Firms have to be able to manage those concentration risks, but this specific shock was one that shut down businesses almost indiscriminately.   It is a distraction from the real economic challenges.

And inequality, well yes sure, but there doesn’t seem to be any sense that the very worst thing we could do for a lot of people is leave the economy running below potential, unemployment hanging up there for a moment longer than necessary.  These people on the wrong side of that will, in many cases, end up disadvantaged for life, and we know it is mostly the less-skilled, less well-equipped generally who find it hardest to get back into employment.

More generally, there is a great deal there about the role of the state and very little about the power and value of the private sector, market entities pursuing best opportunities, once the big policy signals have been got right.  And for all the passing mention of productivity –  the sort of passing mention (and no more) that Robertson has always given –  there is no sense that he or his advisers have much sense as to why those poor outcomes have happened, or what might enduringly change the business environment for the better.   There is no sense, for example, of a pro-productivity reform agenda (whatever specifics you or I might think should be part of such an agenda).  Nothing at all about a more propitious climate for outward-oriented business investment.

Strangely –  from a Labour minister, in an election year –  there was also remarkably little focus on the imperative of getting back towards full employment just as quickly as possible.  Perhaps that would have required conceding that the starting point would be a high rate of unemployment? Perhaps it had to do with talking to a busines audience?  Whatever the reason, it was a curious omission.    But a relative de-emphasis on that point seems to allow the Minister to get away without focusing on the tool that usually plays the large part in cyclical stabilisation and getting short-term growth rates up to reabsorb unused labour and capital: monetary policy.  The (in effect) complacency about the lack of any material fall in real  interest rates in response to this dramatic economic slump is quite remarkable –  and really rather alarming.  The exchange rate didn’t, I think, get a mention in the speech at all, and yet (a) it hasn’t fallen far, even though one of our major export sectors is just closed off for now, and (b) if the government is serious about doing better on the trade front you’d have hoped that a sustained lower real exchange rate would be a material part of the mix.  For that, a much looser monetary policy is a key upfront part of the initial mix.

(And for those still keen on much more use of fiscal policy beyond the crisis period, recall that generally higher fiscal deficits put upward pressure on the real exchange rate, working against any sense of a more outward-focused highly productive New Zealand economy.  In addition, of course, there are likely to be large cyclical deficits for a few years anyway, and the experience in other countries after 2008/09 is that in well-governed countries there isn’t limitless tolerance for sustained large fiscal deficits.  We need monetary policy back in action –  the Minister should be doing more to get it there.)

Overall, I remain concerned that there is no clear and credible economic strategy for any of the stages ahead we now face –  and the refusal to rule out the wasteful ill-targeted idea of a lump-sum payment to every household (when many households haven’t had much income impairment in the first place, while others are in dire straits) isn’t exactly reassuring.

Perhaps there really is a great deal of hard and serious medium-term thinking going on and in the Budget in a couple of weeks time much –  and much more encouraging –  will be revealed.  We must hope so, because on the evidence of last week’s speech the prospects are for lingering high unemployment, further reductions in trade/GDP (the environment having got tougher and the relative prices not changed in our favour) and no credible prospects of any improvement in our productivity performance.    The world is going to be a tougher place to take on, but we need to focus our energies on policies that might help us successfully do so, supported by making getting macro policy signals right, in ways that help get New Zealanders back to work just as soon as possible.  Turning inward –  which seems to be the default emphasis of the government at present – is no more sensible a strategy now than it was in 1938 (when the government’s hero, Michael Joseph Savage, presided over just such a lurch, part consciously chosen, part driven by misfortune and poor prio management).

From the other side of politics, I noticed this morning a link to a piece by one of National’s Associate Finance spokespeople, Andrew Bayly MP.    I don’t want to comment on it in any detail, but I noticed that same glaring omission as in the Minister’s speech: nothing at all about the combination of an exchange rate hanging up, and real interest rates hardly down at all, in the face of one of the most severe economic slumps in a very long time (even after “Level 4” has passed).   It is no way to get excess capacity reabsorbed –  as people eventually realised, and finally acted, in the 1930s.

 

 

17 thoughts on “The Minister of Finance spoke

  1. I think Tony Alexander wrote a note suggesting NZ had 160k people on work visas pre the outbreak; more broadly, any quick musings on the future flow of net migration and knock on impact?

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    • There is a real tension. As you know, I favour lower immigration (temporary and permanent) in the longer-term, as part of a path to boosting productivity.

      But, in the short-term, net migration boosts demand more than supply so I argued some weeks ago that we shouldn’t be aggressively cutting immigration in the near-term. that was overtaken by events – border closures etc – but the move to, in essence, net zero migration is another thing dampening demand/activty etc here this year.

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      • I’ve written comments agreeing with you on immigration. If immigration is such a great idea it is odd that other countries haven’t adopted it with the enthusiasm of our Labour and National governments.
        We are now in a new situation. We have a moral duty to the temporary immigrants stranded in New Zealand and a particular need to thank those who have cleaned our hospitals and been care-givers and nurses in our care homes. The best thank you being putting those who have applied to the top of the permanent residency backlog. [A civilised country would have no processing backlog – passport issuing takes hours and INZ visas take months.]
        The Covid-19 shutdown with its requirement for a concerted effort has emphasised patriotism. Good that we now think of one another but not good if we think of ourselves superior to other nations/cultures. With heavy levels of unemployment low-paid immigration will be deservedly unpopular. So immigration policy needs to be retargeted. Lets take in the best we can find but stop the relatives taking low level work; bring in students but let them come for education not for work. Of course this would mean many menial jobs being taken by Kiwis and that will require increased pay levels even in this recession. But leaving low status jobs to a caste of visible immigrants was always wrong.
        Musing on net migration – we can control our immigration policies but who knows how many New Zealanders will return? It could depend on the simple issue of how long other countries enforce wearing face-masks and how many times the epidemic returns.

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      • In NZ we like to call short term 12 month foreign workers and international students as migrants. In Europe they call refugees migrants.

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    • https://mbienz.shinyapps.io/migration_data_explorer/

      That’s the MBIE/INZ migration data explorer and it has lots of data there for people who are interested. According to that, there are 221,034 work visa holders in NZ as at 31/03/2020. If we go back by month, the total work visa holders in NZ were:

      31//03/2020 – 221,034
      29/02/2020 – 220,818
      31/01/2020 – 212,619
      31/12/2019 – 196,497
      30/11/2019 – 211,806

      Net migration will be hard to estimate for a while because of the lack of flights in and out of NZ as NZers are obviously returning home (which keeps net migration up) but migrants are also leaving when they can.

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  2. On a tangential front, I notice that our Governor is still basically saying we aren’t operationally ready for negative interest rates in this country. It really is remarkable how our leadership can just refuse to see something coming and then when it hits be woefully under prepared.

    I’m sure the banks are lobbying like crazy against negative rates.

    Liked by 2 people

  3. “Overall, I remain concerned that there is no clear and credible economic strategy for any of the stages ahead we now face – and the refusal to rule out the wasteful ill-targeted idea of a lump-sum payment to every household (when many households haven’t had much income impairment in the first place, while others are in dire straits) isn’t exactly reassuring.”

    Amen to that Michael!

    I put it too you that the “strategy” is/will be the same as it was before Covid19 ….and back even further than that.
    It’s simply this: Protect the private housing debt bubble at as ALL COSTS…no matter what. They will throw everything at this one thing…Don’t let real estate prices drop significantly because people in negative equity will not vote for us at the next election.

    Example: IF the government was to provide lump-sum payment to every household of say $1500 like the Kiwibank economist is advocating….where does that capital go? Well, where it ALWAYS goes….onto the all the banks balance sheets. No matter what joe public does with it (save, spend it…) it always stays with the banks. One might even call it a ‘$7 billion bank bailout by stealth’

    p.s. Patrick Watson had a good piece today also.

    https://www.interest.co.nz/opinion/104699/mauldin-economics-patrick-watson-bemoans-massive-central-bank-intervention-financial

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  4. “Climate Change will continue to be a major challenge long after the effects of this pandemic have been mitigated. As Rod Carr raised yesterday, our economic recovery needs to be one where emissions continue to reduce and more sustainable technologies are invested in and taken up.”
    As the impact of widespread unemployment becomes apparent, I doubt climate change policies will get a look in.
    I wouldn’t be surprised if National campaigned strongly (and effectively) on overturning the oil & gas ban as well as opening up more mining.

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    • re your final suggestion, perhaps…..but with oil prices this low they’d easily be rubbished by Labour/Greens. Would need to be part of an integrated response, championed by a really able and credible communicator……..gaps National has at present.

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  5. I get a subtle impression that the tax loss carry-back scheme was chosen as a means to reward those businesses paying tax – whilst punishing those who might have minimized (or avoided) paying company taxes.

    This for example from Stuart Nash;

    “Other small business support is being delivered through the tax system, and will shore up those businesses that were viable before Covid-19, but are vulnerable now.”

    https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12325044

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  6. I’m not sure why a lump sum to each person or each household should be so bad a way to stimulate the economy, if the government wants to spend to do that. As opposed to the government picking out whatever infrastructure plans happen to be lying around, regardless of their merits. At least the lump sum will be spent (or saved) on whatever is actually useful to households.

    And your income insurance scheme (as well as the current wage subsidy scheme) is a drag holding us back from recovery. If a business is going to be fine in 2 months time but can’t pay employees now, let the employees go on the unemployment benefit without delay, and they can come off again as soon as the business recovers. Meanwhile the employees can take any other opportunities that come along and/or be thinking about alternatives.

    If the business isn’t going to be OK in 2 months, the sooner businesses and employees come to grips with reality the better. Currently we have the government paying a lot of businesses money to keep people sitting around, while everyone puts their heads in the sand.

    Your insurance scheme would invite businesses to invest in R&D and de-emphasize sales this year, while emphasizing sales next year etc, and ensure a rosy few years for tax accountants. How about instead, businesses that are vulnerable to a pandemic will do worse this year, and businesses will have to price in pandemic risk in future rather than expect government support?

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    • My aim isn’t really to keep businesses together, altho in some cases it would do that. but to buy time and offer insurance across the board – indivs and firms then making their own choices.

      Re your point about R&D etc, yes there are some avoidance risks. I’ve suggested capping any payout for firms using last year’s gross expenses as some sort of outlays ceiling.

      Re the lump sum handout, it isn’t obvious there is even the mechanism in place to enable it to be done. Personally, I’d rather do stimulus by some mix of much lower interest rates – and a lower exchange rate – and a temporary cut in GST. Beyond that, I’d focus household assistance on those in direct need.

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      • Probably the simplest way to achieve it would be a retrospective increase to family tax credit, independent earner tax credit (so that it applies to the tax year just ended), and have MSD pay an equivalent lump sump to recipients of any state support that makes the recipient ineligible for either of those e.g. jobseeker support (formerly the dole), student allowance, NZ super.

        If $1500 for adults and $1000 for children (for example), increase IETC accordingly (and also increase the threshold to $70,000), and FTC can be increased by $4000 for the first child (to cover both parents) and $1000 for each additional child. Solo parents would get all of it in this case, but that’s a small price to pay for expediency.

        This provides an abatement mechanism and an existing delivery system, rather than trying to create it from scratch.

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  7. Michael
    I note your comment that higher fiscal deficits tend to be associated with a strong currency. That isn’t something I’d have guessed. What is going on there?
    Tim

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  8. It isn’t an absolute statement, but relative to a counterfactual. Think about trying to stimulate an economy. One could cut the OCR, which all else equal will lower interest rates and the exchange rate, or one could increase the fiscal deficit. All else equal, that will add to demand more directly, and thus interest and exchange rates will be higher than otherwise. A further strand relates to the conception of the real exch rate as the relative price of tradable and non-tradable items: if the govt goes out and directly purchases goods and services (eg labour intensive “shovel ready” projects) that will leave tradables prices unchanged (set globally) and raise non-tradables prices (ie undermining private sector international competitiveness.

    Of course, there are other relevant channels. An increased fiscal deficit perceived to be reckless and irresponsible could lead to a fall in the exchange rate, but at the margin in current circs with NZ publix debt so low, that is unlikely to be the dominant story here in the next year or two.

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  9. Thanks Michael. That all makes perfect sense. Let’s hope that some of the restart projects do provide a positive return and aren’t versions of light rail

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