MAX HAYTON. New Zealand’s budget presses the reset button

May 20, 2020

Before the Covid-19 pandemic New Zealand’s unemployment and net Crown debt were low. That has all changed, but in the midst of the crisis the Labour Government sees opportunities.

For two years the Labour Government in New Zealand has been engaged in reforming many aspects of life through its emphasis on wellbeing. It had a record of restraint and fiscal responsibility by keeping to stringent rules governing debt ratios and other measures.

Last year’s budget was the Wellbeing Budget’, putting mental health and other social issues into focus. Then in January this year the Government announced a huge investment in infrastructure, $NZ12 billion, to ‘upgrade’ New Zealand. It was a very large investment in roads, railways, hospitals and schools yet would continue to observe the budget responsibility rules.

Net core Crown debt would be kept below 20 percent of GDP. At that time most indicators, including unemployment, were looking favorable for this election year.

Then came the Covid-19 pandemic.

The Government took strong steps early enough to be able to justify its claim to have ‘gone early and gone hard.’ On 28 January it set up a National Health Coordination Centre to deal with the outbreak and on 3 February began to limit travel from China.

On 17 March a Covid-19 recovery package was announced. It was valued at NZ$12.1 billion or about 4 percent of GDP, one of the largest per capita responses of any country at the time. The package included wage subsidies, measures to bolster the healthcare sector’s response to the virus, more money for low-income families and those on social welfare, and changes to business tax.

On 23 March the country was put on Alert Level 3. Two days later a state of emergency was declared and Alert Level 4 lock-down was imposed.

The lock-down was to very seriously impact the tourism, hospitality and retail sectors of the economy. In his Budget Speech last week the Finance Minister Grant Robertson defended the measures. He said the best economic response was a health response. By ‘going hard’ early a public health catastrophe had been averted while measures were simultaneously put in place to protect jobs and businesses.

The results have been dramatic. As the world death toll passed 300,000, there have been just 21 deaths in New Zealand (population 5.11 million), and in recent days New Zealand has been reporting zero or one new case per day.

The New Zealand public has shown strong support and a high compliance rate. A Colmar Brunton poll in early April showed more than 90 percent of respondents said they were doing what the Government asked them to do to slow down the virus. An astonishing 83 percent of respondents said they trusted the Government to make the right decisions on Covid-19. The average of G7 countries was 59 percent.

The high level of support for the Government and the high compliance rate helped to control the outbreak in New Zealand. Prime Minister Jacinda Ardern’s widely watched daily updates were clear and credible.

The latest Newshub Reid Research poll, the first public poll since the start of the pandemic, shows strong support for the Labour Government with 56.5 percent, while the National Party Opposition is on 30.6 percent. Jacinda Ardern is at 59.5 percent, up over 20 points on the last poll and the highest for any Prime Minister in the poll’s history. National’s leader Simon Bridges is on 4.5 percent. On these figures in an election Labour could govern without coalition partners and some senior Opposition MPs would lose their seats.

These figures were reassuring for the Government but succeeding against the virus came at a very high economic cost. Before the pandemic unemployment was at historically low levels of about 4 percent. It is predicted to peak close to ten percent in September before starting to recover. Some economists say it will go higher and stay high for longer. The predicted peak unemployment coincides with the General Election which is scheduled to be held on Saturday September 19.

To help hold unemployment under ten percent, last week’s Budget discarded the previous target of net core Crown debt under 20 percent of GDP. It is projected to reach over 30 percent at the end of this financial year and peak at over 53 percent by the 2023 fiscal year. Finance Minister Robertson said this is “the rainy day we have been preparing for.” He pointed out that the net core Crown debt of some countries is already over a hundred percent of GDP as they respond to the virus.

The Budget proposes some of the highest spending per capita of any country so far to recover from the effects of the lock-down and respond to the likely deep recession. The Budget provided a NZ fifty billion dollar fund to recover and rebuild. The fund includes $NZ20 billion to be used where needs arise.

The fund provides further assistance to businesses. The wage subsidy already in place will be extended for a further eight weeks. A large fund has been provided to support tourism, although there is little prospect for an early recovery of that sector which depends on the world aviation and cruise ship businesses. Heavy expenditure on ‘job rich’ sectors was announced. Eight thousand more social houses will be built, funding will be provided for large increases in trade training and free apprenticeships, and there will be a massive increase in the provision of free school lunches.

One commentator said it was Robertson’s lucky day’. He was given permission to save the economy with an almost unlimited budget to spend on Labour’s most favoured projects. He did so with liberal expenditure on health, education, social housing, environmental projects, road and rail transport, infrastructure (including new Cook Strait ferries) and the tourist industry.

The Leader of the Opposition Simon Bridges said that in his view the lock-down was too severe causing excessive damage to the economy and high debt levels that could remain a burden for generations to come. He argued that the huge Budget spend is a “slush fund” with which the Labour Government would try to buy the election. He said a National Party government would have managed the economy better and given a thousand dollars in tax cuts to every earner. He plausibly predicted higher taxes would be needed to help deal with the deficit and rebuild the economy.

Regardless of these comments from the Opposition and some media commentators it appears as if the Labour Government has seized the day. There is no plan for austerity and recovery won’t be left to the markets. Instead the Government plans to direct resources to “hit the reset button” and “rebuild better” to create a society with less pollution, less inequality, less homelessness, less carbon, less child poverty, more skilled higher paying jobs, healthier happier children, more sustainability, increased wellbeing and a more cohesive society.

A judgement on the Budget’s aim to optimise opportunities from this unprecedented time of crisis will be delivered at the General Election on 19 September.

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