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Government Grabs The Wheel For Post-Covid Recovery

Wellington, 14 May 2020 - Budget 2020 puts the Government firmly in the driver’s seat to get New Zealand through the Covid-19 financial crisis, but it will need more than good intentions to succeed, according to The New Zealand Initiative.

The Coalition Government announced the largest spending package in the country’s history, adding $50 billion to the already announced $12.1 billion Covid-19 recovery fund for an enormous total of $62.1 billion, with much of that funding held in reserve in case of future outbreaks.

Part of this new funding will include an extension of the wage subsidy scheme, but on a more targeted basis, out to an extra $3.2 billion.

The Initiative’s chief economist Dr Eric Crampton said this new targeted spending may help private sector employment, but the Government has sent a clear signal about how it plans to tackle the economic crisis.

“The Government is banking more generally on its own projects to see things through.

“Although there was no talk of Kiwibuild, it plans to build 6000 additional public housing homes and 2000 transitional housing homes. On top of this is an obvious preference for projects with a job-creation focus, including environmental projects,” he said.

However, he added there was no direct information on how the Government wants to reopen the border or develop its hypothetical trans-Tasman travel bubble.

“While $84 million is allocated for border protection for passenger travel, that seems rather light if they’re expecting any real increase. By way of comparison, it has allocated $315 million for biosecurity pest and weed control,” he said.

“Hopefully the Government plans to run future quarantine schemes on a cost-recovery basis, so these would not consequently show up in the budget. But some sign of an outward-focus, building on the success we have achieved while strictly protecting the gains we have made, would have been welcome.”

The budget documents also show New Zealand’s core net debt levels are projected to peak at 53.6% of GDP in 2023-2024, and only drop to 42% by 2034. While the Government has avoided tax increases so far, they can be expected going into the election, Dr Crampton said.

“Finance Minister Grant Robertson views current and future debt levels as prudent and as consistent with his responsibilities under the Public Finance Act. And taking on debt during a crisis certainly is!

“But where both major political parties have viewed debt to GDP ratios of 20-25% as prudent, it would be nice to see a path back to those levels,” Dr Crampton said.

The Government is also maintaining contributions to the NZ Superfund - $1.46 billion this year and $2.12 billion next year.

“While this of course doesn’t affect net debt levels, it does seem odd,” Dr Crampton said.

Reducing future Superannuation entitlements while using some of the SuperFund to assist with the pandemic response could be warranted, he added.

New Zealand Initiative senior fellow Dr Bryce Wilkinson said the budget is “all about spending” based on “good intentions.”

“Budget 2020 is plausibly consistent with respect to turning deficits into surpluses. It is less convincing on the prudent debt target,” he said.

He points out that the Government expects borrowing to be about 85.4% of GDP by 2022 while its gross debt will rise to 54.6% that year. At the same time, its core Crown tax revenue is expected to drop from 28.5% of GDP to 26.6% by 2022.

“The Government’s strategy to get back to productivity and economic health seems simple enough: just throw money at a few things like research and development (R&D) and vocational training and increase corporate welfare,” Dr Wilkinson said.
 

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