Liam Dann: Grant Robertson’s $10 billion dilemma

OPINION:

Is it time for Finance Minister Grant Robertson to take a lead from US President Joe Biden and inject a fresh shot of cash into the economy?

New Zealand’s economic performance was worse than we hoped in the last three months of 2020 and there is a very real risk that we are slipping back into recession.

You can contextualise that with all the weirdness of the pandemic but it doesn’t change the fact that there is going to be economic pain until the borders open.

And until then there isn’t an obvious reason or the kind of rebound out of recession that we saw last year.

Robertson now faces a big call.

Do we tough it out until we’re vaccinated and can open up to the world?

That would keep the Crown accounts in better shape and probably make life easier for governments in the decades ahead.

But if the economy really stalls we run the risk of doing long-term structural damage – losing valuable businesses and letting high unemployment become embedded.

So do we deploy more fiscal stimulus now to maintain economic activity and support businesses through this last difficult phase of the pandemic?

As well as the damage that would do to the government books, there is also a risk of overdoing it and creating inflation, which would hurt the poor and further fuel house prices.

And how do you deliver that stimulus to where it is really needed?

That’s not easy.

President Biden’s US$1.9 trillion stimulus plan will, among other things, deliver every American a $1400 payout in the next week.

It’s a bold policy move underpinned by the belief that it safer to over-deliver on economic stimulus than under-deliver.

That is a view shared by most central banks right now. They are determined to keep interest rates low even in the face of rising inflation risk.

The US Federal reiterated that position this week, saying that even though it expected the US economy to accelerate this year it would also keep its benchmark interest rate pinned near zero through 2023.

Our own Reserve Bank Governor Adrian Orr has also been steadfast in the view that stimulatory settings will be needed for a long time to get through this crisis.

Last week’s GDP data drives home the point Orr has been making this year about risks of not doing enough.

It should have put an end to calls for the RBNZ to start lifting interest rates any time soon.

But despite expectations that our economy will see much lower growth than the US this year, our government has been cautious.

There have been wage subsidy extensions to cover specific lockdown losses – but that is support not stimulus.

There’s been no fresh spending policy unveiled with view to pumping the economy.

Why?

Critics will cry complacency or incompetence but it seems to be an active choice.

The Government has been reluctant to prop up businesses in sectors of the economy where it doesn’t see a great long-term value.

That includes what it perceives to be low-value tourism.

Call it creative destruction, forest fire theory or whatever- there are solid economic arguments for this.

But they are pretty brutal and not what we’d usually associate with a left-leaning government.

By taking a laissez-faire approach, governments can let natural economic forces do transformational work that needs to happen to make an economy more productive.

So that guy, who sees his tourism operation go under, heads off to become a builder or studies to become a software developer … or something that adds more value to the economy in the long run.

Some of this has happened already and more probably needs to but there is a delicate balance between the creative bit and the destructive bit in this equation.

If the economy gets stuck in deep recession this year then we’ll lose businesses that we’ll need to employ people when the recovery really kicks in.

If too many people lose jobs at once, the capacity of the economy to re-employ or re-train is stretched and higher unemployment becomes entrenched.

It’s worth considering that Robertson does have the fiscal firepower to match Biden’s big move.

There is roughly $10 billion left in the Government’s Covid relief fund that is accounted for but not yet allocated.

That is more than enough to deliver every New Zealander a $1400 cheque.

I’m not advocating that we do that.

Parts of our economy are still doing very well.

The last thing we want to do is pour further fuel on the housing fire.

Home-owning New Zealanders are benefiting very nicely from house-price inflation – and they really don’t need a government handout.

But it underscores the potential that is there for more-targeted stimulus.

Robertson has always been committed to fiscal responsibility in the finance role.

He well understands the reasons why New Zealand needs to run conservative levels of Crown debt.

We are vulnerable to costly natural disasters and our private debt levels are through the roof.

But there is a risk that if we head deeper into recession this year we may undo much of the good economic work that saw us through the first phase of the pandemic.

The Government needs to think laterally and act quickly on any opportunities it can see that will enable it to get cash into – and flowing through – this struggling economy.

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