Finance Minister Grant Robertson during his announcement over the wage subsidy scheme extension last week. Photo / Mark Mitchell
COMMENT:
A newspaper recently asked if the average Kiwi can live on a Covid-19 wage subsidy of $585 a week. Unsurprisingly, it found this would be difficult, particularly in Auckland where the average weekly expense for a couple with two children is about $2000.
The reality is grimmer. The Government can only give money to Kiwis that it takes from them one way or another. The wage subsidy is not a gift. It is a murky IOU, a latent time-bomb.
Right now, the Government is borrowing $1 billion a week in bond tenders to fund this subsidy and other spending. That is the rate at which some combination of future taxes and spending cuts are rising.
If individual Kiwis borrowed the $585 directly, watching their mortgage or credit card obligations rise with every wage subsidy payment, the reality of the IOU would be more obvious. But the IOU aspect is murky because no one can be sure who will shoulder the debt burden and to what extent. It could be Kiwis today, or their children. Or it could be both. That is why it is a lottery.
This murkiness has a short-term political advantage because those who get the money can hope someone else will be "asked" to pay back the IOU later. The political game is to push the lottery decision far into the future.
Yet this uncertainty will hurt Kiwis' future wellbeing. Imagine if you put all your costs on the credit card, but the bank did not tell you how much you really owed. Responsible people would find that unsettling. For others, it would be an invitation to be irresponsible.
Those on a high income and/or with good savings will think they are the future targets for higher taxes. For many in this cohort, taxation is already their biggest single annual expense, with GST at 15 per cent adding to the top 33 per cent income tax rate. That concern will affect their decisions, and not for the better.
For a much larger group, Government spending is a big source of their disposable income. Public servants, teachers, health professionals, academics, superannuitants, working age beneficiaries are in this group, along with many charities, sports and arts bodies. Many will be fearing for their jobs and their income.
In short, freely spending borrowed money is the easy part. The fiscal pain lies ahead.
Ignore the snake oil about painless borrowing from central banks. This is simply Government borrowing by another name, but of a particularly dangerous type for financial stability. Like fire in the hands of a child, a poorly-constrained power to do print money is dangerous.
The notion that Kiwis will be happy with a lower income due to Covid-19 is also wishful thinking. New Zealanders are constantly asking the Government to give more taxpayer money to students, workers, consumers, and other recipients of government spending. General election campaigns have become a lolly scramble for other peoples' money.
Policies that make it easier for businesses to create jobs, innovate and survive would also boost national income. After all, higher incomes make public debt burdens more affordable.
Subsidies are not needed to encourage job creation and productive investment. They effectively tax those not receiving them. Unfortunately, policy design too often seems to think of farmers as polluters and employers and landlords as exploiters of market power rather than as generators of much-needed jobs, income and rental housing. Foreign direct investors are people to be exploited.
Oil and gas exploration is to be discouraged, or even banned. The perceived policy focus is instead on restriction and redistribution along with a bucket load of unseemly corporate welfare.
The Minister of Finance after the election will need to find a balance between spending reductions and tax increases. A "borrow and hope" strategy will compound the above uncertainties. The spectre of "austerity, but when" haunts this election campaign.
Mainstream Keynesian economics has long held that spending reductions are worse for national income than increasing taxes. That view neglects the impact uncertainty has on investors and employers. It unduly dismisses the importance of spending quality.
For example, projects that are "shovel-ready" may be a worse use of scarce resources than an alternative project since they deprive the community of the chance to use them better.
Empirical research can help with this balance. For example, US and Italian academic economists, Alberto Alesina, Carlo Favero and Francesco Giavazzi, studied close to 200 'austerity' plans in 16 high-income OECD economies between 1970 and 2014. These plans included 3,500 individual fiscal measures.
Their 2019 book, Austerity: When It Works and When it Doesn't, found that, on average, a drop in spending by 1 per cent of GDP reduced GDP by a quarter of a percentage point for less than two years. By contrast, a comparable tax-based austerity measure reduces GDP by more than two percentage points – eight times more – and for a longer period of 3–4 years.
Of course, their 'on average' funding is well short of a universal result. It is case-specific. Even so, it's plausible that heavier taxes on earned incomes are likely to have chilling effects on work effort, innovation and investment. Policy quality and credibility matters.
The standard objection to tackling fiscal deficits is that it is the kiss of death politically. Not necessarily, say the authors. They devote a chapter to evidence to the contrary. They do not mention New Zealand, but the Lange-led government's landslide victory in the 1987 general election is consistent with this thesis.
How might the next Government reduce spending? The short answer is to cut spending that cannot be justified on wellbeing grounds. Another guideline is to prioritise spending of a public (collective) good nature.
Arguably, the "job-saving" case for the wage subsidy has largely run its course. It is deferring job losses rather than preventing them. It is impeding job creation and adjustment. And it is making better targeted assistance less affordable. Greater competence in border protection management would be massively more economic.
After October, a new Government cannot keep throwing taxpayer money around like confetti. To use all its fiscal ammunition in the first round of a battle with a virus is not a good idea. It needs a credible plan for restoring the fiscal position before the next natural disaster comes along.
Post-election fiscal policy will be crucial for job creation, private investment and economic recovery. Prudent and responsible corrective fiscal action, if done well, can be a win-win economically and politically. That is a central message from this research.
- Dr Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative.
BGH's tilt at Tourism Holdings has sparked more merger and acquisition speculation.