Richard Meade: We need to prepare our economy for Covid 2.0

Prime Minister Jacinda Ardern at a research facility. Thirteen billion dollars in wage subsidies and aggressive monetary loosening kept the economy going. Photo / Hagen Hopkins

OPINION:

We need a plan so that if Covid resurges or the next pandemic hits, the country knows how it will support the economy during the public health response.

The Independent Panel for Pandemic Preparedness and Response established by the World Health Organisation has released a sobering report.

Co-chaired by former New Zealand Prime Minister, Helen Clark, it describes Covid-19 as a "terrible wake-up call" for the world and makes key recommendations to avoid and limit future outbreaks.

It stresses that successful national responses were built on lessons learned from earlier outbreaks, while the pandemic was made worse by countries who just waited to see how events unfolded.

The panel rightly focuses on improving global public health preparedness for pandemics, including financing for public health responses. But it also acknowledges that economic support has played a key role in Covid containment.

This is because effective economic support relieves people of having to choose between prioritising the health of others, for example by being tested or staying at home when unwell, and being able to pay their bills.

Such measures can only go the long haul – as they must for long-lived or repeated pandemics – if they are also affordable. This means we need support measures that are cost-effective and, ideally, equitable.

New Zealand's main economic response to Covid – $13 billion in wage subsidies, combined with aggressive monetary loosening by the Reserve Bank – staved off the worst of what many feared last year, a crashing economy and rocketing unemployment.

But can we keep up this approach in the long term? The past 15 months have made it starkly clear that it is a matter of when, not if, another pandemic will become a global threat.

Is there a way we could achieve the same outcome at lower cost, since our extra government debt will one day need repaying? Our kids, especially, should be concerned.

These questions are already pressing. The Government's recently announced public sector wage freeze might have been avoided had wage subsidies not cost almost $13 billion.

In a recent article and related policy paper, I outlined a proposal for "Covid loans" as a better way than wage subsidies to keep economies afloat in pandemics.

In short, I proposed that households and firms should be able to access initially interest-free loans from the Government, with the loans making it possible to top up any revenue shortfalls for the duration of the pandemic.

Like student loans, Covid loans would be repayable only as and when borrowers' incomes rebounded sufficiently, making them manageable to repay (and hence to take on in the first place). The Government pre-committing to such loans would boost confidence and activity for employers and consumers alike. That, in turn, means the loans might not actually need to be used.

Precedent for such an "economic confidence trick" comes from the famous "whatever it takes" speech made by the then chairman of the European Central Bank in the midst of the European financial crisis following the GFC.

Mario Draghi's speech is credited with saving the European financial system and meant that emergency funding mechanisms put in place at the time were not actually needed.

Richard Meade. Photo / Supplied

My research shows that Covid loans would be around 14 per cent cheaper than wage subsidies and offer up to 2.5 times more economic support. They also more equitably direct the cost of support to those who receive it.

They are not just more cost-effective than wage subsidies, but also fairer.

It is unclear whether Covid-19 is in retreat, or if we are simply in the eye of the storm.

Though wage subsidies may have been an expedient way to support the economy when Covid first struck, we currently have the luxury of putting more cost-effective solutions in place – while the initial emergency has passed – to make sure we can continue to roll out effective support measures as needed.

If we squander this opportunity, we might find ourselves limited to less cost-effective and hence unsustainable support measures in the future, as well as tighter future budgets.
We should heed the panel's warning that there is no time to waste.

All countries need to improve their public health preparedness for the next pandemic – which means also improving economic preparedness.

• Richard Meade is a Research Fellow in economics and public policy at the Auckland University of Technology.