John Roughan: Coronavirus economy shock an important lesson

Finance Minister Grant Robertson says his careful handing has the economy in a good position. Photo/Mark Mitchell

Two people in New Zealand ought to be feeling a little queasy right now. One of them probably is. Grant Robertson has been a good minister of finance, unruffled, responsible and strong enough to withstand calls from left and right to loosen his grip.
But he will be acutely aware that just before Christmas, when the world hadn't heard the word coronavirus, he did loosen up. He blew the surplus in a $12 billion splurge on infrastructure when he didn't really need to.
Now economists are contemplating a recession induced by efforts to contain the coronavirus in China and keep it out of New Zealand. Some of our best industries – tourism, dairy products, forestry and education – are already feeling the pinch. Plus, the Upper North Island is in a drought.
With luck the recession will last no longer than six months or so. With luck it will not cause business to reduce staff by attrition or lay-offs, which could put the economy into a downward spiral.
The Treasury is scrambling to assess the possible impact. Robertson says his "careful management of the accounts puts us in a good position to withstand those economic challenges" and believes his recent package of infrastructure projects will provide support for the economy. But a responsible finance minister, which he is, would be having a twinge of doubt in the pit of his stomach.
The other person who would be feeling queasy if he suffered from any self-doubt is Reserve Bank Governor Adrian Orr. Last winter Orr surprised all close observers of the economy by shaving 50 points off the bank's base interest rate when he didn't really need to. That was a third of the best ammunition he had to fight a recession.
Chances are the latest coronavirus will be no worse than previous ones before a vaccine is developed. It is, after all, only flu, "deadly" for very few. But this is an age very averse to health risk and the scale of quarantine measures being taken in China and around the world will have an economic impact greater than the disease probably warrants.
The global panic is a timely reminder of how suddenly economic shocks can happen and why it is wise to maintain the buffers against them.
Shocks come in many forms. Helen Clark's Government enjoyed seven years of plenty before finance company collapses signaled a recession in 2007. It was a local precursor of the sub-prime mortgage failures in the United States that triggered the global financial crisis in 2008.
Fortunately for seven years Finance Minister Michael Cullen had resisted pressure to spend budget surpluses and he had reduced the public debt to a very low level. That enabled John Key's Government to safely run deficits through the global recession and pile on more debt after an earthquake devastated Christchurch.
It is nine years today since Key stood amid the dust and debris of the Christchurch CBD and assured business owners the Government would pay all their staff wages in the weeks it would take for them to relocate. This and outlays to restore vital services in the city sent the budget into the deepest deficit we have seen.
Thanks to low debt, New Zealand's international credit was not in peril. Bill English was able to bring the budget back to balance fairly gently and it was building surpluses again by the time Robertson took over in October 2017.
For two years Robertson resisted a growing chorus of calls, not only from Labour's left but from business hungry for a stimulus, telling him he should relax fiscal responsibility and take advantage of low interest rates to tackle a mythical "infrastructure deficit".
In December he succumbed to this siren song, announcing a $12b capital spending programme. When the chosen projects were revealed this month none were new or vitally urgent. The roads had been programmed by the NZ Transport Agency to be funded in due course from petrol tax and other user charges.
That is how infrastructure is sensibly financed, not from occasional raids on general taxation when a government has a rush of blood for election year.
A former Treasury Secretary, Graham Scott, once told me the main thing international credit agencies look at when assessing the country's credit risk is its public debt (not to be confused with national debt which includes private sector borrowing). That is why surpluses matter.
That's why Robertson sounded relieved last month when one agency, Fitch, upgraded our foreign currency AA rating having noted, pre-coronavirus, the Government's intention to spend on infrastructure.
He sounded equally relieved this month when the Crown accounts for the first half of the financial year showed a tiny unexpected surplus. But he warned the accounts for the second half will show the impact of coronavirus. Let's hope it's brief.