Finance Minister Grant Robertson during the pandemic. Photo / Pool
Finance Minister Grant Robertson during the pandemic. Photo / Pool
Opinion
Three facts:
A Treasury report has questioned the level of stimulus spending during the Covid-19 pandemic.
The report noted that Treasury was initially supportive of some of the stimulus, but advised against it later in the pandemic.
A lot of the spending during the pandemic, including the costly wage subsidy, had cross-party support.
It is often said that history is written by the victors.
Perhaps when it comes to politics, this is better formulated to say that all Governments ultimately come to an end, while history is reinterpreted by the institutions that endure beyond them.
Treasury’s recently-released Long-termInsights Briefing (LTIB) examines the use of fiscal policy as a macro-stabilisation tool and hints at a reassessment of some major economic decisions during the response to Covid-19.
Coverage of this report has focused on an implication that Treasury were opposed to much of the Covid-19 response and had sought to limit the extent of Government spending.
Others have noted that the report does not say this directly, though the selective quotes from advice at different stages do not exactly discourage this reading.
In the interests of full disclosure, I was an adviser to the Minister of Finance Grant Robertson from December 2020 onwards. Unsurprisingly, my perspective often differed from Treasury (which in some ways was a key required skill for that job), and readers may reasonably take that into account in the criticisms that follow.
The risks highlighted in the report around the use of fiscal policy tend to underline the view that “cyclical management should mostly be left to monetary policy run by an independent central bank”.
This is not a new position – it is such an established aspect of economic orthodoxy that it is known as the ‘consensus assignment’.
Finance Minister Grant Robertson during the pandemic. Photo / Pool
Why, then, would we use fiscal policy in response to a shock?
Recent decades have seen very low interest rates, and therefore situations where central banks cannot cut rates to the level they believe necessary to support the economy.
This issue is known as the ‘effective lower bound’ and was one of the major preoccupations of economic debates following the global financial crisis.
However, it was clear that Treasury had done limited thinking on how fiscal policy should be used in a crisis.
This was despite the fact that the official cash rate was just 1% as the pandemic approached. I recall my surprise at being briefed on a work programme to review Treasury’s macro-economic framework – thinking that I would have assumed it had already taken place sometime in the previous decade.
At different stages Covid-19 required spending to support overall economic activity (i.e. stimulus) as well as more targeted spending for workers and businesses directly affected by lockdowns.
The LTIB notes that Treasury did support large-scale spending responses in the initial stages, but then “advised shifting towards more targeted fiscal support and recommended against further stimulus from Budget 2022 onwards”.
Covid-19-related supports had continued during this period, because large numbers of New Zealanders continued to be affected by Covid-19, most notably during the Auckland lockdowns.
But the purpose of this spending was to support people and businesses during a time when normal economic activity was not possible, not to stimulate more economic activity.
Despite the large initial cost of the wage subsidy scheme in 2019/20, the largest year for Covid-related spending was actually 2021/22, owing to the combination of business support programmes and the ramping up of the national health response.
Former Beehive staffer Toby Moore. Photo / Supplied
A further, separate category of spending is funding allocated through the Budget operating allowance, which is typically a mix of new spending and the increased cost of existing spending (cost pressures).
In late 2021, the operating allowances for upcoming budgets were increased compared to what was previously signalled. Treasury has at times raised concerns that adjusting future allowances might undermine credibility; however, it was not an uncommon occurrence for parts of Treasury to raise such concerns and for other parts of Treasury to put advice to the Minister suggesting that allowance should increase.
It is important to understand that budget allowances are not an end in themselves.
Adhering to previously planned allowances come what may does not amount to a sensible fiscal strategy, and governments tend to put more focus on whether those allowances are contributing to them keeping debt or deficit levels in line with their intended objectives.
The operating allowance for Budget 2022 was large, at $6 billion. But based on forecasts at the time, that level of spending was consistent with Government debt peaking at a much lower level than earlier forecasts, and the Government’s books returning to surplus much earlier, in 2023/24.
At the point Treasury states that they were not advising further stimulus, this was very much the Government’s view as well. Economic and fiscal forecasts were looking much different from mid-2022 onward, and the economy continued to slow as the Reserve Bank tightened interest rates in response to rising inflation of the sort that was experienced around the world.
While larger proportions of budget spending during this period were trying to maintain existing public services in the face of high levels of inflation, the other side of this story is the fact that forecast tax revenue has continually failed to eventuate.
Prime Minister Jacinda Ardern during the pandemic. Photo / Mark Tantrum
Ahead of Budget 2024, Nicola Willis alluded to a further downgrade in economic and fiscal forecasts, saying “Sadly, I’ve learned to dread what comes out of the forecasters’ mouths when they come into my office”.
If nothing else, this is a sentiment shared across successive offices of the Minister of Finance.
Repeated downward revisions of the tax-to-GDP ratio over time means that Budget 2025 forecasts for the current fiscal year are a full 3.3% of GDP lower than what forecasts in mid-2022 had anticipated.
This has contributed to OBEGAL surplus getting pushed further out in the forecast period (and more recently, only showing surpluses on the Government’s self-invented measure, OBEGALx).
If decision-makers had cared only about inflation and nothing else, fiscal policy could potentially have done a lot more to reduce economic activity.
With the Government not willing to resort to tax increases, more contractionary fiscal policy would have meant absorbing more of the burden of constraining demand through deteriorating public services, with the Reserve Bank having to do less through the OCR.
Given the ongoing pressure on the health system today, we should be glad this was not the path that was taken.
But far from being critical of this Budget spending, Treasury was also raising concerns that spending was not high enough.
In the half-year update in 2022, Treasury expressed concern about what it described as the largest fall in real government consumption since 1987.
As late as October 2022 Treasury was advising the Minister of Finance to increase the allowance for the next Budget from $4.5 billion to $5b.
This incongruous array of advice was not a matter of mutinous radicals seizing control of the Government’s lead economic adviser. Treasury was trying to tread the same narrow path that the Government was.
The economy as a whole was hitting up against its capacity, and vulnerable New Zealanders needed targeted support towards the cost of living.
Every dollar of additional spending risked adding to inflation and every dollar of spending that was withheld meant that rising costs would hit core government services or households directly.
It is appropriate that we try to learn lessons from the experience of Covid-19. It is reasonable for people to disagree with some aspects of the fiscal response and it is highly unlikely that every decision taken was the right one.
But the economic response was overwhelmingly guided by officials’ advice rather than contrary to it.
There may now be unease among some public servants about the level of debt that New Zealand assumed or the spending pressures that it is facing.
But the other side of that debt is the businesses that are still operating, the people who were kept in work and the loss of friends and family members that were avoided because NZ chose to support each other through that most complex and challenging time.
Toby Moore is a doctoral candidate at Te Herenga Waka - Victoria University of Wellington and was previously a senior adviser to former Finance Minister Grant Robertson. He is also on the Labour Party’s policy council, though the views here are his own
