Govt faces 'one hell of a fiscal repair job' MPs told by top economist

NZ Herald,
Publish Date
Wed, 13 May 2020, 11:44AM
Finance Minister Grant Robertson. Photo / Mark Mitchell
Finance Minister Grant Robertson. Photo / Mark Mitchell

Govt faces 'one hell of a fiscal repair job' MPs told by top economist

NZ Herald,
Publish Date
Wed, 13 May 2020, 11:44AM

Economic figures due to be released by the Treasury in the budget tomorrow will paint a stark picture of New Zealand's economic position, according to experts.

The numbers will also show the colossal challenges ahead, as New Zealand moves into, what one top economist this morning said would be the "sharpest, deepest economic slump ever."

Economic and tax experts appeared in front of the Epidemic Response Committee on the eve of tomorrow's budget to outline some of their concerns about the economy.

Bagrie Economics chief economist Cameron Bagrie said the data which will be released tomorrow would be "horrible".

He is estimating the Government's deficit to explode to roughly $30 billion – that's up from a pre-Covid expectation of just a $1 billion deficit.

Bagrie is also forecasting Government debt to $180 billion within four or five years – that's almost triple the current levels.

At the same time, the economy is going to take a significant hit as the recession bites.

Bagrie picked that Covid-19 will impact the economy by $3 billion a month every month the country is in level 1.

That means even at level 1, the economic hit of Covid-19 will be bigger than that of the Global Financial Crisis, he said.

"[The Government] will have one hell of a fiscal repair job," he told MPs this morning.

One thing the Government could do to help save some economic pain down the road would be to increase the retirement age.

And he wasn't the only one pessimistic about the economy going forward.

Independent economist Michael Reddell, formally a top Reserve Bank economist said the upcoming recession would be the "sharpest and deepest economic slump ever."

New Zealand's GDP will take at least a 10 per cent hit and the unemployment rate will increase to levels not seen in decades.

Like Bagrie, Reddell is expecting Government debt to increase and he this morning called for the Reserve Bank to reduce the official cash rate (OCR) down to negative territory.

This, he said, would help reduce the value of the New Zealand dollar and would, therefore, make exports to the country more competitive.

When it comes to the Government's response, Reddell said Finance Minister Grant Robertson should consider cutting cooperate tax for businesses.

This would help stimulate more investment, he said.

PwC New Zealand partner, and tax expert, Geof Nightingale said this was something worth considering, especially if Australia does it first.

But he said the worst thing the Government could do right now would be to increase taxes, or create new ones.

Instead, he said the Government needs to do all it can to help the country to return to solid economic growth.

That would be that tax revenue would automatically rise, he added.

Wealth tax 'not a good idea'

PwC New Zealand partner, and tax expert, Geof Nightingale said New Zealand is going to have an "enormous blow out" in Government debt levels – to 40 or 50 per cent of GDP.

He said there may be a need to tax increases in the future, to help lessen the burden.

But, in the meantime, the Government needs to do all it can to help the country to return to solid economic growth.

That would be that tax revenue would automatically rise.

"The worst thing we could do is start raising tax, or implementing new taxes, too early."

Nightingale said the Government has already made a number of moves to help businesses through lessening their tax burden.

He praised IRD and the Government for having such a well-resourced tax department.

He said a wealth tax was not a good idea – but he said the Government will need to think about thinking changing the way New Zealand is taxed going forward.

He pointed out a capital gains tax has been ruled out, but Nightingale said the tax system has to be tilted towards capital in the future.

He said a fourth tax bracket – higher than the top bracket of 33 per cent level – would not actually bring in a whole lot of revenue.

A better use of the Government's resources would be to restart economic growth.

He said that going forward, foreign investment is critical. But to get it, how that investment is taxed needs to be competitive.

The main competition is Australia – "if they started to reduce their cooperate tax rate, we would have to respond," he said.

In other words, if the Australian Government reduce their business taxes to attract more foreign businesses, New Zealand will need to do the same.

'Govt needs to cut tax for businesses'

Independent economist Michel Reddell, formally a top Reserve Bank economist, said Government officials were simply not ready for the economic impact of Covid-19.

Looking ahead, Reddell said New Zealand was looking at the "sharpest, deepest economic slump ever."

He said there the world is in a "savage and deep" recession.

In New Zealand, he said GDP could still be 10 per cent less in as a result of Covid-19.

Reddell said the RBNZ needs to implement a "deeply negative" OCR to help drive down the New Zealand dollar, which would help stimulate growth.

Reserve Bank Governor Adrian Orr has ruled a negative OCR out already – Reddell said he was wrong to do this.

Fiscal measures – more Government spending – will help, but the Reserve Bank needs to be doing more to help the economy.

"We must do what we can… to limit widespread unemployment."

In fact, Reddell said the Government needs to be cutting tax for businesses.

This would help stimulate more investment, he said.

'Can you be trusted?'

National Iwi Chairs Forum spokesman Rahui Papa said there was a "growing feeling" that the efforts of the Government are undermining iwi.

He cited the public health response bill, which he said "smacks of discrimination" – for example, the way police are allowed to enter marae under the new rules.

"While we are doing our part to look after each other in our communities, there is a growing feeling that the efforts of the Government are determined to undermine iwi, whanau and hapu.

"The public health response bill that is before the house today singles out maraes and employs a totalitarian enforcement right and above all smacks of discrimination. There are some phrases being coined around that this is an affront to our way of life. It is also an attack on our away of death."

He said Governor General Dame Patsy Reddy officially pardoned 20th-century pacifist Rua Kenana in December for "exactly the type of situation that we are getting into now, that police entered the marae without warrant and without cause and caused havoc that brought an apology some 105 years after the event."

In 1916, the Crown invaded the Tuhoe prophet's settlement in Te Urewera and accused Kenana of trying to stop Māori men being conscripted into the armed forces.

"It is very disappointing that Māori are being viewed as different and can't control our own spaces, especially in a tikanga space as it related to marae and as it related to tangihanga," Papa said.

"Māori have been protecting their people for generation upon generation and we don't see that we should be singled out in any of the bill. Marae are particularly singled out. There are no provisions for other entities.

Bridges asked: "I'm not meaning to be facetious but I'm asking you this genuinely, could you be trusted to continue with marae gatherings, tangihanga and the like? That's the question. Could you be trusted to do that?"

Papa said "very much so".

"We don't need the Ministry of Health, we don't need the New Zealand police to regulate the tikanga on our marae. I you've ever been to a marae, you'll know that the nannies rule. And when the nannies rule, the nannies rules are followed."

He said there would be social distancing, there would be sanitisation and in some cases there would be one-day tangi.

The limit of 10 people was "ludicrous", Papa said.

"Quite frankly, there are some catchphrases that we should have our tangi at the pub because you're allowed 100 people there. We should have it at a mall because you're allowed more people there, and you're allowed to have a kai. But for our marae, the restrictions are such that it makes it impossible for us to employ our tikanga.

"You can have people on a rugby field that smash each other over and then can't shake hands afterwards. There are some inconsistent messages."

Bridges asked about the future of the hongi.

"It will come back," Papa said.

"We have put it aside for now but this is a temporary measure that Maori have made the call on. It hasn't been because of Ministry of Health guidelines or Government guidelines."

Meanwhile, he said iwi have shovel-ready projects that the Government should prioritise.

At the end of the day, Papa said iwi must be involved in the economic response going forward.

Papa was challenged on his comments that the Government is not working with iwi by Labour's Tamati Coffey and Kiri Allan, who pointed to a number of initiatives where Maori and the Government have partnered over Covid-19.

For example, iwi checkpoints and care packages.

But Papa said those checkpoints would not have gone ahead without iwi proactively leading them, while MPs squabbled about them.

Allan disagreed, saying that the Government was supportive and police helped with the checkpoints.

She said the checkpoints were "well supported" by the Government and were not an "after thought," as was insinuated by Papa.

Papa said he was disappointed to hear negative comments about the iwi checkpoints from National.

Budget eve

Finance Minister Grant Robertson had been expected to address the committee, after economists and fiscal experts are questioned by MPs, but withdrew this morning.

The committee meeting comes on the eve of tomorrow's budget release, which will be the third delivered by Robertson.

He has said it's going to be a "budget like no other," given the enormous economic and fiscal pressures created by Covid-19.

Many billions of dollars of new spending are expected to be announced, on top of the more than $20 billion which has already been allocated and spent to fight Covid-19 and cushion the economic blow.

New Zealand is widely expected to slip into a recession.

Bridges, said an economic recovery plan is of "immense importance".

"The committee will be hearing submissions from respected economists who can paint a picture of what we're facing and how we can start rebuilding."

Bridges said that the Epidemic Response Committee continues to have an important role to play in New Zealand's response to Covid-19.

"As we start trying to climb out of the deep economic hole we find ourselves in it is important we make sure our response is up to the challenge and is ensuring the best future for all New Zealanders."