I was surprised when the prime minister described the Economic Response to Covid-19 package as the ‘largest peacetime government spend in New Zealand's history’. Reflecting – checking through history – I realised that the term ‘spend’ was crucial and the package had no income tax cuts. Even so, it has a $2.8b p.a. lift for income support. It is a convention that social security benefits are not treated as negative income taxes.
There were those who thought there should have been conventional income tax cuts. But this boost will be in place on 1 April 2020, just a fortnight after the announcement. The system would be scrambling to get income tax cuts in place by 1 July.
A second technical reason is that the aim is to boost spending. The majority of the extra income will go to those desperate to spend it. In contrast much of an income tax cut would have been saved. Part of the justification for the stimulus is that people in middle-income brackets are cutting back on their spending as a response to self-isolation.
The third reason is political. There is a slogan, much used by the right, ‘never waste a good crisis’. This leftish government isn’t going to waste it either. The income support package enables it to deliver on its promise to reduce poverty and income inequality.
Had the 1972 Royal Commission on Social Security recommendation of the base benefit for a couple been maintained in real terms, it would be $472 p.w. today. The savage cuts in the 1990 Economic and Social Initiative had reduced it to $367 p.w. when Labour took over in 2017. From April it will be $428 p.w. (including the Winter Energy Payment averaged across the year). A rough estimate suggests that the income share of the bottom decile may lift to where it was about 20 years ago.
(These comparisons adjust only for prices; the Royal Commission clearly stated that it wanted benefits to be raised in line with rises in general prosperity, as occurs for New Zealand Superannuation.)
The least grumpy on the right acknowledged the urgent need for a private spending injection but said that the benefit hike should be temporary and later reversed. Presumably they want the funds to be used for an income tax cut which will be of greater benefit to them. They may sort of get their wish, for income tax cuts are likely to be announced in the May budget, to be implemented just before the election.
No one can be sure just how much room there is for the tax cuts, especially as the government is making further spending commitments. The Treasury won’t do its full balance for a month or so, and then there will be a debate on just how much borrowing is prudent, an answer to which we cannot possibly know now because we do not know the full impact of the virus on the economy. (Watch this space.)
Another structural change is the $500m injection into the health system. It is needed to cope with Covid-19 pressures but I would be astonished if it were reversed rather than absorbed into general health spending after the disruption is over. One suspects, too, the minor changes in the administration of the tax system may be permanent.
In principle, the business support package will unwind as the economy recovers. (When? Your guess is as good as mine and no better than that of the commentariat.)
However, the totality of the package may not be implemented quickly and efficiently. We have been running down the capacity of the public service for at least a decade. I do hope those who participated in, or supported, this running down will shut up rather than criticise the government.
I cannot help noticing that even those with Austerian/neoliberal proclivities have been advocating major interventions. Have we got to the point where the lessons learned from the GFC are going to become the conventional wisdom? A parallel might be that the lessons of the Great Depression were not really taken up until the Second World War.
So I shant be surprised if the business support package has a longer run impact. New Zealand has a lamentable record for policies to reduce the frictions in the labour market. In part it was because the high rates of employment in the first two decades after the Second World War made them less necessary. That ended about fifty years ago and we have done little since to deal with redundancy, redeployment, retraining and upskilling. The business support plan has some glimmerings.
So the government is not wasting a good crisis. But the Covid-19 tsunami could still overwhelm us all.