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Insights 35: 18 September 2020
NZ Herald: The biggest global bailout in history
 
Podcast: Oliver Hartwich on NZís economic house of cards
 
Report: Democracy in the Dark

The worst is yet to come
Dr Eric Crampton | Chief Economist | eric.crampton@nzinitiative.org.nz
Treasury’s pre-election fiscal update makes for grim reading.
 
Bryce Wilkinson tallies the numbers, showing the forecasts are based on heroic projections about growth in labour productivity and on greater fiscal discipline than has been the norm. That means debt to GDP ratios will be worse than forecast for longer than is safe in a country subject to many other risks.
 
The long term is scary. But the next couple of years give me nightmares.
 
The fiscal update assumes border restrictions can lift from the beginning of 2022, but also provides worse forecasts about what happens if only a limited opening from mid-2021 is possible. In that case, unemployment would be almost a percentage point higher in 2022 and GDP growth rates would be over a percentage point lower in 2023.
 
Even if an effective vaccine is developed by the middle of next year, scaling up production and distribution will take time. Covid-19 is likely to be around for a while. There is, at minimum, a strong insurance argument in favour of preparing for a worse-case scenario. And there is worryingly little evidence that the Government is preparing for it.
 
The border’s managed isolation system is straining to handle even 14,000 monthly arrivals. Scaling that system up, recouping costs through user fees, could be well worthwhile. In the scarier Covid scenarios, safely accommodating more entry will help avoid the worst economic consequences. Overseas remote workers could relocate to New Zealand, continue to be paid by their overseas employer, and spend and pay taxes here. Businesses could relocate here as well. But the border system needs to scale up.
 
This week, Air New Zealand laid off hundreds of air cabin crew, many of whom would need only a little additional training to work in managed isolation. If the Government is preparing for the longer term, where are the staff training programmes for building up managed isolation?
 
But the policy problem extends beyond the border.
 
Firms pivoting to new opportunities in desperate circumstances need access to funds. But rather than simplify this, the Government has tightened restrictions on access to foreign capital.
 
More risk-sensitive approaches for any future Level 3 restrictions still need to be built, along with support programmes suited to a longer-term Covid world.
 
Setting policy to prepare for that reality would make the outlook rather less grim.

No grounds for complacency
Dr Bryce Wilkinson | Senior Fellow | bryce.wilkinson@nzinitiative.org.nz
We should thank Ruth Richardson for requiring Treasury to publish pre-election economic and fiscal forecasts. Compliments also to Treasury for maintaining their quality over nearly three decades.

The central projections released this week present the fiscal situation as challenging but manageable. Sure, core Crown government spending is expected to hit 39% of GDP in 2020/21, an eyewatering $60,000 per household. But by 2024/25, it will be down to 31%. The fiscal deficit would be tamed and the public debt ratio to GDP will have peaked. All this without new measures to reduce spending or increase taxes.

A day after the Treasury’s forecast, Statistics New Zealand published its June quarter results. A ‘lock-down’ fall in real GDP of “only” 12.2% looks pretty good against Treasury’s forecast 16% decline. But the difference is minor from a fiscal strategy perspective.

The Treasury’s projections always assume the incumbent government’s policies will continue. That rules out major new spending initiatives. As a result, projected core Crown spending per capita in 2020 dollars in 2029/30 is no higher than in 2019/20. That is unlikely. Pressure to increase future spending is inexorable. Projected spending in 2029/30 is already $15 billion (12%) higher now than in the pre-election estimate in 2017.

Treasury also assumes income growth will exceed the interest paid on government debt to 2034. In 2014/15 the interest on public debt was 1.9% of GDP. That was when gross sovereign issued debt was 38% of GDP. In 2029/30 Treasury’s projected interest cost will still be just 1.9% of GDP, despite the debt being 68% of GDP by then.

Long-term projections for income growth depend greatly on labour productivity. Treasury assumes by 2033/34 labour productivity will be 18% higher than last year. That represents an average annual compound growth rate of 1.1% pa. How do they expect this to happen? After all, in the six years to 2018/19, the average growth rate was only 0.1% pa.

Treasury’s central forecasts to 2034 also assume no major financial meltdown and no further big hits from mother nature. The next Government’s fiscal strategy should not be so sanguine.

Tough times lie ahead, tougher than readers might think by looking at central forecasts alone.

Retail therapy
Nathan Smith | Chief Editor | nathan.smith@nzinitiative.org.nz
Back in March, the World Happiness Index 2020 placed New Zealand eighth with a score of 7.3, tucked between Austria and Sweden. Every country ranking higher was Nordic (aside from Switzerland) and I notice they also have plenty of Ikea stores.
 
That same month, the Swedish flatpack retail giant told journalists it hasn’t changed its plans to open a few stores in New Zealand. The year started off so well.
 
That got me thinking: if the RMA process hadn’t blocked Ikea from opening in Auckland back in 2008, and Christchurch recovery tsar Gerry Brownlee the role Ikea might play in supplying cheap furniture for rebuilt homes, maybe 2020 would be less miserable? Who needs kindness when you’ve got happiness?
 
I won’t take credit for it, but someone has created a scatterplot correlating the happiness index with Ikea stores per capita. They had to exclude Sweden for obvious outlier reasons, but the results speak for themselves.  
 
 
Canadians have far too few Ikea stores (14) for their amount of happiness (7.2). Even Australia’s happiness-to-Ikea distribution is skewed (10 stores nationwide scoring 7.2 on the Happiness index). The happiest? The Netherlands, with 13 stores and a 7.4 on the index. The country has 17 million residents.
 
Having one Ikea store per million rather than zero is associated with a full point increase in national happiness. Even having just one Ikea (0.2 per million) would give New Zealand an expected 0.2 point boost.
 
Where would New Zealand place in 2020 if Brownlee had agreed to Ikea using some vacant land near the Christchurch airport years ago? Likely somewhere near the Indonesia and the UK, hugging the left-hand boundary of the graph.
 
It would take a lot to push us to Dutch happiness levels. A few more stores in Auckland would still leave spots for other locations elsewhere, but I’m not sure how much happier Kiwis would be with Ikea stores in Whanganui, Nelson or Tauranga.
 
Of course, these measurements aren’t serious. We might as well compare the distribution of swimming pools or sex shops with happiness rankings. And I’ve always been curious how surveys control for cultural biases when asking: “are you happy?”
 
Yet if the Government insists on using “wellbeing” as a goal, what’s so bad about using happiness? Think how much happier we’d be this year with an allen key and a set of assembly instructions.
 
On The Record
 
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