Budget 2020

Budget 2020 brings a completely different outlook on life compared to this time last year. The first Wellbeing Budget of 2019 was built on expectations of stable GDP growth and a tight labour market, and was underpinned by uncertainty in the international and domestic economic outlook. Budget 2020 will make forecasters look back on that time fondly, as the Treasury’s economic forecasts highlight a very different view for New Zealand over the coming years, filled with an exceptional level of uncertainty.   

Real GDP is forecast to decline by 4.6% in the next year, followed by a further decline of 1.0% the year after. GDP is expected to bounce back strongly from 2022 onwards as the impacts of COVID-19 are expected to ease. The decline in growth reflects the impact of lower consumption and investment, partially offset by around $35 billion of discretionary fiscal support for COVID-19, as well as supporting monetary conditions.

The impacts on households are expected to be significant. The unemployment rate is forecast to be at 8.3% in June 2020, and approach 10% by September 2020. The last time the unemployment rate reached double digits was in the early 1990s. While the labour market is expected to steadily improve from 2022, it will take five years before we start to see the country return to pre-COVID-19 levels.

However, aggregate unemployment figures hide the fact that the economic impacts will not be evenly spread across communities and businesses.  The economic impacts of COVID 19 will be more acutely felt by communities that already have higher unemployment rates, and in certain sectors such as tourism. Māori and Pacific Peoples’ unemployment rates were more than double the Pākehā rate pre COVID-19, and COVID-19 is likely to exacerbate this.  

Budget 2020 has demonstrated that the Government is committed to supporting individuals and the economy recover and rebuild from COVID-19. One genuine measure of success would be how equitable that recovery truly is.

COVID-19 has seen the Government fundamentally rethink its fiscal strategy.  In December, the Government was expecting OBEGAL surpluses in 2021/22, and net debt to reduce to below 20% of GDP. That plan is well and truly on hold, with the economy not expected to fully recover until 2028. 

With the Government clearly focused on fiscal stimulus, expenditure is expected to peak at $119.8 billion in 2022/23. To fund this, net core Crown debt is expected to grow year on year over the forecast period, reaching $200.8 billion by the end of 2024/25. By this time net debt will reach almost 54% of GDP by 2023, reducing to 42% of GDP by 2034. 

Although we are in a low interest rate environment, the scale of this burden means that a continued focus on fiscal prudence will need to be at the forefront of this and every subsequent Government’s fiscal strategy. While COVID-19 was a short-term health crisis, and will continue to disrupt the economy over the medium-term, the fiscal impacts of COVID-19 will be intergenerational. For decades to come, future Governments, and taxpayers, will be paying for COVID-19. 

This creates a genuine fiscal balancing act for the Government. In the near-term, the Government needs to support the economic recovery, while also exercising fiscal constraint. However, the immediate impacts of COVID-19 must not dwarf the need for strategic investment in some of the bigger intergenerational challenges we face - such as critical infrastructure needs, housing and climate change. 

Tax revenues, across all tax types, are expected to decline in the first two years of the forecast period before starting to recover from 2022 onwards. However, it is not the time to make any changes to the tax system to increase the tax take, now or in the immediate future. Any increase of tax rates or introduction of new taxes should only be considered once economic recovery is well underway.

How did tax revenues fare during the last recession? Looking back to the 2008 global financial crisis, tax revenues dropped from $56.7 billion in 2008, to $54.7 billion (2009), then $50.7 billion (2010). However, revenues quickly recovered, with the Crown netting $51.5 billion, $55.0 billion and $58.1 billion in successive years.  The key takeaway from this is that tax revenue will bounce back as our economy recovers.  The question will be whether the Government will want to re-examine the tax system, once the economy has recovered, to address some of the more fundamental equity issues posed by a post COVID-19 world.

The Government is clear that this is not the Wellbeing Budget they envisaged. Priorities have shifted with COVID-19, and the Government is unapologetically focused on managing the immediate impacts of COVID-19, and setting the economy up for recovery. 

That said, the ‘wellbeing’ spend in this Budget is lighter than we would’ve expected. While the announcements in this Budget will make a difference (i.e. historic funding increases for Family Violence Services, Whānau Ora, and community-based services for disabled people, along with a $5 billion investment in housing), they will not be enough to address the inequities that existed before COVID-19. Without careful management over the coming months and years, these inequities will only grow deeper in the wake of COVID-19. 

Where to next for wellbeing?  

With the socio-economic impacts of COVID-19 just beginning to unfold, a wellbeing focus is more important than ever. Approaching the recovery from a wellbeing lens is a way to drive investment so New Zealand can come through COVID-19 as a safer, more equitable place to live. 

With nothing in Budget 2020 that will fundamentally shift the dial on wellbeing, when will wellbeing come into its own as a genuine driver of investment? We are keen to see how the Government plans to use the remaining $20 billion in the COVID-19 Response and Recovery Fund to address equity issues highlighted by the crisis, and how the Wellbeing Outlook will shape investment priorities. 

While Budget 2020 is an important start, the Government has a long way to go to show how they will use COVID-19 to fundamentally shift the dial on systemic inequality in New Zealand.

Budget 2020 is very much focussed on getting the economy moving again with a further $4b Business Support package announced aimed at keeping people in jobs and to help businesses recover from the impact of Covid-19.  The lion’s share of the $4b is earmarked for the extension of the wage subsidy, with the remainder for initiatives that look to help kick-start the economy.  

There are also sector specific measures announced including additional support for exporters, tourism, agriculture, Māori economy, as well as additional funding to provide retraining opportunities to those that need it.    

While the additional support will be much appreciated by businesses that are still doing it tough, it remains to be seen which of those businesses will be able to pivot and meet the challenges of a very different post Covid-19 economy. 

Wage subsidy scheme - targeted extension 

The wage subsidy received a targeted extension up to the tune of $3.2b, which will provide a further much needed cash injection for those businesses that are feeling the impacts of Covid-19 the most.  The extended scheme will apply to businesses that have suffered, or expect to suffer, revenue loss of 50% or more over a 30-day period before the date of application for the extended scheme versus the nearest comparable period last year.  The scheme will be available from 10 June 2020 until 1 September 2020.   

The payment amount continues to be the same ($585.80 per week for employees working 20 hours or more per week and $350 per week for those working less than 20 hours per week) and will be for a period of 8 weeks.  Together with the wage subsidy, eligible businesses will be able to receive support of up to $11,716 per full time employee.     

R&D loan scheme

Budget 2020 establishes a $150 million fund for loans to research and development (R&D) intensive businesses. The loans will be administered by Callaghan Innovation.  By early June, loans will be available up to 50% of annual R&D expenditure, capped at $100,000.  Further details on the loans are expected with a signal from the Government that the loans will be provided on favourable terms.

R&D activity will play an important role in the recovery and growth of the New Zealand economy.  The targeted cash support will hopefully allow businesses to continue to invest in innovation.   

Support for small businesses

Small and medium enterprises receive further targeted support as part of the Business Support package, a key focus on helping them move to a more digital economy, including: 

• $10 million of grants and incentives to develop e-commerce capabilities and to train digital advisors

• $12.5 million for the existing trans-Tasman e-invoicing regime (which helps automates invoicing processes) 

• $2.3 million is earmarked for recovery/cash flow advice

• $15 million for other support measures like Business Connect and Better for Business programme. 

The extraordinary circumstances of Budget 2020 have seen a huge widening in current and future projected operating deficits (OBEGAL) to $28.3bn in FY20 and $29.6bn in FY21. Accompanying this is a massive expected increase in the FY21 NZ Government Bond Programme to $60bn, $50bn higher than forecast at the HYEFU 2019. Net issuance (incorporating maturities) is $49bn in FY21.The forecast bond programmes for the FY22, FY23 and FY24 years have also been revised higher, expected to be NZ$40bn, NZ$35n and NZ$30bn respectively. 

Net core crown debt is expected to increase from existing $66bn (21.3% of GDP) at March 2020 to $88.9 bn as at June 2020 (30.2% of GDP) and $129.5 bn as at June 2021 (44.0% of GDP) . Net core crown debt is forecasted to be 53.6% of GDP as at June 2024.

Ordinarily, such a sharp increase in government debt would have a material increase in government bond yields. It is not clear this will be the case currently as the Reserve Bank of New Zealand continues their Large Scale Asset Purchases (Quantitative Easing) of mainly central government bonds. These purchases will offset the vast majority of increased government bond issuances over FY21. Coordination of monetary and fiscal policy is necessary to ensure ‘orderly’ functioning of our government bond market and deliver monetary policy easing (lower interest rates). New Zealand 10 year government bond yields fell by approximately 0.1% to 0.5% following the RBNZ monetary policy announcement the day before the budget, subsequently increased back to approximately 0.6% after the budget announcement, although later in the afternoon fell back to 0.55%.

There is no clear evidence that we should experience sharply higher interest rates in New Zealand for some time. Interest rate market reaction immediately post budget seemed consistent with debt increasing by a little more over time than may have been expected.

As recently as last week Standard and Poors reaffirmed the New Zealand Governments’ AA+ Local Currency long-term credit rating and ‘positive’ outlook with our strong fundamentals for economic growth beyond the crisis holding us in good stead. We are one of only two countries (along with Japan) with a positive outlook. The expectation of Standard and Poors remains for a quicker economic recovery and lower government debt (than Treasury expectations) with the positive outlook again reaffirmed after the budget announcement.

Budget 2020 sees the Government investing over $900 million to support Māori in response to COVID-19.

One of the main components of this investment includes growing Māori job opportunities with the establishment of a $50 million Māori trades training fund as part of a wider Māori Employment Package of more than $200 million. With the expected increase in unemployment for a further (two) years; and likely disproportionate impact on Māori, there is a significant need to boost Māori employment opportunities particularly for the younger generation or rangatira. It will be interesting to see how Māori business activity and entrepreneurship also impact on the recovery and growth of jobs for Māori.            

A further $136 million for Whānau Ora is provided to support whānau and communities who need it the most. Throughout Aotearoa COVID-19 has seen iwi, urban Māori, and other community organisations mobilise into action, with kete kai and manaakitanga. The impact of COVID-19 at both a household and community level will see the continuing need to provide essential support to Māori households and kaumatua in particular. Community collaboration amongst iwi, hapu and NGOs has played a critical part in the wellbeing of at risk whānau and communities to date, and this is likely to be an important determinant into the future.      

There is further support for Kōhanga, Māori learners and the continuing revitalisation of te reo Māori with an extra $200 million of funding for Te Kōhanga Reo. The revitalisation of te reo and the strengthening of educational facilities will underpin Māori aspirations to continue to promote and grow Aotearoa’s indigenous language from an intergenerational perspective.      

Recognising Māori NGOs and the work they are involved with with vulnerable whanau sees an extra $11 million specifically targeted for these groups. Budget 2020 also provides an extra $40 million to help tackle the housing challenges Māori face through the MAIHI (Māori and Iwi Housing Initiative) programme. The funding will help close the gap to some degree, but the question remains as to whether this is sufficient post the impact of COVID-19.    

The funding set aside for Māori supports the Government's intent to work with people and providers across Aotearoa to restart and repair Māori communities. The impact of COVID-19 at both a household and community level sees an essential need for this. At the root of recovery for the Māori economy, Māori business and households, will be the retention and creation of new jobs. The $400m Tourism recovery fund will be welcome news, given the level of investment and Māori businesses that have a stake in this important sector.

The ‘Rebuilding Together’ Budget has an expected focus on responding to the COVID-19 crisis with a heavy emphasis on job creation as a core element. This focus appears to be at the cost of other critical and important issues such as climate change and New Zealand’s transition towards a low- emissions economy. The Government references the importance of addressing these larger issues in prose, but there is no meaningful commitment to funding actions and initiatives necessary to address New Zealand’s major emissions sources and the risks posed by climate change. 

As the economy emerges from the current crisis, climate change will not have gone away or solved itself. Borrowing from the future without an action plan that explicitly keeps these longer term issues in mind risks this money being spent in a way that heightens future New Zealanders’ problems, rather than lessens them. It is vital that we not only rebuild together, but that we rebuild better together. While ‘building back better' was stated as an objective it is not clear how the funds allocated by the 2020 Budget improve New Zealand’s ability to address climate change.

The opportunity remains for the Government to ensure that the funding that has been allocated is spent in a manner that not only addresses short-term problems but also keeps longer-term issues in mind, especially with respect to climate change and sustainability.

The impact of the Rebuilding Together Budget on New Zealand's ability to meet the challenge of climate change will therefore depend on whether infrastructure investments supported by the 2020 Budget explicitly consider non-financial costs and benefits, such as the lifetime environmental impact. Or whether funding allocated to housing and transportation, ensures new homes are more energy efficient, are accessible to public transportation and supports the use of other low-emission options. 

Funding for adult education and job training needs to not only reskill for short-term employment but also to upskill our workforce for a low- emissions economy and grow skills and knowledge on sustainability, climate change mitigation and adaptation. Funding dedicated to jobs and programmes that promote and enrich New Zealand’s biodiversity are important, but are only one piece of a much broader, more integrated agenda that needs to ensure New Zealand is set up to address its long-term goals in the midst of today’s short-term challenges.