An interventionist Government with a pragmatic approach?

Insight

Budget 2020 signals the level of Government involvement in the economy in coming years and how much policy is being influenced by these unprecedented times.

The political and economic response to the coronavirus pandemic shows how a crisis can suddenly turn heretical ideas into orthodox ones.

After the devastating earthquakes in Canterbury in 2011, the Green Party urged the Reserve Bank to print billions of dollars to buy earthquake bonds from the government. Politicians and commentators roundly mocked the idea as fanciful nonsense.

Fast forward to 2020 and the idea is orthodox policy with the Reserve Bank planning to buy $60 billion in Government bonds and $3 billion in local Government bonds.

What was once economic anathema is now the agreed way to stimulate the recovery from COVID-19.

A Budget that inches its way towards recovery

Like the Reserve Bank, Finance Minister Grant Robertson has taken a torch to his previous fiscal parameters in a $50 billion Budget to restart the economy after seven weeks of lockdown.

Budget 2020 is by far the largest ever increase in Government spending and debt but might only be a down payment to nurse the economy back to health.

The Budget covers almost all sectors of the economy – free trades training for people who will lose their jobs; thousands more state houses; free school lunches for nearly a quarter of all school children; billions for rail, conservation; and more operations in public hospitals.

All of these initiatives are signs the Government knows it has to intervene, but steps towards more control of the economy are not overt. It also tacitly accepts business must play a part in the recovery, hence the extension of the wage subsidy.

It’s also politics in action. Each initiative aims to slow growing unemployment lines and counter the frightening prediction of 10 per cent jobless.

Keeping the support partners happy

The two support parties will also be reasonably happy. The Greens get over a billion for jobs ‘in nature’, wins in social housing, and an expanded insulation programme for low-income households. And no cuts to services.

New Zealand First should be even happier with capital funding for rail, infrastructure projects in the regions, and support for the racing industry.

Alongside the Budget, the Government will amend the Overseas Investment Act to protect key assets from foreign ownership. This is strongly supported by both New Zealand First and the Greens.

This populist measure is aimed squarely at middle New Zealand, with the implicit message ‘we can’t trust the market’ so the Government will step in.

Keeping some powder dry for later

While there were calls for a bigger reshaping of the economy, Mr Robertson has preferred a pragmatic approach.

He has earmarked $20 billion of unallocated spending in case COVID-19 causes more economic mayhem. The signs from abroad point to troubled times ahead with 36 million Americans alone applying for the unemployment benefit in just eight weeks.

Thanks to the new monetary policy orthodoxy, Mr Robertson has the fiscal headroom his predecessors could only have dreamed of.

That means his war chest remains healthy for the coming months, which he will use carefully.