Budget 2020: The Economic View - Joe Ascroft
Unsurprisingly, the Government’s Budget Responsibility Rules (which capped Government spending and debt in coming years) are dead. Net debt is forecast to climb from $57.7 billion ($31,500 per household or 19% of GDP) to $200.8 billion ($109,700 per household or 53.6% of GDP) by 2024. Deficits are expected to average $28 billion ($15,300 per household) per year across 2020 to 2022.
It’s easy to get lost in the numbers – but these are truly eye-watering figures. More than one in every four dollars spent by the taxpayers will be borrowed over the next three years.
Luckily for the Government (and taxpayers) borrowing costs are expected to remain low – in no small part due to the Reserve Bank’s quantitative easing (freshly-printed cash used to purchase Government debt) programme, which yesterday was doubled from $30 billion to $60 billion. If the Reserve Bank hadn’t embarked on this programme, financial markets might have struggled to digest forecast debt in coming years.
To put that in context, $60 billion amounts to more than half what the Government plans to spend in the next year. To say the least, the Reserve Bank is doing a lot of heavy lifting to enable the Government's spending programme.
The big risk? If there is any inflationary pressure in the coming years, the Reserve Bank will have to pull back on printing money and push up interest rates. In that world, Government debt would become a problem very quickly.
Treasury predicts unemployment to climb to 8.3% in 2020 and – with the aid of the Government’s $50 billion recovery fund – fall to 4.2% by 2022. However, if the fund fails in its goal to stimulate the economy (perhaps because the spending is poorly targeted, politically manipulated, or poorly managed) then unemployment will remain higher for longer. The main forecast (excluding the recovery fund) assumes unemployment will remain at 5.7% in 2022.
The $50 billion fund
The Budget centre-piece is a $50 billion ($27,332 per household) ‘Covid-19 Recovery Fund’ to be spent over five years.
Today the Government has announced $15.9 billion ($8688 per household) of new initiatives to be packaged under the ‘Recovery Fund’ including:
an extension of the wage subsidy scheme for businesses who have suffered at least a 50% fall in revenue ($3.2 billion or $1750 per household); and,
a jobs package split across a variety of sectors including $1.6 billion ($874 per household) for trades and apprenticeships and $1 billion ($546 per household) for ‘environmental’ jobs.
$10.7 billion ($5,847 per household) of this fund has already been allocated through to April.
The sector allocations Budget (at least in fiscal terms) pale in comparison to the sheer size of the recovery fund, but still deserve mentions:
$1.2 billion ($655 per household) more has been wasted on KiwiRail – despite a decade of Treasury advice that rail is not worth the cost.
$1.77 billion ($967 per household) has been allocated for defence – of which about half is for new aircraft.
A $3 billion ($1640 per household) infrastructure investment fund.
A $55.6 million increase in foreign aid.
$280 million ($153 per household) for NZ Post (old-fashioned snail mail, not couriers).
Joe Ascroft is the Consulting Economist for the Taxpayers' Union