Thursday, 14 May 2020

Fiscal policy does its job

Before this Budget, just about everyone urged Grant Robertson to go for it (including me). The big initial question was always going to be: how large did the fiscal boost need to be?

Various bits of triangulation help here. In its pre-Budget economic scenario modelling, Treasury was running with an additional $20 billion (if the outlook didn't turn out too horrible) or an additional $40 billion (if it did). The most recent IMF forecasts suggested that the more downbeat scenario might be in play, so something closer to the $40 billion end sounds a plausible estimate of a minimum level of support.

Yesterday's Monetary Policy Statement from the Reserve Bank was using $30 billion as a working assumption: even fiscal support of that order would still see unemployment peak at 9% this year and GDP drop by 8.3% in the year to March 2021. The RBNZ also noted that its baseline scenario was relatively optimistic, and sketched two worse ones, so again you get $30 billion as a minimum and arguably more.

Against that background, the planned boost delivered, with $50 billion allocated to a Covid-19 Response and Recovery Fund (CRRF). I was especially pleased to see an extension of the wage subsidy scheme: supporting immediate cash flow is 90% of everything at the moment. Lending, or other assistance (eg the planned support for maintaining R&D), while worthwhile, are wholly secondary to the immediate priority of supporting income. And while I'd have been just as happy to see the existing extended without further qualification, I can see that targeting it to the most-affected saves some money and possibly helps maintain wider social support for what is the essential policy of first response.

It may be that not all this $50 billion gets spent. Elsewhere in the Treasury documentation the Budget Economic and Fiscal Update (the 'BEFU') says (B.3, p9) that "The main economic forecasts assume approximately $35 billion of discretionary COVID-19 fiscal support, alongside significant monetary policy stimulus. An additional economic forecast is also presented in which fiscal support is extended further, in line with the overall magnitude of the COVID-19 Response and Recovery Fund (CRRF)". But even $35 billion looks to be in the ballpark of what was needed - well done.

One thing that somewhat bothers me though is the degree of front loading. It's not bad, as the table below shows, with some $20.5 billion being spent under the March 17 package and the CRRF combined. And it's obviously hard to roll out many billions of operating expenditure at the drop of a hat - a lot of the programmes in the CRRF look to be works in progress, and I'm not surprised. But a large chunk of that $39.3 billion of still unallocated CRRF money needs to get spent in the 2020-21 year when it is most needed, and not in the years beyond.

As always with New Zealand (and overseas) Budgets, a lot of focus goes on those headline CRRF and fiscal deficit numbers. And yet again (as I said in 2019, 2018, 2017 ... ) the single most important indicator in the Budget material is not those headline eyecatchers.

Rather, it's the 'fiscal impulse'. That's a measure which abstracts from cyclical impacts on the headline Budget surplus or deficit, which can give a misleading impression of whether is is boosting or braking the economy. The fiscal impulse compares one year's Budget to another's, when both are stripped of cyclical effects on revenue and spending, and then asks how has the true underlying situation changed? If a (true, underlying) deficit has got larger, it's a boost. If a (true, underlying) surplus has got bigger, it's a brake. Here are this year's estimates, which (given the larger uncertainties) are even more best guesses than usual.

The fiscal impulse shows a very substantial fiscal boost of some 7% of GDP in the current fiscal year ending this June 30 - very much what was called for. But the fiscal impulse drops to only a small extra stimulus in the year to June 2021, which agrees with the time pattern shown in Table 2 above.  Next time we see these numbers, which will be in the pre-election fiscal update, I hope that more of the CRRF will have been brought forward and deployed in the critical months ahead.

What does the economic outlook look like? Just what you'd expect - a difficult year ahead, with (all going well) a strong recovery in the 2021-22 year. Again, though, you see the value of getting the full CRRF fund spent (and quickly). The main forecast (in bold) is based on spending $35 billion, and GDP drops by 1.0% in the 2020-21 year. Spending the full $50 billion turns a 1.0% decline into a small 0.6% increase. Every way you look at it, you get back to the same place - spend it all, and spend it soon,and make sure that execution of the programmes goes to plan. The other two forecasts, by the way, are 'things are worse' and 'things aren't quite so bad' flavours.

This is fiscal policy doing its job. Yes, nod to the long term (and important) objective of rebuilding the ammunition chest down the track. But put out today's fires first. And the fact that we have the ability to do it on this scale was generously acknowledged in the Budget speech today, where Grant Robertson said that "These were conscious choices that did not go unchallenged. But this strong fiscal position, built on the work of Bill English and Michael Cullen, now means we are much better placed than many other countries to use our balance sheet to cushion the blow of COVID-19 on the economy and to protect the wellbeing of New Zealanders. The rainy day has arrived, but we are well prepared". Our oppositional parliamentary system doesn't always make it easy to stick to multi-year fiscal discipline: today's Budget shows why it matters.

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