Covid-19 Coronavirus: Treasury numbers show need for big increase in Govt support

Finance Minister Grant Robertson is preparing to release more Government funding. Photo / File

The range of grim economic scenarios published by Treasury this morning offered little certainty.

But they did make one thing very clear: more Government support is needed - much more.

As a base case, a doubling of the $20 billion already unleashed to support the economy looks likely.

That's the figure for extra spending that Treasury has attached to its "scenario one'" - an outlook that might, sadly, be described as best-case.

Scenario one assumes we get out of Level 4 lockdown on schedule, after four weeks, that we spend another month at Level 3 and then the next 10 months at Level 1 or 2, with borders closed to tourists right through the period.

Without extra stimulus that sees unemployment rising to 13.5 per cent in 2020.

With an extra $20b of Government support, unemployment could be limited to 8.5 per cent.

Treasury also runs a scenario that could see the level of Government support tripled - so an additional $40b to $60b.

That level of spending is attached to its "scenario two" - a much bleaker possibility which assumes we stay locked down at Level 4 for three months.

That would see unemployment rise to 17.5 per cent in June this year without extra spending.

With an extra $40b, it could be kept just under 10 per cent this year.

Frankly, on either scenario we should assume the extra spending levels are likely.

The Treasury report offered "a big hint" about the scale of government spending to come, said Westpac chief economist Dominick Stephens.

"That should be positive for markets," he said.

But Stephens noted that Treasury's outlook was more pessimistic than that held by his team, or most other private sector economists.

For the base case of one month at Level 4 and one month at Level 3, Westpac had forecast that June quarter GDP would drop 15 per cent and unemployment would rise to 9 per cent.

Other major bank economists issued similar numbers.

"Treasury is much more downbeat," Stephens said.

"Even with the roughly $20 billion of fiscal stimulus introduced to date, they are forecasting -25 per cent for June quarter GDP and 13.5 per cent for unemployment."

Beyond the immediate one-quarter hit, Treasury was also forecasting a more gradual recovery path than Westpac.

Perhaps the only good news in these scenarios is that Treasury recognises that the Government has the borrowing capacity to lift support levels to that degree.

It would be extremely surprising if we didn't see Government support lifted by another $20b, whatever happens.

We may eventually see more.

We know we are going to hear more from the Government this week on new business support measures.

We know there will be a need to extend the wage subsidy scheme to some extent.

There will also be a need for targeted sector assistance to get essential industries through this period in some sort of shape to recover when things start to normalise.

On top of that, the Government has indicated that there may be other opportunities for bringing forward further infrastructure investment - that would pay dividends for the country long-term.

Treasury has so far advised that it will borrow an additional $25b this year.

But many economists have suggested we would could eventually see three or four times that figured borrowed.

"We do see the Government taking on upwards of $100b in extra debt," ASB chief economist Nick Tuffley told the Herald last week.

"So debt to GDP going from around 20 per cent to around 50 per cent."

In theory that still leaves New Zealand relatively low on league tables of sovereign debt.

We were fortunate to be at a low ebb in our debt levels - at 19.5 per cent - when this crisis hit.

By comparison, Japan had debt to GDP above 200 per cent, the US was above 100 per cent and the UK above 80 per cent.

That's their starting point before they borrow for the stimulus they'll need to support their economies through the crisis.

But much bigger countries can get away with sovereign debt that we can't in New Zealand.

Our private debt levels are very high and our savings rates are low.

New Zealand is also vulnerable to economic shocks like drought and earthquake, which is one of the reasons our governments have been so fiscally prudent for many decades.

If our sovereign debt was to rise too far, too fast, it would be counterproductive.

The global rating agencies would get nervous, and the cost of borrowing would rise.

In a new report today, ANZ chief economist Sharon Zollner said she expected net core Crown debt to lift to around 45 per cent by the end of the Treasury's current forecast
horizon in June 2024.

"This suggests a significant boost to New Zealand government bond issuance is on the cards," she said.

"Based on our estimates, bond issuance for the 2021 fiscal year will need to be around $45 billion – that's $35 billion higher than [Treasury's half year] guidance.

"Cumulatively to June 2024, we currently expect to see gross issuance increase by around $100 billion compared to December's Half-Year Update."

Meanwhile, Finance Minister Grant Robertson this morning made it clear that plans for more support were under way.

"Work on further significant Government investment to protect jobs, support cashflow, and prepare the economy for recovery is well advanced," he said, as the Treasury outlook was released.

"The Budget is also another important part of the response, and it will include significant support to respond to and recover from Covid-19."

How and when the additional billions are deployed will be the focus of intense scrutiny and political debate in the months to come.

But one thing New Zealanders can be sure of is that there is a lot more to come.

• Covid19.govt.nz: The Government's official Covid-19 advisory website