Mark Riggall on Budget 2020: 'It's how, not how much'

Finance Minister Grant Robertson now has to deliver on the objectives set out.

The $50 billion Recover and Rebuild Fund announced in Thursday's budget, plus the $12.1b support package announced on March 17 adds up to about 20 per cent of New Zealand's total GDP. Big numbers in anyone's book, so it might seem odd that the first question we need to consider is whether those numbers are big enough?

As Prime Minister Jacinda Ardern said yesterday afternoon, nothing about this time in our history is usual, and that must include the way we mark and measure the various initiatives outlined in the 2020 Budget.

Certainly, some sectors will think it's not big enough. Tourism receives much more than it has in previous years – but well short of what it had hoped for. And while the extension of the wage subsidy is expected to cost some $3.2b, businesses lacking cashflow to meet their fixed costs would also have hoped for more.

But there are some other big numbers we need to remember. A forecast budget deficit of 10 per cent of GDP over the next couple of years, a net debt/GDP ratio of more than 53 per cent, the RBNZ planning to buy $60b of bonds; this very necessary stimulus does come at a cost.

On balance, yes: it's enough. Government spending will be 7.8 per cent of GDP over the next couple of years, another big number, but it is how and where that money is spent that really matters. The Budget is a very large canvas, but the picture being painted on that canvas is still unclear.

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The wage subsidy scheme is a valuable short-term measure: by saving jobs it will limit the length and depth of the recession. This focus on employment provides a foundation for economic recovery, and keeping the tax/GDP ratio constant will help businesses make a profit. But beyond that, how can we stimulate the economy so as to increase GDP and thereby reduce the debt burden for future generations?

Many of the initiatives announced are unlikely to deliver the immediate stimulus the country needs and the Government says it wants to provide. KiwiRail's new ferries and rolling stock will not be Made in NZ – nor will the RNZAF's new aircraft. Can we be certain the much-touted "shovel-ready" infrastructure projects will actually be ready to go and, even more importantly, suitable for the labour force and other resources we have available? Will the environmental jobs created be self-sustaining over the longer term?

In this context, the $20b in the fund which is yet to be allocated is vital. At more than 6 per cent of GDP, it would itself be a big number in any other year: the Government may yet need it to drive job creation or implement even more radical measures to generate immediate economic activity.

Apart from an initial plunge, the New Zealand sharemarket has stayed strong throughout the course of the pandemic to date. Investors seem to be looking through the factors that would otherwise generate considerable volatility – perhaps recognising that New Zealand remains much better placed than many others.

Over the past eight years, foreign investment in New Zealand equities has grown significantly; the motivation for those investors – strong dividend yields and a relatively stable business and political environment – are unchanged. The swift and effective containment of the virus (so far) and the Government's willingness to provide fiscal stimulus means New Zealand could be back in business faster than many other countries.

But while the Government has acted to minimise the pain and enable recovery, the long-term sustainable economic growth required to support a rebuilding will need to be provided by the private sector.

- Mark Riggall is a portfolio manager at Milford Asset Management.