Budget 2020: John Roughan - Grant Robertson's economy rebuild needs a restart first

Grant Robertson wants a rebuild that will feature, he hopes, less child poverty, fewer carbon emissions, higher incomes and swimmable rivers. Photo / Mark Mitchell

COMMENT

Somebody said to Grant Robertson the other day, "If your house burned down you probably wouldn't rebuild it exactly the same, would you?" He found that remark so profound he cited it in a pre-Budget speech. He entitled the Budget "Rebuilding Together".

Analogies are a useful way of understanding something as amorphous as an economy but there are better ones. An economy, as I think of it, is not a static, planned, deliberately constructed thing like a house, but a dynamic, adapting, constantly evolving thing, more like a car engine.

Like a car, an economy can generate its own energy and momentum so long as its engine is properly calibrated to draw exactly the right mix of resources in the right amount into its cylinders of industry and commerce. The carburettor of a sustainable economy – the distributor of its investments of human and capital resources - is the spending of consumers in a competitive market.

The house the Finance Minister wants to build would feature, he hopes, less child poverty, fewer carbon emissions, higher incomes and swimmable rivers, among other things. But if he thinks he can build it with deep budget deficits, high public debt and bonds bought by the Reserve Bank, we are in big trouble.

First, he needs to restart an engine that was very well-tuned and purring along on all cylinders until a virus got into one of them and the Government stopped the car. The infected cylinder, tourism, had become very large and lucrative and will not be easy to replace or revive quickly. But the carburettor has a capacity that exceeds this metaphor. Given time, it can find new cylinders for investment.

When the economy was recalibrated in the 1980s to ensure resources could flow freely to their most profitable use, many previously protected industries closed and unemployment rose frighteningly. I remember people doubting the new economy could ever replace those jobs. But it did.

Unemployment went above 10 per cent in 1991-92 but then dropped to 6 per cent by 1996, remained around that level by 2000 and dropped to about 4 per cent in the first decade of this century. It rose after the global financial crisis, reaching nearly 7 per cent in 2012 but steadily declined thereafter, and those were years of high immigration.

Until eight weeks ago, only 4 per cent were without a job, which rates as full employment since part of the workforce is usually moving between jobs. Now 184,000 people (6 per cent of the workforce) are on the Jobseeker benefit and another 1.7 million in the private sector are having their wages paid by the Government.

We're sitting in a car in the dark. The engine's damaged but we don't know how badly. We're in a place we've never been before.

The world has had recessions caused by a sharemarket slump or a tariff war or a currency collapse but never a pandemic, though those have occurred from time to time. In recent years there's been bird flu, swine flu, Sars 1. Long ago there was the Spanish flu, which sounds as bad as Covid-19. But governments of free countries have not shut down their economy to stop a disease.

Ours shut down hard and early, which might have been wise, might not. Nobody knows how deep and lingering this recession will be. It will depend on how badly the whole engine has been shaken by the shock of a shutdown by executive order.

Could it happen again? No business investment can be as confident as it used to be, nobody's job is quite as secure, consumers will not spend as readily for a while.

We're in the car looking at the drivers. The Prime Minister is saying, "jobs, jobs, jobs", which means indefinite subsidies. The Finance Minister wants to build a house. Passengers with a house or business loan and a reliable income two months ago just want the engine restarted.

The Government talks of a "kick-start", which is at least in the right metaphor, but that always risks flooding the engine with investments that are probably not going to get it functioning efficiently again.

We are still getting big sums allocated by this Government for no stated purpose besides demonstrating it cares. District health boards got a colossal $4 billion boost in the Budget, only a third for costs caused by Covid-19. More money is going to roads and railways despite the likely acceleration of the trend to work from home. Winston Peters' racing investment is the pits.

Drivers of modern cars know the less tinkering they do with the engine the better. They leave that to those who know how it works. Drivers of an economy have enough to do controlling its monetary and fiscal accelerators and brakes to keep it running smoothly on sometimes bumpy roads.