Editorial: Balancing Covid pandemic response with economic fallout

A royal commission found the $70.4 billion allocated by the previous Government was the second highest additional spending, relative to the size of the economy, by any OECD country in response to the Covid-19 virus.

Opinion

OPINION

It is five years since a new and potentially deadly respiratory virus infected human beings, three years since quarantines ended and the population was vaccinated against it. Yet, we are still suffering the economic and educational consequences.

Inflation followed by recession, higher unemployment, persistent budget deficits and rising public debt – along with poor exam results for today’s school leavers shut out of classrooms for many weeks of 2020-21 – are often said to be consequences of Covid-19.

That is not strictly accurate. They are consequences of our chosen response to Covid-19.

As a year of deep recession ends with the economy still struggling to recover, and the Treasury forecasting slower growth, more borrowing than expected and no budget surplus for another five years, it is time to ask, did we overdo the Covid response?

A royal commission appointed by the previous Government has offered one answer in its report made public last month. It found the $70.4 billion allocated by that Government was the second-highest additional spending, relative to the size of the economy, by any OECD country in response to the virus.

On top of that, the Reserve Bank lowered interest rates, relaxed bank lending restrictions and embarked on a programme of purchasing government bonds.

Yet the commission, led by an epidemiologist, professor Tony Blakely, concluded the fiscal and monetary measures were justified by the scale of the pandemic. Somewhat contradictorily, they also find an “overshoot” of stimulation – “too high for too long”.

A more decisive verdict might come next year from a “phase two” inquiry commissioned by the present Government. The new commission, led by lawyer Grant Illingworth, a member of the Blakely panel, will be able to apply more critical terms of reference to the data collected in phase one.

Among the subjects it has been asked to review is New Zealand’s use of lockdowns in the light of what was known at the time and the response of comparable countries. It is to examine whether decisions were “sufficiently informed by advice on any social and economic disruption” likely to be caused, in particular their effect on “social division, isolation, health and education, and inflation, debt and business activity”.

During those hectic days in March 2020 when most countries were closing their borders and imposing lockdowns of varying extent and severity, just about all economists expected the measures to cause a recession at least as bad as the 1930s Depression.

It didn’t turn out to be that bad, thanks mainly to wage subsidies but also to the unexpected agility of businesses and staff who quickly found ways to work online, and the surprisingly rapid recovery from lockdowns when people went out and spent money they had been unable to spend.

It is easy to be wise in hindsight, but all the inflationary stress we have seen, and the recession we are struggling to shake off, was entirely predictable given the scale of the stimulation.

With variants of Covid also still around, this is a good time to evaluate the consequences of the treatment against the severity of the disease.