The Government looked at borrowing money and just giving it to people - as much as $5000 each. Photo / NZME
The Government pondered handing over thousands of dollars of cash - up to $5000 - to each New Zealander in a bid to stimulate the economy in pandemic-ravaged 2020 and 2021, alongside slashing the GST rate for as little as two weeks to encourage stimulatory shopping sprees.
The Government also toyed with loading up millions of Prezzy Card-style vouchers and sending them to households to stimulate the economy. This idea was killed partly because it simply wasn’t possible to import millions of plastic cards from manufacturers in China in time.
The reason for these fairly drastic steps was the Government was trying to stave off a recession in the months after the first Covid-19 lockdown in 2020.
The Reserve Bank had slashed the Official Cash Rate to 0.25 per cent and said it would print up to $100 billion to hold interest rates low and stimulate the economy, but officials at both Treasury and the bank were worried that the bank needed help from the Government.
The policy advice matters, because there is still a furious debate over whether the Government got the balance between monetary support from the Reserve Bank and fiscal support from the Government right. Critics, like the Green Party, argue that had the Government spent more money stimulating the economy during the pandemic, the Reserve Bank could have eased up on its money printing and interest rate cuts.
That is significant because the Reserve Bank’s pursuit of an ultra-stimulatory monetary policy during the pandemic contributed to the massive instability in the housing market, where prices rocketed up for nearly two years, before coming crashing down.
The Greens argued during 2021 that using cash transfers to people would allow for better targeting of stimulus, giving the worse-off a bigger boost than the best-off.
They argued this was a better idea than relying on the Reserve Bank to stimulate the economy with ultra-low interest rates and money printing, which primarily benefited homeowners who enjoyed eye-watering capital gains.
Papers released following previous Official Information Act requests showed the Government was repeatedly warned economic stimulus that relied on tools like money printing would have distributional consequences, benefiting the rich and hurting the poor.
The papers the Herald is now publishing, also released under the Official Information Act, show Treasury officials considered fiscal spending options that were targeted towards people on low incomes, including one-off cash payments costing $10b and permanent increases to main benefits.
For whatever reason, the Government decided not to run with these options.
Instead, the pandemic economic response relied on more than $50b of money printing from the Reserve Bank, and fiscal support in the form of wage subsidies, infrastructure investment and job creation schemes.
These papers raise the question: did the Government get the balance of economic initiatives right? Could New Zealand have avoided the pandemic boom and inflation bust?
Finance Minister Grant Robertson told the Herald the Government had considered a “wide range of options” in response to the significant uncertainty created by the pandemic.
“The Wage Subsidy Scheme and later the Resurgent Support Payment were among a number of policies developed and implemented to help save jobs and livelihoods,” he said.
Robertson said questions over whether more fiscal support from the Government would have allowed the Reserve Bank to dial back the fiscal support were “purely hypothetical”.
“Fiscal policy and monetary policy worked together in a highly uncertain environment to save lives and support the economy, and [this] has meant that New Zealand’s response to the pandemic has been among the best in the world,” Robertson said.
But Green Party finance spokeswoman Julie Anne Genter said the Government “missed an opportunity to give more direct cash payments to stimulate the economy rather than letting it [stimulus] happen through the Reserve Bank and QE [Quantitative Easing - money printing], which resulted in a big spike in house prices and now we’re suffering the consequences.”
When asked whether she believed the Government had backed away from cash payments because of debt and spending fears, she said both Labour and National were “constrained by superficial debates that are incorrect”.
Direct payments
The first Treasury paper dates from May 1, 2020. New Zealand had been at Covid-19 alert level 3 for nearly a week, and was a fortnight away from moving to alert level 2.
Officials warned Robertson that New Zealand faced a prolonged period of high unemployment. They said the Reserve Bank could not do more to stimulate the economy as its policy interest rate was near its lower bound - meaning it could not be cut any lower.
Officials recommended a package of temporary support to households “totalling at least $10b” to be rolled out by the third quarter of that year. The stimulus would save 50,000 jobs, they reckoned.
Treasury reckoned the best form of stimulus would be “one-off cash payments to households”.
“A highly visible, lump sum payment is likely to have greater stimulatory impact than increasing incomes through regular tax and transfer mechanisms,” officials said.
“Demand stimulus through cash transfers will save jobs at a scale other interventions cannot.”
The first idea was for the stimulus to come in two payments.
The first would be a cash payment of $2000 to every New Zealander over 18, costing about $8.6b. The second would have been a $3000 top-up to households receiving main benefits which would cost $1.6b.
They reckoned the payments could be rolled out as early as June, but most likely sometime in August - although not mentioned in the papers, this would have been awkward as the election was scheduled for September 17.
Other issues and ideas were also raised.
Presciently, officials floated the idea of a temporary cut to fuel excise and road user charges, which would lower the cost of filling up.
Ideally, this money would be spent, which would stimulate the economy by giving businesses income with which they could retain staff.
Treasury officials reckoned some people would simply save the cash, but they did not think this was a terrible outcome because it would reduce those people’s debt burden, giving them money to spend.
At this point, still very early in the pandemic, Treasury’s forecasting model reckoned the Reserve Bank would need to slash the cash rate from an already record low of 0.25 per cent to as low as -7. This figure took into account the fact the bank had signalled it would assist that 0.25 cash rate with up to $30b in money printing. The forecast was based on the fact the cash rate was cut 575 basis points during the financial crisis.
A later paper put it bluntly: “If it were not for the current inability to reduce the Official Cash Rate below zero, we expect it would have been reduced by around 600 to 700 basis points, rather than the 75 basis points we have seen to date. Alternative monetary policy tools have been only a partial substitute.”
The problem, Treasury said, was that a cash rate that low was impossible.
It would mean people being charged negative interest rates on their savings accounts (something the Reserve Bank said computer systems were not up to doing) - this meant depositors would actually lose money when they saved it.
Treasury and the Reserve Bank both knew this would never happen - people would simply withdraw their money from banks and hold it in cash rather than see their savings stolen by the bank.
Short of “radical changes” at the Reserve Bank, like “moving completely from physical to electronic currency”, which would remove the choice of stashing savings in cash, Treasury reckoned the most the bank could possibly do was lower the cash rate to -0.75 - and even that rate raised risks people would hoard stacks of physical money.
So what to do?
Treasury reckoned the $30b of money printing was equivalent to a 150-basis-point cut, but warned “at least another 300 basis points equivalent could be required”.
“In the absence of further asset purchases, or a deeply negative OCR, the remainder of macroeconomic support needs to come from fiscal policy or exchange rate depreciation,” officials warned.
Interestingly, given debate since the pandemic has focused on the fact that the Reserve Bank’s monetary policy seemed to be taking the lead in the pandemic response, the bank’s view - presented in the paper - was that fiscal policy was taking the lead with “monetary policy playing a significant supporting role”.
“At present, the Bank’s LSAP [money printing] programme is both supporting aggregate demand and helping facilitate Debt Management’s bond issuance.
“The Bank will continue to explore the use of other alternative tools to meet our monetary policy objectives, and within the context of the broader fiscal policy response,” officials warned.
Other ideas for fiscal stimulus were also floated.
These included things like a cut to the GST rate - although the exact size of the cut was not specified. Later in the year, officials were approached by a gift card company and pondered the idea of loading up gift cards with money and giving them to the public to spend.
The money could potentially be set to expire after a certain timeframe, so people would be encouraged to get out and spend money to save the economy.
Permanent increases to benefits (additional to the increase the Government rolled out in April of that year) were also floated by officials. But this was shot down by Treasury, which warned it would require spending reductions elsewhere.
Prezzy Cards?
A late idea, which appears to have been sparked by an approach from a gift card manufacturer, was to load up millions of Prezzy Card-style gift vouchers and post them to people.
The cards would have an expiry date giving people a limited period in which to get out and stimulate the economy through spending.
Treasury officials believed they could get a scheme up and running by early 2021 and it could be targeted at low-income families - or given to everyone.
But Treasury believed there were logistical and reputational risks, and preferred the simpler option of just depositing money in people’s bank accounts.
Officials also warned of data security risks with the cards. These could be mitigated by using a Visa card system, but that would open the door to the stimulus money being used for online purchases - which would mean a large portion of the stimulus spend would end up vanishing offshore.
Infometrics chief executive and economist Brad Olsen said the papers showed the “evolution” of the fiscal approach to managing the pandemic.
He said, in retrospect, the wage subsidy provided “a much better grounding for the economy” because it stimulated the economy with cash while also keeping people attached to their jobs, meaning New Zealand avoided waves of unemployment.
Olsen said the approach was to “keep people in jobs, before [they] lose them”, rather than finding jobs for people after those jobs had been lost.
On the question of whether additional fiscal support would have meant less reliance on monetary support, Olsen said it was not clear the Reserve Bank would have taken a different course of action.
“It’s not clear to me at all the Reserve Bank would have done anything differently. They were already doing a large level of bond buying,” Olsen said.
He said the bank might not have rolled out its final stimulus measure, Funding for Lending, which was activated later in 2020.
He said the papers showed the Reserve Bank and Treasury had appropriately co-ordinated their response.
“It highlights that the Reserve Bank did everything that it could and so did the Government,” Olsen said.
Affordability
For years now, there have been questions over how much debt the Government can reasonably sustain.
Prior to the pandemic, Treasury Secretary Gabriel Makhlouf recommended a net core Crown Debt target of roughly 30 per cent of GDP, based on a maximum debt level of 50 to 60 per cent and a buffer of 20 per cent.
Net core Crown debt is currently at 41.7 per cent of GDP.
Treasury reckoned that debt rising above 60 per cent of GDP would “potentially lead to higher interest rates, reduced private investment, reduced effectiveness of fiscal stimulus, and that markets might be more reluctant to lend debt at reasonable interest rates.”
For that reason, officials recommended keeping debt lower, as the wellbeing cost of those higher servicing costs was not worth the benefits.
“It is important to note that 100 per cent of GDP assessment is not a hard cut-off point or a fixed limit – depending on the circumstances at the time, there may be scope for debt to increase beyond this point, although we expect the costs of doing so could be high,” officials said.
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