Economist Shamubeel Eaqub.
The government opened its books for Pre-election Economic and Fiscal Update, also known as the PREFU, yesterday and the picture is bad but not as bad as expected.
While political parties clashed over the interpretation, Sense Partners economist Shamubeel Eaqub told Morning Report around the world the expectations had gone from the economic situation becoming catastrophic to the “outlook is not as bad”.
He said instead of the big short sharp drop, economists were now predicting a longer period of slower economic growth.
“Our level of debt, even when all the spending is done, is going to be around 55 percent of GDP. In the context of the OECD even before the pandemic it wasn’t extraordinary.”
Eaqub said now was the time to discuss ways to pay back the debt.
“We are facing still a very big economic shock. There will be hundreds of thousands of New Zealanders who will lose jobs, many businesses will fail, there is still a lot of work to be done.”
He said if the government kept continuing on the same track, eventually there would not be enough taxes to pay for all the things it pays for now.
The renewed forecast from Treasury showed that there was a possibility of the same situation as after the global financial crisis.
“You recover from the recession but you’re permanently on lower track.”
He said New Zealand’s economic growth over the past 40 years had consistently averaged about 2.8 percent a year.
He questioned what new steps the government would take to boost economic growth other than housing and immigration.
“More of the same is not going to give us better outcomes.
“We have tried to have this growth in property prices, growth in borrowing, growth in immigration without having the increase in the productive capacity of the economy, infrastructure – it is really not going to work.
“There’s kind of this disconnect between saying that we’re going to just crank up what we’ve done before and we’re going to get better economic outcomes in the future. I just don’t buy it.”
He said although the economy had been growing over the past 40 years, there was not much improvement to inequality.
“I haven’t really heard much on this campaign trail around what’s going to be remarkably different. In some ways, I think, the pain still hasn’t been enough for us to be forced into having a conversation.
“I look back through New Zealand’s history, you know, we kind of had that kind of big reorganisation of politics and economics post the Great Depression and wars, we had that again through that period of post-Muldoon and now I think we are coming into the next reckoning.”
Eaqub said there needed to be a discussion about modern monetary theory.
“That’s not where we’re heading at this time,” Finance Minister Grant Robertson said. “It is important for me that we provide some stability here.”
“We do have an independent monetary strategy governed by the Reserve Bank in New Zealand, and while there has been some shortcomings to that over the years it has served us relatively well. I think right now a major structural change to our system such as that isn’t desirable. Having said that, things we used to call alter monetary policy – for example quantitative easing – are now very much in the mainstream.”
He told Morning Report now was not the time to make a structural change to the system.
“We do have to do more to improve the amount of housing that’s available … and we will continue to work across the economy to lift the value of what we do,” – Finance Minister Grant Robertson
Photo: RNZ /Dom Thomas
“We’ll keep our eye on that but I am prioritising stability and continuity at a time of massive uncertainty for New Zealanders.
He said there was no silver bullet solution.
“Going for any single silver bullet I think is a mistake, it has to be a balanced plan. We’ve got to be careful about the money that we’re spending, we’ve got to invest in critical public services, we’ve got to make sure that we are using the tax system and we are doing that by asking the top 2 percent of earners to do a bit more.”
He admitted investing in more than just immigration and housing would be key, and said that formed part of the government’s “five-point economic plan”.
“That does mean significant investment in our education system, it does mean significant investment in infrastructure and construction, but it also means taking the industries that we’re good at now and adding value to them.
“We have an industry transformation plan for agritech that we’ve already kicked off with the agricultural sector to lift its productivity to build higher-wage jobs. We actually have to do that right across the economy in areas – from digital skills to construction to infrastructure.”
The Treasury report showed New Zealand emerging from the lockdowns better than expected but facing years of large deficits and ballooning debt.
Robertson has concerns about the Treasury’s predictions regarding housing and immigration. It said immigration was expected to increase to 35,000 by 2022 and the housing market growth would continue – continuing to lock many out of the housing market and increasing inequality.
“As I have been clear over some months now, we are going to have higher levels of debt and a deficit for some time to come. That is the nature of responding to a one-in-a-hundred-year shock.”
Robertson said keeping debt under control was not the only indicator of the health of the economy.
“Since we came into government we have attempted to shift the focus so that it is not exclusively on the traditional indicators but we have included within the wellbeing budget other indicators.
“Our approach to Covid-19 has been grounded in that wellbeing approach, we prioritised New Zealanders’ health and wellbeing in the short term to deliver us a long term health and economic benefit.”
Call to ease compliance costs
The Treasury’s report also showed rising unemployment and house prices are likely to extend already deep inequalities.
Far North Māori social housing provider He Korowai Trust chief executive Ricky Houghton said the demand for housing was “progressively getting worse”.
He Korowai Trust chief executive Ricky Houghton.
Photo: RNZ / Dan Cook
The trust has received $1.8 million investment for infrastructure to build 24 houses.
He told Morning Report the large number of people returning home, and the lack of infrastructure and capacity was making it difficult to cope.
“All the services are on overload.”
He said there was a need for more funding and compliance needed to be eased so people on lower incomes could build homes, instead of converting campervans and buses.
“At the end of the day what’s killing the ability for the people up here to move ahead with their housing is compliance cost. They just cannot afford to comply with anything.”
Houghton said, for now, they were transporting relocatable homes from Auckland which would otherwise be demolished.
There were almost 75,000 hectares of undeveloped Māori land up in the north, he said.
Prior to Covid-19, up to 85 percent of the community was on some form of the benefit, he said – 87 percent were single parents, and the average income in the Far North is $21,000.
The influx of people means more were living in overcrowded houses.
“In terms of the pandemic, if it were to hit the Far North in a big way – there’s no water, there’s no ability for people to wash their hands, toilet facilities, sanitation is non-existent. There’s a lot of overcrowding, so it would spread like wildfire if it took a hold on the Far North.”
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