Editor Josh Umbers recently sat down (virtually) with the University of Waikato’s own Associate Professor of Economics Dr. Michael Cameron to have a wee chat about this year’s budget. Here is how it went.
Nexus: For someone who is reading this and isn’t an economist, what is the budget?
Dr Cameron: The Budget is a document where the government outlines what it expects its revenue and spending for the coming financial year. The government typically uses the announcement of the Budget as an opportunity to outline new programmes and policies that have spending implications, which is why you often see the costs reported over a number of years, rather than one.
Nexus: How much is it usually, and how much is it this year?
Dr Cameron: The government’s total revenue (from taxes and other sources) is usually in the range of $80-90 billion per year. Of course, most of that revenue is already accounted for in current spending plans, which is why you don’t see $80-90 billion dollars of announced spending in a ‘normal’ budget.
This year, the proposed spending is $110-120 billion per year for the next five years. So, the government is proposing spending about $30 billion more than usual. With no projected increase in revenue, that means several years of deficits (where the government spends more than it is receiving).
Nexus: Where does the government get all of this money from?
Dr Cameron: Government revenue is mostly from taxes (income tax; company tax; GST; excise taxes on petrol; withholding tax on interest; etc.), with much smaller amounts from user charges and other sources.
When the government spends more than it earns, it must get the money from borrowing. Just like a household, the government will need to pay that borrowed money back later, with interest (of course, because the government is a low-risk borrower, it pays a much lower interest rate on its borrowing than households do).
Nexus: How can we expect this ‘COVID-19’ fighting fund to be spent?
Dr Cameron: In the Budget, the government announced $62.1 billion of fiscal support related to the COVID-19 crisis. Of that $62.1 billion, $12.1 billion was the Economic Relief Package they announced in March (wage subsidies, etc.). That leaves $50 billion, which they are referring to as the “COVID-19 Response and Recovery Fund” (CRRF).
Some of the CRRF is already committed, including $10.7 billion to extend the wage subsidy scheme and make some other tax changes. We can probably expect the remaining $39 billion to be spent on targeted responses to the crisis.
Nexus: What are some challenges that could be addressed by this year’s budget?
Dr Cameron: I know a lot of people were disappointed that this Budget was not able to address some of the big issues like climate change, mental health, or inequality, that many were expecting from the ‘well being’ budget. However, this Budget has importantly, and rightly, focused on returning the economy to normal through a focus on jobs and stability. Getting the economy back on track, while ensuring that we are mindful of the bigger issues, was important.
Nexus: What do you think could be some positives from this year’s budget?
Dr Cameron: There is a saying, “Never let a good crisis go to waste”. The government has taken the opportunity to accelerate spending on infrastructure, housing, and the environment. This is the type of spending that will have long-term benefits to New Zealand.
Nexus: What do you think could be some negatives?
Dr Cameron: Just like for households, there is ‘good borrowing’ and ‘bad borrowing’. Good borrowing protects your income and assets, and creates opportunities for the future. This government is borrowing a lot to fund this spending, and it remains to be seen how much of this is ‘good borrowing’.
Nexus: Do you think we still haven’t seen the worst of it (recession) yet?
Dr Cameron: The physicist Neils Bohr once said “It is very hard to predict, especially the future”. Treasury is predicting a short and sharp recession of only a few months, followed by a return to growth and eventually the economy returning to its long-run trend by 2024. However, that doesn’t mean that we won’t be experiencing a long period of higher-than-usual unemployment.
Nexus: Why/why not?
Dr Cameron: As I noted above, most businesses are already returning and many workers are back at work already (albeit not in the same way, or at the same intensity, as before the crisis). So, we may already be through the worst of the recession. However, to a great extent it depends on whether we see a second wave of infections, how quickly the global economy recovers, whether a trans-Tasman ‘travel bubble’ is introduced and when, and so on. There are many variables that will affect how the economy tracks through the rest of this year and beyond.
Nexus: We have seen that the govt is set to borrow a huge amount, how can this affect us personally?
Dr Cameron: Obviously the borrowing has to be paid back at some point, with interest. That means that taxes will have to be higher in the future than they otherwise would be.
New Zealand is somewhat unusual in that the balance between public debt and private debt was heavily towards private debt. That’s what has given our government the scope to borrow so heavily to deal with recent crises (GFC, Christchurch earthquakes). If New Zealand’s total debt burden (public and private) starts to be seen as problematic by our creditors (or even by the credit rating agencies), we might face higher interest rates in the future.
Nexus: In a time where many workers are being made redundant, what are some ways we can get the economy growing again?
Dr Cameron: Fortunately, while the COVID-19 crisis has led to a short and sharp ‘shock’ to the economy, many closed businesses, and lots of workers without employment, these effects are likely to be temporary for most. Many businesses are already starting up again, and demand for goods and services hasn’t gone away in most cases, it was just delayed. On the other hand, for some businesses this crisis was the final straw and those businesses will not return.
To get the economy growing again, it would be good to focus on making it easier for small and medium-sized businesses to start up. Many of the businesses that have shut down were small and fragile, and it takes drive and commitment, and a bit of funding and luck, to set up a successful small business. I’m confident that within the group of newly unemployed people, we have the drive and commitment, and the government could usefully help out with providing or guaranteeing some of the funding necessary to start new businesses.
I extend my thanks to Dr. Michael Cameron for taking the time out of his day to answer questions that have been on peoples’ minds recently. We hope you can take something away from this.