There’s been a lot of recent chat about a possible economic downturn, and many seem to be living under the misguided notion that the government will be able to save us from harm when it occurs. The reality is that it cannot. While the pain is not explicitly spelled out in a recent Treasury report on surviving through a downturn, the truth hidden between the lines is that the next financial crisis will hurt. The Government’s ability to help can improve though, if time is spent preparing now.

What the document highlights is that conventional monetary policy, whereby the Reserve Bank lowers the official cash rate, has largely run its course. Having said this the Reserve Bank still has a few unconventional tricks up its sleeve. Unfortunately, these tricks are untested, and bring nothing like the firepower of the past. The overall conclusion is that fiscal policy—the tax and benefit system, and money spent on building things—will have to take precedence.

The misguided notion that the government will be able to save us from harm when it occurs

Conventional wisdom here dictates this is largely a three phase rollout to stall an economic slowdown. The first cab off the ranks are the tax and benefit system: tax rates can be lowered, and or benefits raised. Both approaches can give money to those most in need very quickly. The next cab off the rank is “shovel ready” infrastructure projects. The planning is already done, just borrow and build. Realistically though, these come with a significant wait time to get permits, permission, workers and materials in the right place. The third cab off the rank are larger, currently unplanned infrastructure projects. These have long time lags, and as such no short-term economic kick. If the implementation of the Provincial Growth Fund has taught us anything, it’s that having a billion dollars to spend is not the same as actually spending a billion dollars.

The report doesn’t mention that the current push to raise the resilience of New Zealand Banks by raising capital requirements is part of preparations for a crash. Any dollar we make banks hold now is one less dollar that we all will have to come up with in the future when the storm hits. As we know from the last big crisis, banks are very good at privatising profits when times are good and nationalising losses when things go bad. It’s good for us all to ensure that banks weather the storm a bit better.

If the implementation of the PGF has taught us anything, it’s that having a billion dollars to spend is not the same as actually spending a billion dollars

Overall the Government and the Reserve Bank have a lot of work to do to pull together the right mix of responses. The Government could look at the tax working group recommendations to see what might be best to implement if a crisis occurs. There need to be a list of shovel ready projects already prepared. We should support the Reserve Bank’s efforts to help build resilience to our banking system. Most of all we should stop expecting that the government can solve all our problems and buckle up. Start saving, pay down some debt, and be prepared.