Julian Wood

By Julian Wood - 14/08/2019

Julian Wood

By Julian Wood -

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Preparing for economic downturn

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. A recent Treasury report: Scenario Planning – Maintaining Living Standards through an Economic Downturn doesn’t explicitly spell it out, but 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, even after firing their canons last week and reducing the OCR to 1 percent. Unfortunately, the remaining 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 government 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

This is why Grant Robertson’s leadership now is so important. Conventional wisdom dictates this is largely a three-phase rollout of government initiatives to stall an economic slowdown. The first cab off the ranks is the “automatic stabilisers” of 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. Similarly, the Treasury could just give money away. This is known as “helicopter money” as the government can decide to just drop a certain amount of money on the population and require them to spend it to try to stimulate the economy.

The next cab off the rank is “shovel ready” infrastructure projects that are already in the pipeline. The planning is already done, just borrow and build earlier than initially planned. Realistically though, these come with a significant wait time to get permits, permission, workers, and materials in the right place.

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

The third cab off the rank is the initiation of larger, currently unplanned infrastructure projects. These have long time lags, and as such no short-term economic kick. Indeed, 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. Even shovel ready projects are slow to implement, and hence this “third cab” is the most likely to echo what it feels like when waiting for a cab in the rain: you’re definitely still going to get wet before it arrives.

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.

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.

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Julian Wood

By Julian Wood -

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