Covid-19 the crisis that could allow debt rule breach

Covid-19 could be the crisis that allows the Coalition Government to increase net debt beyond the 15-25 percent target range in its Budget Responsibility Rules, Bernard Hickey reports

The Labour-led Government may finally have the crisis it needs to throw off its debt shackles.

Finance Minister Grant Robertson said for the first time today that the global Covid-19 economic drama that worsened substantially overnight could be the crisis situation that could trigger the exemption clause in the Government's much-discussed Budget Responsibility Rules. He suggested today that Covid-19, which crashed stock markets overnight, could have passed that threshold to be the 'out clause' in the BRRs.

Labour promised while campaigning for election in 2017 that it would bring net debt below 20 percent of GDP, and has since modified it to a range of 15-25 percent. But it always included the clause that a new global financial crisis or earthquake shock would be the exception to the rule.

"We said when we set the Budget Responsibility Rules up that if there were some kind of major global shock we have that ability to vary them," Robertson said when asked if the 25 percent upper limit was restricting the Government in its May Budget response to the Covid-19 crisis.

"We have that ability and now we're working through what the consequences are, but we can all see this is a global issue," he told reporters with Prime Minister Jacinda Ardern before Labour's caucus meeting.

Asked if the Government had decided to 'throw out' the rules, Robertson said: "The rules themselves gave us the ability to vary them in the situation like the global situation we are facing now."

Asked if the crisis met the threshold for the 'out clause', he said: "We said when we set the BRRs up that if there were some kind of major global shock we have that ability to vary them. We have that ability and now we're working through what the consequences are, but we can all see this is a global issue."

2011 quake-style subsidies?

Ardern and Robertson rejected criticism that they weren't working fast enough. Opposition Finance Spokesman Paul Goldsmith said last night the Government had been caught flat-footed. Business Central called on the Government this morning to move urgently to implement wage subsidies, and possibly to defer GST and provisional tax payments to preserve cashflow.

Ardern would not confirm the Government was considering earthquake-style wage subsidy programmes.

The then-government agreed to pay companies $3,000 gross per employee after the Christchurch earthquakes in February 2011 for six weeks ($500 gross a week), or $1,800 gross to pay a part-time employee for six weeks ($300 a week). By the end of June 2011, 20,000 employers and 50,000 employees had received a combined total of $202 million from the earthquake wage subsidy. This was administered by the Ministry for Social Development and included a $400/week subsidy for six weeks ($240/week part time) for those who were unable to contact their employer or whose employer had closed permanently. 

"We have models that have been previously rolled out," Ardern said.

"The difference here is that they were discretely applied to regions. Now we're talking about a scenario where we'll have businesses across the country that are potentially affected. That is the detail that's being worked on now," she said.

The Government announced yesterday it was working on a business continuity package that would include a wage subsidy for affected businesses, along with possible working capital support and planning for a longer-term more macro-economic package if conditions worsened. It said yesterday the special Covid-19 sub-committee would meet on Wednesday and the Government planned to announce details next week.

"What we want to make sure though is that we are directly targeting the businesses that are effected by the global impact of Covid-19, rather than just generally those other businesses that are not," Ardern said.

"That design work is going to take a few days, but we'll be ready to present something next week," she said.

'We'll keep it targeted'

She rejected calls to say how much the overall package would cost, although she did know the size.

"We will not choose a figure and design something to fit within it. Instead, we'll design a package that supports those businesses who need support at this time, as we face this global issue, to ensure that they continue to employ their staff and keep their business running until we get through the other side," he said.

Ardern said business leaders had wanted a targeted approach.

"They've supported the Government in working up these options but they've been very clear: make sure that it is targeted at those who are genuinely affected. We don't want to see a situation where wage subsidies are being used to prop up up businesses that would otherwise be failing."

She rejected the claim the Government had been flat footed.

"We've already implemented programmes that directly support tourism, that directly support those within primary industry being affected ... We've already removed the stand-down for those who may come into MSD. Now we're working up a wage subsidy package that some businesses may not need right now, but we're prepared to have it ready," she said.

'But we won't delay too much'

She agreed there was a risk the Government spent too much time designing the targeting of support when more immediate cash-flow support was needed.

"We don't want to get caught up in a situation where the detail either stops people who need it getting it, or slows down our response. That's why we are moving quickly. That's why it will be announced next week," she said.

Robertson was also cautious about adopting an Australian-style 'Kevin Rudd' special one-off payment to all residents of A$900 as happened in 2009, or Hong Kong's HK$10,000 announced last week. Australia is again considering some sort of wider support and is set to make the announcement within days.

"Let's just wait and see what the Australian package is. Bear in mind we've already done elements of what we're talking about with the infrastructure package. We will be able to announce something early next week. It in turn will evolve over time. We also made the announcement that we have officials working on a bigger macro-economic package," Robertson said.

He said the Rudd payments were not all successful.

"We're taking some time to make sure we get that medium and long term bit right while doing the immediate work on support to keep people employed," he said.

Minimum wage hike will happen

Robertson rejected calls from some economists and the opposition for the suspension or cancellation of the $1.20 per hour (7.3 percent) increase in the minimum wage to $18.90 per hour from April 1.

"We know that people on the minimum wage tend to spend any increase they get. It's important to us that we continue to support people on low and middle incomes. The idea that we would stop it is that broad brush approach that's not actually appropriate in the situation that we're in," Robertson said.

Robertson and Ardern said the Government was looking at whether to widen the current export credit schemes to a wider working capital support scheme to include local businesses as well.

'Wage hike the final straw'

National leader Simon Bridges said the Government needed to cancel its planned minimum wage increase because of the coronavirus outbreak and its financial impacts.

“We’ve got small businesses right now that already have low confidence, are facing very significant costs in a raft of areas - I think going from $17.70 to $18.90 [an hour], that will be the final straw for a lot of them,” Bridges said.

Bridges said the Government also needed to take on board the lessons from the global financial crisis and the Canterbury earthquakes in providing urgent support, such as wage subsidies, to employers and employees.

“Many agencies around the world, the IMF most recently, [are] calling on governments to do these sorts of things and saying they shouldn’t be sluggish in the way that they get to them, and we certainly echo their call.”

National would not be “overly critical” about the precise details of any subsidy package, but it needed to be broad in scope and fulsome in numbers.

“If we think about Canterbury and the GFC, it was around $500 I think for full-timers, $300 for part-timers - that seemed about right then.”

'We're not being negative for the sake of it'

Bridges acknowledged criticism in some quarters about National’s alleged negativity regarding the coronavirus response, but he defended the Opposition’s ability to critique the lack of urgency being shown by the Government.

“We've got a very legitimate role here, I think we’ve been quite careful but I think it’s also important that we do front up and make clear our views.”

While Ardern had described New Zealand’s response as world class, the approach taken by other countries like Australia appeared to have been more rigorous, he said.

“I think these things matter and I think it’s important that we are drawing them out, because it’s in every New Zealander’s interest that we have the best response.”

Help us create a sustainable future for independent local journalism

As New Zealand moves from crisis to recovery mode the need to support local industry has been brought into sharp relief.

As our journalists work to ask the hard questions about our recovery, we also look to you, our readers for support. Reader donations are critical to what we do. If you can help us, please click the button to ensure we can continue to provide quality independent journalism you can trust.


Newsroom does not allow comments directly on this website. We invite all readers who wish to discuss a story or leave a comment to visit us on Twitter or Facebook. We also welcome your news tips and feedback via email: Thank you.

With thanks to our partners