Comment

They’re back on track and in touch

The Government's monumental and fast cash injections for small businesses and beneficiaries mark a welcome turnaround. Bernard Hickey argues a GST cut and equally massive Reserve Bank money printing will be needed in the dark months to come.

It was as if they all ran into the wheelhouse at the same time to turn the drifting ship away from the iceberg.

In the last five days Prime Minister Jacinda Ardern, Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr have collectively grabbed the wheel of the economy and the Government to put New Zealand's response to the Covid-19 crisis back on track and in touch with the reality of the biggest macro-economic and societal challenge of our lifetimes.

It seems an age ago now, but just last Tuesday they were pushing back at calls for broad and very fast cash support for small businesses and the need to toughen border controls. Both Robertson and Orr said they would not be bounced into "kneejerk" reactions of big interest rate cuts and massive stimulus.

I personally asked Ardern on Thursday morning why the Government was so reluctant to take bigger and faster action, and why beneficiaries appeared likely to miss out in any support package. She said then that the Government wanted to take measured and targeted action to ensure money was not wasted.

A week is a long time in politics, but the last week for our economy, our society and the world has been like nothing I've seen in my lifetime.

I was there in the middle of the Global Financial Crisis and remember vividly the weekend of October 11/12, 2008. Ireland's decision a few days earlier to guarantee its banks to stop them collapsing cascaded around the world through Australia and into New Zealand. Some believed that week that the global financial system was less than 48 hours away from complete collapse.

Then Finance Minister Michael Cullen and Prime Minister Helen Clark stopped their re-election campaign launch speech writing to invent a deposit guarantee scheme on a Sunday afternoon. In the eight months that followed the Official Cash Rate was slashed from 7.5 percent (!) to 2.5 percent and the economy fell into a recession.

Exponential change

But that seems tame compared with the last five days since I wrote that the Government and the Reserve Bank were looking increasingly out of touch and behind the curve. I was worried the trajectory of the crisis and the speed of the global disruptions had overwhelmed the usual information and decision channels that crawl along in the life of an MMP Government, where the status quo is a thing to hug tightly.

The course correction did come, thanks to the awful and fast-worsening of the situations in Italy, Britain and America. The precariousness of the Australian situation is also quietly a worry. There was clearly community transmission going on in our largest source of tourists and our main entry and exit point for business travellers and returning New Zealanders.

Jacinda Ardern's decision on Saturday afternoon to effectively close the border was the klaxon call for the Government to go into emergency mode. The Reserve Bank called its Monetary Policy Committee in for an extraordinary out-of-cycle interest rate decision. By Monday morning it was ready to announce not only a 75 basis point cut to 0.25 percent, but that they would keep it there for a year and that the next move would be a Government bond buying programme that is known in the rest of the world as Quantitative Easing (QE). Some of the less respectful commentators call it money printing.

Essentially, QE is a process where a central bank swaps its promise to pay cash for a Government bond in the hands of a pension fund or bank. It is designed to lower long term interest rates and encourage banks to lend and businesses to invest. The US Federal Reserve, the Bank of Japan, the Bank of England and the European Central Bank have been doing it on and off for over a decade. Many believe it is largely responsible for pumping up the value of existing assets such as bonds, shares and property, and quietly euthanising the real economy driven by business investment. There's a debate there for another time. Suffice to say, it's controversial and even a week ago was widely thought virtually impossible here.

QE on May 13?

We should all look forward now to the Reserve Bank's next Monetary Policy Statement and rates decision on May 13, a day before the Budget, which is shaping up as Phase Two of the Covid-19 response. The Reserve Bank Chief Economist Yuong Ha told Bloomberg yesterday the Reserve Bank could be ready to buy Government bonds from that May meeting.

He won't have to wait long. The Government will announce massive new bond issues the very next day. It will be a very short trip for those bonds across the Terrace from the Treasury to the Reserve, via some pension fund or bank to clip the ticket.

The package announced today on will cost $12.1 billion and includes a sizeable amount of cash up front for small businesses and beneficiaries, with $8.7b going to mostly small to medium businesses in the form of cash payments and tax relief, while $2.8b will go in an immediate (April 1) and permanent $25 per week increase in income to beneficiaries, working families won't have to satisfy the hours test to get the In Work Tax Credit, and there's a one-off doubling of the Winter Energy Payment for pensioners.

Not too targeted

Thankfully, the Government appeared to change tack towards the end of its design process and widened the scope and size of its wage subsidy for small to medium businesses.

It will deliver a fairly immediate $5.1b cash injection to about half of New Zealand's small businesses. All going well, that could be in bank accounts within the next two weeks.

Recession is still coming

The Treasury sees a recession coming this year and others also see more work to be done.

ASB's Nathan Penny sees room for wider measures with future packages, which could come as early as May 14.

 "A temporary cut to the GST rate is one example of how the Government could give a broad and simple boost to the economy," Penny said.

It would immediately boost spending power and give a short term cashflow boost to businesses if they were allowed to keep the difference.

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