Economy

Should we spend an extra $20b, or $40b?

Treasury's scenarios see unemployment limited to just 8.5 percent, or blowing out to 26 percent. It all depends on the fiscal response and the length of lockdowns, Bernard Hickey reports.

Treasury has unveiled a series of economic scenarios that suggest unemployment could rise as high as 26 percent without further Government income support, or could be as low as 8.5 percent if the lockdown ends quickly and the Government adds another $20 billion of economic stimulus.

The scenario where unemployment rises to 26 percent included assumptions that the economy was in Level 4 lockdown for six months, followed by six months of level 3 lockdown, and with no further Government support beyond the $20 billion already signalled.

Finance Minister Grant Robertson indicated that further support would be announced later this week. He is due to speak later this afternoon at the post-Cabinet news conference with Prime Minister Jacinda Ardern, and is also expected to detail the Government's next economic moves in an online speech to business leaders on Wednesday.

"Work on further significant Government investment to protect jobs, support cashflow, and prepare the economy for recovery is well advanced," Robertson said in releasing the scenarios. 

"The next steps in the Government’s plan to support businesses will be released later this week," he said.

The Treasury's framing of the Government's response suggested the Government would announce a further $20 billion of economic stimulus in the form of income support for businesses and workers, with further details possible in the Budget on May 14.

“The Budget is also another important part of the response, and it will include significant support to respond to and recover from COVID-19. As is usual with the Budget, there may well be pre-announcements, especially where they relate to urgent COVID-19 response activities,” Robertson said.

The scenarios

Treasury laid out five initial scenarios of what the economic impact might be with a range of assumptions, varying from one-month in level 4 lockdown to six months in level four. All scenarios assumed New Zealand would be closed to foreign visitors for 12 months, and four of the five scenarios assumed world real GDP would fall six percent in calendar 2020. The fifth assumed a 10 percent fall in world GDP by next year. This table in the document laid out the assumptions.

Treasury then forecast real GDP, unemployment, inflation and nominal GDP with the five scenarios, with the worst being scenario three, which would see unemployment rise to as high as 26 percent (in between the snapshots at the end of June) and nominal GDP being as much as $270b lower over the next five years than the Treasury's half-yearly forecasts from December.

Here are the real GDP and jobless forecasts.

And if Government responds with more stimulus...

Treasury then laid out what would happen to GDP and the jobless rates if the Government responded with two different levels of stimulus: $20b extra for scenario one, and $40b extra for scenario two.

It found $20b in extra stimulus with scenario one would see unemployment peak at 8.5 percent instead of 13.5 percent, while an extra $40b with scenario two would see unemployment peak at 9.5 percent instead of 17.5 percent.

Treasury did not do a scenario for the larger fiscal response ($40b) with the best-case scenario one, or other mixes of responses for much worse case scenarios.

It also did not include forecast net debt/GDP tracks for each scenario. They will be included in the Budget on May 14.

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