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NZ’s ‘K’ shaped Covid-19 recovery

The New Zealand Government's response to Covid-19 is enriching already rich property owners and bailing out the most politically powerful businesses, while renters and the poor are getting poorer, Bernard Hickey argues

It isn't a 'U' shaped recovery or a 'V' shaped recovery, or even a 'W' shaped recovery. It is actually a 'K' shaped recovery.

The already rich are on the line heading upwards - getting richer because of a range of Government policies aimed at responding to Covid-19. Meanwhile, renters, beneficiaries and the working poor are getting poorer because their rents are rising, their incomes are falling and they have received barely any more direct help than they got before the pandemic.

This wasn't the plan, but it is the inevitable result of relying on the independent central bank to do most of the heavy lifting, which has meant lowering mortgage rates and pumping up asset values so property owners might spend and invest more.

The Government itself also decided early on in the crisis, unlike others including Australia and America, not to pump Government cash to citizens directly and widely, but instead to target cash at businesses. That meant New Zealand's renters, the already jobless and the working poor received none of the tens of billions of dollars handed out by the Treasury and printed by the Reserve Bank.

Almost by accident, and without debate, the Labour-led Government has delivered the biggest shot of cash and monetary support to the wealthy in the history of New Zealand, while giving nothing to the renters, the jobless, students, migrants and the working poor who mostly voted it in. 

It's all about rising asset prices, massive money printing and direct payments to both large and small businesses, rather than cash payments to citizens directly.

Booming housing and stock markets

Despite the biggest drop in economic output in living memory, the most extraordinary thing is happening: asset prices are rising to fresh record highs daily all over the world, and especially in New Zealand.

Astonishingly, house prices have actually risen 3.7 percent between the end of March and the end of July, according to the CoreLogic House Price Index. That has added $45 billion to the value of housing in New Zealand, taking it up to a record-high $1.272 trillion.

New Zealand's stock market has rebounded 40 percent from its March 23 low and is now just 1.3 percent below its February 21 record-high. It could easily break through to a new record high this week, which would mean the value of stocks has risen 15 percent or $25 billion to $172 billion.

The Government has spent $13 billion on wage subsidy payments to large and small businesses alike, but barely anything extra to the already jobless, those on a benefit, or to the working poor, other than through an already planned legislated increase in the minimum wage. Many of those with multiple gig economy jobs or part time jobs have seen their incomes fall as the hospitality, retail and office servicing jobs dried up.

There was a $25 a week increase for people on the main benefit and beneficiary and superannuitant winter energy payments were doubled by $20 to $30 a week from May until October. This amounted to less than $500m for beneficiaries this year, and just $32m for the working poor on Working For Families. Meanwhile, income from part-time and gig economy jobs fell and rents kept rising.  Average weekly incomes were hit hardest for the young. Average incomes from all sources, including Government transfers and wages, for those aged 20-24 and 25-29 respectively fell by $60/week and $20 a week over the year to June. (Updated to include more information on benefits and incomes)

However, those on higher waged and established jobs who lost their jobs because of Covid-19 are getting a special much-higher version of the dole. This is another type of middle class welfare and isn’t means tested. The $490/week benefit is almost twice the weekly jobseeker benefit of $250 for single person over the age of 25, and Covid-19 beneficiaries can get it if their partner earns less than $2,000 (before tax) a week. That’s not the case with the regular benefit. The irony is some home owners who have seen their equity rise hundreds of thousands of dollars and their mortgage payments drop (or be deferred) will receive it.

Those businesses with the best connections to Government have received the biggest amounts and the most support. Fletcher Building, The Warehouse and Sky City received over $170 million worth of wage subsidies between them, but decided to sack 2,700 workers anyway after pocketing the money. Some well-connected big tourism businesses, including campervan giant Tourism Holdings and AJ Hackett bungy jumping were given special grants, while travel agents and smaller businesses did not.

Banks saw their capital requirements relaxed, their lending restrictions relaxed and were offered guarantees funded by the Government to encourage lending to businesses. Barely any new business lending has been done, but banks are back lending at ever-lower mortgage rates to property investors, renovators, downsizers, upsizers and first home buyers.

The Reserve Bank is giving banks and property owners the most help. It has pledged to print up to $100 billion to buy Government bonds over the next two years in an attempt to lower interest rates for the economy. In exchange for those Government and corporate bonds, fund managers and banks either parked the money in their bank accounts or the Reserve Bank itself, or went out and bought more shares and other assets on global markets. Very little is trickling down in the real economy, other than through lower borrowing costs for home owners with over $1 trillion in equity. Borrowing costs for businesses have actually gone up.

And its about to boom more

The Reserve Bank is also planning to print more money to lend directly to banks so they can increase their lending. The Reserve Bank is unlikely to attach strings to the type of lending, so the bulk of it will go in mortgage lending at rates as low as 1.5 percent.

Such a drop in mortgage rates would add another 20-30 percent to house prices, if all other factors were unchanged. That  would be another $300 billion worth of tax-free capital gains on property, further increasing rents, given new housing supply is expected to contract over the next couple of years. Rents have actually risen in most cities through this year, other than in Queenstown.

Meanwhile, the Government has refused to agree to $5 billion worth of benefit increases for the poorest, despite the recommendations of its own advisers. 

This has become the Covid-K recovery: fantastic for the rich and an awful repeat of the much-talked-about 1990-92 recession that Finance Minister Grant Robertson and Prime Minister Jacinda Ardern have said they want to avoid repeating.

By not making direct payments to all and prioritising asset owners and businesses, they have delivered the opposite.

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