Budget 2020: CE perspective
Insights from Deloitte New Zealand’s CE, Thomas Pippos
“It’s the economy, stupid” *
* Coined by campaign strategist James Carville during Bill Clinton’s 1992 presidential campaign.
Resilience is boring. It comes from years of sensible investment. Sometimes with no obvious or initial paybacks.
COVID-19 brought resilience into the cold light of day. However, for certain industries, no amount of preparedness could have insulated them from a global pandemic like this one – which presented almost a doomsday scenario.
More than ever, Budget 2020 was therefore about the economy and its ability to withstand the current shock. The bedrock upon which wider “wellbeing” initiatives are built, and upon which elections are won and lost. So much so that while “wellbeing” was still sprinkled in the documents – relative to last year, it hardly got a mention today.
Yesterday, the Prime Minister said that this Budget would be about jobs and leveraging the Government’s balance sheet to keep people in work.
Positively, yesterday’s rhetoric became today’s reality, with the Government throwing everything including the kitchen sink at the issue at hand; announcing a plethora of spending initiatives aggregating to over $50 billion to accelerate economic activity and shelter the worst of the current economic shock.
Included in this was a more targeted extension to the initial Wage Subsidy Scheme. The reality is that “more” is a relative concept when compared to the initial breadth of access. Related, and somewhat lost in today’s discussion, was the quality of the spending as well as its quantity, as we all live in a world of limited resources – including in relation to Crown finances.
That said, pivoting the Budget’s focus back to the economy was inevitable. It’s what always happens when we face an economic challenge; as the economy is what is taken for granted once we are out of the woods. Consistent with that, the unsung hero of recent budgets (under successive Governments) has been the economy. The goose that has continued to lay the golden eggs; that has more recently been taken for granted or assumed (the treatment of business taxpayers in the last decade demonstrates this).
The focus on the economy is also true in Australia. The Australian budget has been put on hold. My Australian colleague, Chris Richardson, Deloitte Australia Partner, is predicting a deficit of AUD $143 billion for 2019/20 and large deficits for at least the next three years. Compounding this is a contraction in the economy and a material rise in unemployment; all of which is unsurprising and directionally mirrored here1.
More importantly, he noted that a “rapid budget repair would be misguided". Specifically, “that the budgetary damage isn't structural, but [that] the damage to [their] economy and [their] jobs would be if [they] started raising taxes and cutting spending," a truth that applies on this side of the Tasman, also.
Positively again, consistent with yesterday’s rhetoric, today's reality did not include tax increases or massive expenditure cuts. Questioning during the lock up made it clear tax changes were out for this term of Government, but open for future Governments.
Today, the Government dodged rather than addressed the tax bullet. In this, the Government merits applause for resisting the temptation to act in a precipitous fashion. Dealing with COVID-19 and its flow on consequences will be a long game, not able to be addressed through a wave of a magic wand; and the Government needs to keep its powder dry until its target can be identified with greater accuracy.
Of course, Budget 2020’s context starts with COVID-19 itself. On this front so far, so good. New Zealand has seemingly flattened the curve in a way few other countries have with the most serious aspects of the health challenge now hopefully behind us.
Positively also, two of our most material trading partners, China and Australia, are also seemingly (at least for now) ahead of the curve in their own ways – and are re-opening businesses at a time when many other countries are still in full or material lockdown.
Related, our tyranny of distance is now one of our greatest assets, as is our attractiveness as a destination. Likewise, our ability to feed ourselves and provide many of the necessities of life is a real asset during what can only be described as uncertain times.
This context takes our focus back to the economy and our financial resilience. Five related points that suggest that there is light at the end of the tunnel include:
- We have historically addressed material economic challenges. They include the fall out of the multiple seismic events in the South Island and the GFC. Going back further, many will recall 1984, when we experienced a simultaneous financial, economic and constitutional crisis, which resulted in a decade of radical reform, including the share market crash in ‘87 – challenges which we again overcame and were arguably more material than what we face today.
- We’ve saved for a rainy day, even though saving has been seen by many as boring, unimaginative and unnecessary, with a relatively low Government Debt to GDP ratio (19%), so that the options available to this Government are markedly different to those facing the US (107%), China (50%) and even Australia (45%). So much so, that our ratios remain world class by today’s standard, even after ballooning to over 50% by 2023 (through the measures announced today).
- Our current economic challenges are unlike others we have faced. They are not structural in the same way they were in the past, they are more about how quickly we can reactivate what has been forced to hibernate; which as evidenced by the forecasts, suggest we could see a degree of economic normality by 2022.
- So far, including today, our responses, while not universally acclaimed, are sufficiently thoughtful to not impede ultimate success.
- The budget scenarios themselves, that suggest that NZ does, in fact, have a resilient economy.
This positive lens is not intended to downplay the enormity of the challenge, including four years of deficits aggregating to a staggering circa $100 billion.
Businesses facing immediate material stress were looking to the Government’s Budget to provide direct and immediate help; and again, the Budget delivered this through a plethora of measures led by extending the Wage Subsidy Scheme for a further two months (aggregating to five) for some of the most impacted businesses.
The wider business community was also looking for clarity as to the path ahead and for investments that will cushion the blow of COVID-19 to our GDP forecast. And again, this was delivered through projecting the resilience of the economy that could see us turning the deficit corner by 2024/2025.
And positively the magic wand that some hoped would be waved to provide some form of relief through instantaneous gratification for all, was kept out of sight.
It is, of course, too early to know what the full effects of COVID-19 will be on the economy. But despite global media and economists casting this as a tragedy, the outcomes, while still extreme, are likely to be more optimistic. Apart from anything else, forecasts are an art rather than a science, are inevitably set on the conservative side and underplay our ability to innovate to recalibrate to a different context.
Our view is also that the Government has two roles to play in the story.
The first is to smooth the way forward and allow the market to find its new equilibrium as swiftly as possible but in an orderly and rational fashion; as the pre and post COVID-19 markets will be different. This is a real challenge for a centre left Government whose traditional inclination is to overtly insert itself as part of the business or market response. Positively this itch was not scratched in Budget 2020 in the way some expected; but that itch is real as the Minister stated with disdain “the economic carnage of the 1980s and 1990s…. that was based on a tired set of ideas that the market would save us…. if the Government sat on the side-lines, all would be well…”
Their second role is to provide targeted support for our most vulnerable communities and the sectors most affected by COVID-19. Again positively, they did seem to do that through the measures announced including the extension of the Wage Subsidy Scheme.
Pivoting to the negative, we are facing some of our most material economic challenges in an election year. This will mean that the way forward will inevitably be played out in sound bites, to an audience that will likely become more fractured, staring at that stage directly into the cold light of our post COVID-19 economic reality. This heightens the risk of one-upmanship and suboptimal policy responses; accepting that it also puts the Government on notice that its handling of the health and economic aspects of COVID-19 will be scored as either a pass or fail in the near term, by what will be somewhat eclectic markers.
And even in terms of tax, it's far from clear what a successive Labour-led Government would look to do.
In this context, Budget 2020 has morphed into something quite different to what it otherwise would have been. It has become an important prologue to what will be a riveting “must watch” for future generations. While the genre of this story is uncertain, it is likely towards the suspenseful. However, if past performance has taught us anything, it will inevitably have a happy ever after type of ending – but only after several seasons.
Overall, however, as part of hoping for the best but planning for the worse, my sense is that the budget marked a sensible start to our economic rebuild as we welcome our entry into Level 2.