Is it a good time to be young?

The past is often viewed with rose tinted glasses that gloss over historic social and economic challenges. 

Going back, New Zealand was a closed economy that was materially exposed to global and national shocks that it wasn’t well placed to adapt to. Yes, housing was more affordable and global warming wasn’t omnipresent. Inequality and poverty were however still there. We were also somewhat insular and in cases held an entitled mindset. Accepting that New Zealand is still a very young country, it has been forced to grow up very quickly in what isn’t a particularly nice or fair world.

Drawing this into Budget 2021, the Government has referenced the 30 year anniversary to the so called “Mother of all Budgets” that was the hallmark of the 4th National-led Bolger Government that had Ruth Richardson deliver her first budget in 1991 (generally viewed as unpopular). This followed the collapse of the Lange/Palmer/Moore Labour led Government that of course followed the earlier Muldoon led National Government.

For those with a sense of history, the backdrop of budgets past were often challenged, irrespective of the political divide, in part due to the juvenile and protected nature of our economy that was opened to the world in the late 80s, with all the associated challenges that resulted from that.

During the later parts of this period the economy has matured such that it has also been able to withstand a number of challenges with the current Government, more than any other in recent memory, largely just managing through crises.

John Key’s tenure as Prime Minister included having to address the Global Financial Crisis (GFC) and also the catastrophic events of the Christchurch earthquakes. Jacinda Ardern’s tenure (to date) is more of a baptism of fire; with crises including the terror attacks in Christchurch, the White Island eruption and most recently leading the country through COVID-19. Somewhat ironically therefore, managing outside of a crisis is not normal for the current Government and not something that they have been tested on in the normal way a second term Government would have by now.

Budget 2021 continues with the crises theme – as the overhang of COVID-19 remains omnipresent; the most pronounced manifestation of which is the level of crown debt (accepting materially less than expected).

Accentuating the positive and accepting all the criticisms thrown at the New Zealand economy, it has more than continued to positively surprise pundits; showing much greater resilience and adaptability than expected when confronted with an external economic shock. The New Zealand economy unquestionably remains the unsung hero in this and prior budgets.

While Government stimulus clearly played a material part in this story, our small open economy was forced to close in 2020 and become largely insular – yet it still adapted such that many businesses, accepting not those in the most impacted industries, not only weathered the storm, but also posted record years; as evidenced by the material upswing in crown revenue that is expected to continue and only suffered a minor dip in 2020 while in the middle of the forced COVID-19 lockdown.

Tainting this positive view is that we are not living within our means and aren’t planned to until the mid-2020s. Viewed through the lens of net core crown debt, its anticipated to fall back to around 40% of GDP in the near term which is actually somewhat of a relief.

Relevant is that budgets are a marker in a journey to a dynamic and evolving destination; accepting that the practice seems to focus more on the here and now. The destination being projected is considerably more positive that what was envisaged one year ago, and generally well ahead of other jurisdictions when like for like comparisons are made. 

Budgets are also meant to be hard, particularly when the context is a difficult one, and often written with a political backdrop. Budgets as traditionally defined look to ration limited resources. The more limited the resources that exist to allocate, the greater the challenge budgeting should be. That should be our current context, with success not necessarily being whether people are “happy”, given the diverse stakeholder groups that are represented in society, but often whether those diverse groups are to varying degrees equally unhappy.

 This traditional theory has been turned on its head by the economy’s strength and current monetary policy (interest rates) which has materially softened the traditional fiscal theory and outcomes budgets strive to achieve – a balanced budget – by projecting that resources are not as limited as traditionally thought and that debt is more acceptable / cheaper – thereby parking issues largely to future generations at (hopefully) minimum current cost.

In terms of those “happy”, the Government has deliberately thrown a safety banket over those at the bottom of the economy looking to help address inequities that have arisen over time to also enhance social cohesion. This social dividend, badged to right the wrongs of the 4th National Government, is how Budget 2021 is projected.

Business of course benefits from this and was the material beneficiary of the relevant wage subsidy schemes last year. There was also a plethora of other material spending in Budget 2021, such that many will be forgiven for thinking that just one year ago, we were heralded as being in the midst of an economic and social calamity akin to the great depression of the 1930s.

Recognising that enough is never enough, and that the material increase in spending also raises questions as to the quality of that spending / investment, Budget 2021 feels more like a “business as usual” budget than a budget following an unprecedented financial and social shock.  

Of course, the only certainty looking forward is that there is a huge degree of uncertainty as to what the future holds and how this will play out economically; albeit it is projected favourably. The extent of quantitative easing is unprecedented, as has been the monetary response (i.e. reduced interest rates) by central banks to stimulate activity. The effect has been to materially surge asset values, exacerbating the risk of asset bubbles and corrections (let alone wealth disparity), and heightening the risk of inflation including hyperinflation.

In New Zealand this has manifested itself in housing values hitting new highs (anticipated by Budget 2021 to stall); but it is considerably broader than just housing, to include many forms of other assets, not just those yielding income, including crypto currencies and even digital art achieving values never previously thought possible and/or predicated on traditional valuation concepts. By contrast, those left holding cash and term deposits have been left severely wanting – having missed out. 

Putting risks around bubbles to the side, the most immediate and interrelated economic risks (outside of COVID-19 resurgences) seem to pertain to inflation and interest rates; and more specifically, how quickly they move and how high. At an individual level these risks depend on the nature and extent of debt and assets. At a Government level, these risks can impact the broader economy and tax takes, as well as the carrying cost of materially greater debt.

While both internationally and domestically economists and central bankers are talking down the inflation risk (less so internationally with the passage of time albeit still the Government’s view in Budget 2021) – the reality at the coalface is less comforting, with material inflationary pressures seemingly across many sectors and costs.

Where that leaves the Government, and in fact governments around the world, is still in a precarious situation where more than ever, future generations are burdened with today’s costs, including through increased taxation. Exacerbating matters is that those generations will also likely only benefit from relatively lower investment returns (outside of a bubble popping).

So is it still a good time to be young – unquestionably so – but it’s not without its challenges, maybe it’s just how it has always been and always will.