The Government is coming for your economy – how ready are you?

Insight

The post-Covid world is almost certainly going to be different to what we knew before. The question is; just how different?

Around the world we are seeing Governments pump huge sums of money into their economies and societies. This is almost the exact opposite of the retrenchment and austerity seen in many places after the 2008 – 09 economic crash.

The question is; what will the New Zealand economy end up looking like in the coming years? Budget 2020 will be the Government’s opportunity to set a vision. But even before that it is clear there are several trends coming down the tracks.

Should Labour lead a government after the next election, then in the next three years we are likely to see:

  • more government intervention and ownership

  • a review of what ‘strategic assets’ New Zealand needs

  • and a much greater focus on New Zealand made.

Government intervention

Already the Government has told Inland Revenue to offer interest free loans of up to $100,000 to businesses, and offered over $10 billion in wage subsidies, but that is just the start. The opposition National Party have even argued funding should be grants and not loans.

In the coming months we are likely to see the Government take a larger stake in companies like Air New Zealand and, possibly even look at the operating model for things like public transport. There will also be more calls from some lobby groups for ‘even more’ state support for their specific sector.

After four decades of market economics, the era of the big centralised state looks to be back.

Strategic assets

In a nod to the prescriptive New Zealand First-National Coalition Agreement of 1996, policy staff across the public sector will be working hard to define what ‘strategic assets’ New Zealand should hold on to. For example, do we need an oil refinery? An aluminium smelter? Or even a stronger local manufacturing sector?

The answers to those questions may lead to decisions that look suspiciously like picking winners. And for the owners of some of those assets, which may have been struggling to book a decent profit, then renewed Government interest may give them an opportunity to welcome a new shareholder on board.

Buy New Zealand made is back

Right now, across the globe, countries, states, cities and even individual companies are competing with each other to buy Personal Protective Equipment. New Zealand has been lucky that we already manufactured some of what we needed.

New Zealand First has recently mused that ‘if we can make something in New Zealand at close to a competitive cost, then we should’.

It does not take much of a tea leaf reader to be able to pick the Government will be giving some strong hints (and possibly some cold hard Provincial Development Fund cash) to key sectors if they can make what we think we need back here in Aotearoa.

The logical outcome: more spending and more taxation?

However, all this big spending can only happen with a large increase in borrowing, and some careful management of other line items. Right now, around a third of workers in New Zealand have lost income or have reduced hours due to the government’s lockdown and 43 per cent of us are spending less. Those numbers will only increase in the coming months.

No matter what the Prime Minister may have said in the past, this Government will have to look carefully at the retirement age, at capital gains taxation, and other options to both cut some spending, and to raise revenue, because they know they will have many more people on benefits to support.

That means a bigger role for the state. And for a Government that was already inclined to be interventionist, that can only mean intervening in a greater share of the economy, for good, or ill.