Week in Review - Economic and Infrastructure Outlook

A strong and growing economy is incredibly important to New Zealand's future, and the long term effects on jobs, incomes, businesses and our regions will very much be dependent on our collective response to COVID-19. 

→ COVID-19: the failed strategy?
→ Emptying the Covid kitty
→ Our exposure to China
→ Access to talent
→ Support growing for Small Business Rental Support Package

Welcome to my monthly economic and infrastructure outlook for September 2021 on how our economy is doing.

COVID-19: the failed strategy?

The question has to be asked about the Government’s Covid strategy. Their principal approach has been to impose a line of defence at our borders to stop the virus coming in.

The Government has dawdled with rolling out vaccinations across the country. We are currently second-to-last in the OECD (overall about 119th in the world) and have less than a quarter of our population fully vaccinated.

This delay is not only a health issue, but increasingly an economic one, as the cost of lockdowns is huge – both to the economy and to the taxpayer. The current lockdown is costing the economy about $1.9 billion per week and the first fortnight cost the taxpayer $1.25 billion.

Relying solely on a line of defence at our borders has not worked. There have been at least a dozen border control failures, the most recent allowing the dangerous Delta virus to take hold in Auckland. All can be tracked back to mishaps at MIQ facilities. Once through the border, our abysmal vaccination rate meant we had no choice but to impose an extended, national lockdown.

The other danger area is our ports, and we have had three near-misses with ships coming in to Tauranga, New Plymouth and Lyttelton with Covid cases aboard.

It seems incredible that we have relied upon a strategy of accommodating potentially infected people in the midst of our most densely populated areas. Instead, proper facilities should have been established away from our cities, such as at our military bases. These would have provided immediate access to greater space, cooking facilities and ease of providing entertainment options for those in isolation.

You can read more about National plans to supercharge vaccinations here.

Emptying the Covid kitty

According to Budget documents, Finance Minister Grant Robertson has already allocated around $45 billion of the $50 billion Covid Response and Recovery Fund that was set aside to deal with the pandemic, leaving only about $5–$6 billion unallocated in the kitty.

Around $12 billion has been squandered on projects completely unrelated to the pandemic.

To put it in context, this sum would probably be enough to build a second harbour crossing in Auckland, or alternatively fix all of Wellington’s transport woes and still complete key roads put on hold by this Government, including triple-laning of the Southern Motorway from Papakura to Drury (for which work had already started), four-laning of State Highway 2 west of Tauranga (regarded as one of the most dangerous sections of road in New Zealand), and four-laning of State Highway 1 between Whangārei and Port Marsden Highway (the busiest and deadliest highway in Northland).

Grant Robertson’s response to this issue? Don’t worry, we will borrow more – and the economy is strong anyway.

This attitude highlights two worrying issues.

The first is that over the past 18 months, our debt has almost doubled from $60 billion to just under $120 billion. More troubling is that at the rate the Government is borrowing – currently about $110 million every day – our debt is forecast to increase by another $65 billion over the next three years to $184 billion. That’s about $100,000 in debt for every household in New Zealand.

It can be appropriate to increase debt to fund measures to stabilise the economy in a shock or to respond to a natural disaster, but not for many of the pet projects that have been funded out of the Covid Response and Recovery Fund. What New Zealand needs instead is proper investment in roads, rail, hospitals and schools.

The second issue is that Grant Robertson has not left sufficient room in his financial forecasts for responding to a Covid resurgence like we are seeing now. When Covid-19 first hit in March last year, the initial $12 billion support package went in a flash. Far more of the $50 billion Covid fund should have been kept aside for actually responding to a further Covid outbreak.

Our exposure to China

Another reason that New Zealand needs to protect its financial resilience is our reliance on exports and therefore our vulnerability to the economic fortunes of our trading partners. As a major economic power and our largest trading partner, what happens in China is important to us.

A slow-down in the Chinese economy can affect New Zealand both directly and indirectly through our other trading partners. For example, demand for iron ore has dropped significantly in recent times. For Australia, our second largest trading nation, its iron ore price – which is driven from demand out of China – has dropped by more than US$100 per tonne since mid-May.

This could have significant consequences for New Zealand. It is the thing that pays taxes for a lot of Australia’s social welfare system and drives consumer spending. It sloshes through the entire economy.

New Zealand is effectively double-exposed to China: directly, and through Australia. A slowing China and Australia won’t import so much and our export prices will fall.

The implication of this is what happens to global economic growth, particularly in a Covid Delta-variant world. Overlay this with the current supply chain issues, which are now expected to continue for some time (with the attendant costs and disruption these bring), and the outlook is further compounded.

Most economic agencies are currently forecasting robust economic growth, including New Zealand, but this prognosis is not guaranteed.

Access to talent

Wherever I have been over the past few months, the first issue raised by business owners is the shortage of talent. There are two edges to this.

The first is there is a maximum level of employment and we are close to it. In normal situations, firms have a choice as to who they hire; under-performers are not hired. However, with our borders closed and skilled labour in short supply, firms are not investing in growth as much as they could or they are downscaling their businesses so they can meet customer expectations. Neither is a good outcome.

The second issue relates to our immigration settings. It is outrageous that we have many thousands of immigrants who have been here from the start of Covid last year whose visa status is unclear and they are unable to bring their loved ones through MIQ to join them here in New Zealand. Understandably, many are leaving.

This Government has been too slow to provide certainty for these people. The huge risk is that both our migrants and young Kiwis will leave New Zealand in droves as the rest of the world opens up. Further compounding this issue is that Australian and Canadian firms are here in force trying to attract skilled people to leave our shores.

In the meantime, while we’ve been struggling to get the population vaccinated and appear reticent to open up even after vaccination, the economic pressures continue to build.

Support growing for Small Business Rental Support Package

On 1 September I announced a Small Business Rental Support Package which I am the urging the Government to adopt.

With the Delta variant of Covid now on our shores, it is likely we will see ongoing lockdowns, ones that have been more severe than in the past. The Rental Support Package is about alleviating hardship on businesses and preventing the harmful knock-on effect of people losing their jobs, should businesses fall over as a result of the lockdowns.

Over 225,000 businesses have applied for the first round of the Covid-19 Wage Subsidy 2021, estimated to employ in excess of 800,000 people. If a large proportion of these businesses fail due to lack of cash flow, this will have not only a massive economic cost, but also a huge social and health cost for the country.

We need to be supporting businesses now, otherwise this could see a dramatic increase in the number of people on the jobseeker benefit.

National’s Rental Support Package targets those businesses with 19 or fewer FTEs (full-time equivalent employees) that have seen a 40 per cent reduction or more in their revenue under either Level 4 or 3. The Government would cover 50 per cent of the rent and associated building operating costs and the landlord would be expected to cover 25 per cent in the form of them writing off or discounting the rent by 25 per cent. This would leave the business owner with just 25 per cent of their rental costs to pay.

Watch my interview with Max Whitehead, one of New Zealand’s leading employment relations practitioners, and Vaughan Winiata, who specialises in business advisory for Māori small businesses.