Now let’s see how Robertson harnesses the powers of the state to revive the economy

Finance Minister  Grant  Robertson,  who only four  months ago  would have  been quietly rejoicing at the prospect of presenting an election-winning  budget,  now has the challenge of framing a  programme to  salvage  the  economy.  It will be a  formidable  task,  even  if at the time of presentation the country is  in sight of  freeing itself  from  the  blight of  Covid-19.

He says  he  has  a strong personal  belief  in  the  power of  the state  to  do  good.   And   certainly  the  Ardern   coalition   has  deployed  the   power of  the state  effectively  in the campaign  against the  Covid-19  pandemic.

If  Robertson  can  do the  same  with the  economy,  he  will win a  place   in  history.  But   with  economists  predicting  unemployment will soar  above 10% of the workforce,  and consequently  inequality  set to deepen,  many New Zealanders could be  disadvantaged for  life.

Already Robertson is getting  plenty of advice   on what   his priorities  should be.  Labour’s  coalition supporter, the Green Party, is calling is calling for an “ economic stimulus package fit for the 21st century that puts people, climate, and nature first with significant investment in nature based jobs”.  

It  proposes a $1bn package over three years to support local communities, iwi, businesses, NGOs, councils and DOC to employ thousands of people across NZ to restore and look after our natural landscapes, native bush, birds, waterways and coast.

Whether  Robertson   will be  excited   by that  idea   remains to  be seen.  Point of  Order  is not  aware   of  what Labour’s  other ally,  NZ  First, is proposing,  but  suspects  Shane Jones   will be  outbidding the Greens  with  a  package costing  a good  deal  more than the  $3bn  he got in  his  Provincial  Growth Fund.

Independent  economic  commentator  Michael  Reddell is  concerned the government has no clear and credible economic strategy for any of the stages ahead  now facing the country.  He worries  that  the prospects are for lingering high unemployment, further reductions in trade/GDP (the environment having got tougher and the relative prices not changed in NZ’s  favour) and no credible chance of any improvement in  productivity performance.

Robertson   himself has conceded  that New Zealanders – through this virus have seen what happens when sectors and industries are overly reliant on certain markets for their export revenue.   He  has said   while NZ must always remain a trading nation,  it will need to look at greater diversification of export markets to make sure it is prepared for any future shocks to trade networks.

Just  how  NZ   will  compensate  for  the  loss of   foreign exchange  it  has earned   from  tourism  and  the education of   international   students   is unstated.  Nor do  Opposition  politicians  offer   options.

But  that   loss – probably of more than  $40bn a year – underlines  the  vital  need  to  place top priority on sustaining, and expanding,  the  earnings   in  NZ  dollar terms  from NZ’s primary  and manufacturing  industries,  the biggest of  which  is   the  dairy industry .

NZ’s  largest   company,  Fonterra, will  return  more than  $11bn   to  its farmer suppliers   this  year.  But with  the deterioration  in  world  markets, Rabobank (for example) is  forecasting  the    farmgate milk  price  for  the  2020-21 season   will fall    to $5.60/kgMS.

This  is  well below  the  range of  $7  to  $7.60   for the  current  season,   and   below   what would be the break-even  point for  many  dairy farmers.    Without    the  financial   incentive  of a  better  price    farmers   might   concentrate    on   trimming   costs,  rather  than  expanding production.

Clearly  NZ   needs a    more  favourable  exchange    as it  navigates  this   economic  crisis.

But    even  though   a  couple  of  NZ’s  major export sectors   are  closed  off,  the  exchange rate   has  not  depreciated   to the  extent that  might have been  expected.

Michael  Reddell  spells   out  the  hard  truth:

“If the government is serious about doing better on the trade front you’d have hoped that a sustained lower real exchange rate would be a material part of the mix.  For that, a much looser monetary policy is a key upfront part of the initial mix.”

As for  the   dairy industry,   without that sustained   lower  exchange rate   the  priority  for individual  operators  might be  to  reduce  debt as fast as  possible  rather than  increase production and potential  foreign  exchange earnings.

Rabobank  based  its   forecast  payout for the 2020-21  season  on  an exchange   rate  of   the  NZ  dollar  at 57USc  (down from  the  current  59  to 60USc range).   Realistically,  it  needs to   be    around  10%   lower.

Reddell  finds it  “alarming”  that   the government  has  not  focussed on the tool that usually plays the large part in cyclical stabilisation, getting short-term growth rates up to reabsorb unused labour and capital: monetary policy.

 “The (in effect) complacency about the lack of any material fall in real interest rates in response to this dramatic economic slump is quite remarkable –  and really rather alarming”.

Not  everyone   will be  convinced — as Robertson  claims — the   government  has been able to coordinate and provide leadership for New Zealanders, guiding both the public health response and the economic response to this crisis, because  NZ  has  a well-funded,  highly functional public service.

The  scepticism   might  become   more  widespread  if  the  Ardern   government   fails   to  get to grips   with   the  underlying   pressures  within  the  economy,  misses   the real  targets   with its  policy  signals,   and  does  not  ensure  the  incentives  for the  private  sector   to   absorb excess  capacity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ly functional public service.

 

The  scepticism   might  become   more  widespread  if  the  Ardern   government   fails   to  get to grips   with   the  underlying   pressures  within  the  economy,  misses   the real  targets   with its  policy  signals,   and  does  not  ensure  the  incentives  for the  private  sector   to   absorb excess  capacity.