Economist suggests 'literally' giving money to the poor to save the economy

An economist has suggested a very simple way to turn around the stalling economy - "cash payments to poor people".

"Literally just cash out to poor people," Shamubeel Eaqub told The AM Show on Thursday morning. "If you give poor people money, they will spend it."

The suggestion comes ahead of the latest GDP figures, which the Reserve Bank has forecast to show 0.5 percent growth for the quarter ending June 30 - bringing annual growth down to about 2.1 percent.

"Right now what we need is fiscal stimulus, right? That's the big thing that's going to work," said Eaqub. "The Reserve Bank's monetary policy's impotent. It's not going to work. At these low rates, nothing matters."

Some economists back cash payments to the poor over other stimulus methods, such as tax cuts, because the poor have little choice but to spend it on things they need. This spending becomes income for another person, increasing their ability to spend too, so the overall benefit to the economy exceeds the Government's initial spending. Economists call this the multiplier effect.

The AM Show host Duncan Garner asked Eaqub whether tax cuts could achieve the same thing, citing Australia's recent package targeted at people on middle and moderately high incomes.

"Funnily enough, their tax cuts haven't worked very well," said Eaqub. "When they gave cash payments to families, that worked - but the tax cuts have actually been very, very slow."

Shamubeel Eaqub.
Shamubeel Eaqub. Photo credit: The AM Show

Interest rates are at record lows, but the Government remains wary of borrowing to fund infrastructure investment. Eaqub - and other economists - have repeatedly called on Finance Minister Grant Robertson to loosen the purse strings, but the Government has effectively tied its own hands with its Budget responsibility rules

"If you can't do those two things, then fiscal stimulus is not going to work."

The current sluggishness in the economy dates back to 2016, Eaqub said.

"This has been really unusual in how slow and gradual it has been. So when we're talking about a downturn, we're not talking about the economy going backwards. It's very sluggish. Everything has kind of just ground to a halt. Everyone is on strike."

What's clear, he says, is we can no longer rely on immigration to prop up the economy. Record levels over the past decade helped drive GDP up, but per capita - which Eaqub says is better for tracking how well the economy is actually doing - has been "going largely sideways for a long time".

According to World Bank data, GDP per capita in New Zealand is lower now than it was in 2014. 

NZ's GDP per capita, compared with other countries.
NZ's GDP per capita, compared with other countries. Photo credit: Google Public Data/World Bank

Asked by sportsreader Mark Richardson what the Government could do for rich people that might help the economy, Eaqub said nothing.

"They're fine. They don't need help. What we need for everybody else is a lot more opening of the pipes. We need more infrastructure, more capacity. Because New Zealand can grow, but we're being constrained by a lack of infrastructure, whether it's housing, roads or trains and all that stuff."