COVID-19: Grant Robertson predicts 'quantum economic shock' greater than Global Financial Crisis

The Finance Minister predicts a "quantum economic shock" greater than the 2008 Global Financial Crisis (GFC) because of COVID-19, but he's standing by the Government's decision to boost the minimum wage. 

Grant Robertson told the Epidemic Response Committee on Wednesday that gross domestic product (GDP) is going to "take a serious hit, as will unemployment, and I've got no doubt this shock is a quantum greater than the GFC". 

Robertson said that makes putting together Budget 2020 "challenging" but that the Government is still going ahead with its May release, only the focus of it will be different. 

"We will endeavour to meet cost pressures and employment-related expenditure, but for the most part, our focus will be on the COVID-19 response, both short, medium and long-term," Robertson told the committee. 

"These are very extraordinarily tough times for the whole country, for businesses and workers especially, but we have to remember the economy was robust going in - sound, and full of innovative and successful people, and it still is."

Robertson highlighted how New Zealand's net debt was low before the coronavirus impacted the global economy, explaining how the country has more room to spend. 

The Crown financial statements for the eight months to the end of February were released this week, showing net debt was $600 million below forecast at 19.2 percent of GDP, and the surplus of $1.4 billion was $100 million above forecast.

Robertson said advanced economies are starting from an average net debt position above 70 percent of GDP, with the UK around 75 percent, the US above 80 percent, Italy above 120 percent and Ireland above 50 percent of GDP.

 "Our job is to get people through this so that in the recovery, we will see all of those things continue to prosper for New Zealand."

Robertson pushed back against criticism of the Government's decision to move ahead with boosting the minimum wage by $1.20  - which has now come into force bringing it to $18.90 - along with the main benefit increasing to $25 per week. 

Business New Zealand said on Wednesday that the increase to the minimum wage will cause additional difficulties in many businesses once the Government's wage subsidy is discontinued, but Robertson said the change won't be delayed. 

"I understand concerns about the minimum wage but it's a decision we made some time ago," he said, adding that he's confident businesses will be able to meet the increase. 

Robertson described the current situation as "unprecedented" and that there it's going to get an unprecedented response". 

He thanked MPs for passing legislation under urgency last week allowing the Government to access up to $50 billion to help New Zealanders get through the crisis. 

"It is an envelope - it's not a target to reach, but having that large sum of money available means we can respond quickly and push New Zealand through this," Robertson said. 

"In terms of how we're working at the moment, an hour's like a day, a day's like a week, a week's like a month - and so we have to move in quantum terms, far quicker than we ever have in the past. 

"That means there are going to be mistakes and there will be changes that need to be made rapidly to allow us to respond swiftly."

He said the Government is following three principles, the first being to "act swiftly, take a no regrets approach, and be prepared to shift". 

The second principle has been to act to improve cash flow and confidence. He said the clearest example of that was the move to get the wage subsidy scheme in operation right away - which is estimated to cost between $8 billion and $12 billion. 

He said unlike the similar schemes that have been announced in the UK and Australia, New Zealand's one is paying out immediately, whereas in the UK it's April and if you're in Australia it's May. 

"I think that's made a big difference in terms of cash flow and confidence."

The third principle the Government is using to underpin its response to the crisis is the "importance of coordination to secure and support the business sector". 

Robertson said looking ahead, the Government is looking to further support small-to-medium enterprises. 

"Wages are the biggest expense that businesses have, but second only to that is rent and other costs around utilities, so we're working on the sector to shape a package to deal with that and that includes further looks at the tax system as well."

Robertson said he wants to be clear that the conversations he's having with businesses indicate the same issues that have been raised already: mainly concerns about what happens if the lockdown continues after four weeks. 

"The really important point there is we will need to manage the virus for an extended period of time. Regardless of whether we're in level 4, we're still going to have to look at what the impacts are on the economy, and do different scenario planning for those responses."

He said the Government wants New Zealand to be in lockdown for the shortest amount of time possible, but it all depends on how successful the lockdown has been. 

Long-term, he said the Government will look at just how disruptive the virus has been on the global economy, with trade routes disrupted and sectors New Zealand is used to relying on - like tourism - struggling.

The COVID-19 pandemic has weighed heavily on the Government's finances, with several billion-dollar packages announced to help workers as the country experiences four weeks of lockdown.

  • Wage subsidy scheme that will be worth between $8 billion and $12 billion 
  • $500 million increase to public health funding for the immediate response
  • A six-month deferred mortgage scheme for home-owners affected by the virus, part of $6.25 billion package to support businesses 
  • A doubling of the Winter Energy Payment 
  • An increase to main benefits
  • Rent freezes and a ban on terminations of tenancies/evictions other than in exceptional circumstances