We are in unprecedented times, with the global pandemic of COVID-19 having a significant global health and economic impact.
To date, there have been more than 4.4 million cases and almost 300,000 deaths. New Zealand, by international standards, has fared well with less than 1,500 cases and 21 deaths due to strict border controls and lockdown measures. However, the full impact of the economic fall out is yet to be seen. We know the full brunt is coming, but we don’t yet know how bad it’s going to be.
Treasury are predicting a sharp fall in economic activity (4.6% GDP reduction to June 2021) and rise in unemployment (peaking to 9.8% in September 2020).
The Government’s response has been, again, unprecedented. The entire country has been under effective house arrest, while at the same time the Government has pumped more than $15 billion into the economy in its immediate response, largely centred around the wage subsidy.
Against this backdrop, the Government released its much anticipated Rebuilding Together Budget yesterday. The Budget signals the second stage of its response to the economic fall out of the COVID-19 pandemic. The Prime Minister has previously stated that the Government’s economic response will be delivered in three stages, the immediate response (centred mostly around the wage subsidy, financing support and tax changes), the medium term response (cushioning the blow and positioning our country for recovery) and rebuilding.
The Budget allocates a $62 billion war chest (a further $50 million announced today on top of the $12 billion already spent) to the country’s COVID-19 response. Around $20 billion of this is unallocated and the Government has indicated that its economic response will be ongoing, that its spending is not limited to budget day, so we are likely to see further announcements depending on how the situation progresses.
The Budget announcements yesterday, at a glance, are:
Finance Minister Grant Robertson was right in his statement that this is a “once in a generation budget”. This level of spending has not been seen before and reflects the Government’s approach to this crisis and its objectives of cushioning the blow and priming New Zealand for recovery. This sentiment was expressed clearly in Grant Robertson’s statement that he is “not a fan of austerity”.
The spending does however, come at a cost. It is expected that the Government’s debt to GDP will increase to around 42%. However, given New Zealand’s strong balance sheet position going into the crisis and expected low borrowing costs in the medium term the Government’s view is that the increase in debt is still within prudent debt levels. Whether this results in an increase in tax rates in the long term remains to be seen, at this point the Government is not planning any significant tax reform.
This Budget has no doubt been a fine balancing act; the current pandemic is not a situation that anyone could have foreseen and while the measures to support businesses will not please everyone, they are certainly positive. We will no doubt see further announcements in this area, depending on how the situation evolves.
Please contact us if you require any further assistance with the Budget changes announced, we are happy to assist.
May 15, 2020