Date posted: 04/08/2022 8 min read

That was then. What’s next?

Increased government spending and stimulus packages did a fine job of cushioning the COVID-19 blow to the economy. Fiscal policy had a good pandemic!

In Brief

  • Both Australia and New Zealand got shedloads of money into people’s hands, and there are many small and medium businesses alive today, and jobs saved, that would have gone under but for the support.
  • From here, the conventional wisdom is that the tooth fairy will be put back in her box, deficits will shrink, and government debt will peak and in time start falling.
  • That’s the plan, but it ain’t gonna happen. My guess is that fiscal policy is going to have to keep on doing the heavy lifting as it faces a raft of ongoing challenges (...) The good news is that Australia and New Zealand are in quite a good place to pay it.

Before COVID-19, fiscal policy had been on the outer: the thinking had been that fiscal measures were slow to deploy, and managing cyclical ups and downs might be better left to monetary policy.

In the event, fiscal policy showed its true power. Both Australia and New Zealand got shedloads of  money into people’s hands, and there are many small and medium businesses alive today, and jobs saved, that would have gone under but for the support. Both countries spent up big by developed economy standards, as the International Monetary Fund (IMF) estimates in the graph below show, and rightly so. The lockdown setbacks to economic activity consequently turned out to be a lot less than originally feared. Supportive monetary policy certainly helped too, but fiscal policy decisively set to full steam ahead proved the best tool in the box.

Additional spending and revenue forgone, % GDPGraph 1: Additional spending and revenue forgone, % GDP (click image to enlarge). Source: IMF, Database of Fiscal Policy Responses to COVID-19

More recently, both governments have used fiscal policy in this year’s Budgets to help people through another rough patch – the hit to household living standards from world price pressures. Whether that was sensible countercyclical fiscal support, or just a political sop, is debatable: savings rates had soared relative to pre-COVID levels in both Australia and New Zealand (the savings rate peaked at 23.7% in Australia and 14.5% in New Zealand, both in the June 2020 quarter), and families are still saving more than usual. They may not have needed the help, but fiscal policy now looks well embedded as the go-to option when the business cycle turns tough.

From here, the conventional wisdom is that the tooth fairy will be put back in her box, deficits will shrink, and government debt will peak and in time start falling. There may be a slight hiatus: the Reserve Banks in both countries have started tightening monetary policy (especially at the Reserve Bank of New Zealand) and monetary and fiscal policy turning tighter at the same time would risk an unpleasant cyclical crunch. Fiscal policy will likely be the one to back away. Nonetheless, the longer-term plan on both sides of the Tasman is a return to pre-COVID fiscal rectitude.

That’s the plan, but it ain’t gonna happen. My guess is that fiscal policy is going to have to keep on doing the heavy lifting as it faces a raft of ongoing challenges.

“My guess is that fiscal policy is going to have to keep on doing the heavy lifting as it faces a raft of ongoing challenges.”

There’s the demographics

The OECD, for example, reckons that an ageing population means that by 2060 public spending in both Australia and New Zealand will need to be 5% of GDP more than it is today.

There’s health spending

It’s not just older people using more services, but the rising costs of new treatments and our poor starting point where people are not getting what they need. In mental health, for example, New Zealand’s inquiry into mental health and addiction (in 2018) and the Australian Productivity Commission’s Mental Health Report (in 2020) came to exactly the same conclusion: the 3% or so of the population with the most severe mental issues are tolerably well treated, but the 20% or so with mild to moderate problems are woefully underserved.

There’s education

We’re better than the typical OECD country, but on the PISA (Program for International Student Assessment) measures, since 2000 both Australian and New Zealand kids have been recording progressively worse outcomes on standardised reading, writing and maths tests.

There’s infrastructure

We’ve made some progress. We’ve rolled out next generation fibre broadband, but we’ve lots more to do. Both governments should have been filling their boots with ultra-cheap money when the low interest rate going was good and getting the diggers and tunnellers to work, but they didn’t, and there are enormous programs of infrastructural work outstanding on both sides of the Tasman.

There’s climate change

If there’s one thing the 2022 Australian election showed us, and I suspect it’s true of New Zealand too, it’s that there is now a sizeable ‘teal’ slice of the electorate that wants to operate within a market-friendly economy, but also wants real action on climate change and the environment, and is tired of mouth music and of plans to have a plan. Investment to decarbonise can’t be ducked any more, despite the tough politics of Australian coal or New Zealand farming.

Looking back over the list, fans of Stephen Covey will spot a common theme. Covey pointed out that we can choose to allocate our time between the important and the unimportant, between the urgent and the non-urgent. Our politicians, like the rest of us, spend too much time focused on the urgencies (big and small), and neglect the important but non-urgent stuff like prevention and infrastructure. But sooner or later the neglect can’t be ignored. The overdue bill is knocking on the door now.

Net government debt, % of GPDGraph 2: Net government debt, % of GDP (click image to enlarge). Source: IMF, World Economic Outlook database

The good news is that Australia and New Zealand are in quite a good place to pay it. On whatever measure you choose – gross or net debt as a share of GDP – we both have lots of room left to incur higher debt if we have to. And we do: our accumulated issues aren’t going to go away by themselves, and they’re going to take hefty dollops of taxpayer money to fix. Politicians, Aussie and Kiwi, like to posture about who can get back to surplus fastest: a better question is who will use the fiscal purse to deliver the wellbeing outcomes we actually value.

Read more:

Happy days are here again. Mostly

It won’t all be plain sailing, but the spending data points to a couple of good years for economies on both sides of the Tasman.

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