Budget's big numbers are smaller than they look
If the government really wants to save jobs, argues Simon Chapple, it will need a stronger response than this budget offers.
The Government has announced that its Budget 2020 is primarily about jobs.
The consequence of this focus, combined with the large negative economic shock delivered directly and indirectly by the Covid-19 pandemic, is the expansionary fiscal package announced by Finance Minister Grant Robertson. This package is designed to push the economy rapidly back to full employment.
There is, I believe, a strong case to be made that the Labour-led coalition’s fiscal response is at its maximum too weak and that it peters out far soon. That case can be made based solely on numbers presented by the Government’s own officials – Treasury – in its Budget 2020 Economic and Fiscal Update (BEFU).
After including the Government’s pro-jobs Budget announcements, the BEFU forecasts unemployment, which has been stalled in the past year at around 4 percent (a figure I consider unreasonably high), to double to 8.3 percent by June 2020. According to the BEFU, unemployment will peak at 9.6 percent in September 2020. It will thereafter decline to the end of the forecast period in 2024, when it will still be at 4.4 percent – nearly half a percent of economic slack above where we started.
At the same time, the BEFU believes that, even given the Government’s announced policies to support demand, total demand will be so weak in the economy that annual inflation will fall under 1 percent – that is, outside the 1 percent to 3 percent Reserve Bank target range – for nearly an entire year, September 2020 to June 2021.
So the best case BEFU scenario is unemployment well above its long-term sustainable level for the entire forecast period and inflation below the Reserve Bank’s target band for a quarter of the time and never above it.
Let’s now consider the Government’s fiscal impulse – the net injection of demand it is putting into the economy to push unemployment down. That injection is 6.6 percent of gross domestic product in 2020, falling to 1.2 percent in 2021. The injection becomes fiscal suction and goes negative, sucking demand out of the economy, to -1.2 percent in 2022, -1.9 percent in 2023 and -3.2 percent in 2024.
So the Government is not injecting enough demand to pull down unemployment rapidly in 2020 and 2021, and then planning on sucking demand out of the economy in 2022-2024, all while there is still considerable economic slack remaining.
All these BEFU numbers say the Government has not gone hard or early enough fiscally and, in addition, is planning on winding it back far too quickly.
Is that a fiscal strategy that makes sense to you if a Government is focused on jobs? Well, it certainly doesn’t to me.
If it were to err, a Government that puts jobs first should be prepared to take a few risks on the inflationary side – after all, it believes it is going under the inflation target, even following its fiscal impulse, and never over!
My second concern is around the actual BEFU numbers. As indicated above, the BEFU has unemployment at 8.3 percent in June 2020. I think there is a case to be made that our June unemployment rate may come out at 10 percent or more – perhaps around 2 percent higher than Treasury believes in the BEFU. If this concern is found to be valid when the numbers arrive from Stats NZ in the middle of the year, the size of the deflationary shock will have consequently been seriously under-estimated by officials.
What will the Government then do? If it is true that jobs are central, almost certainly an immediate upward revision in the Labour-led coalition’s fiscal injection will be necessary. I suggest it starts contingency planning for such an intervention now, so as not to be caught on the hop if – or indeed when – it happens.
Thoughts?
- This commentary first appeared on Newsroom