Covid 19 Delta outbreak: Tax more or spend less, Treasury warns

Tax increases, trimming public spending, and boosting the productivity of the workforce will need to be part of the Government’s economic medicine as the country recovers from Covid-19, Treasury says.

The Government had to rearrange much of its economic work programme while it fought the pandemic, but in April this year, Treasury got in touch with Finance Minister Grant Robertson as the Government’s economic programme recommenced.

It said it would brief Robertson either every quarter or every six months on the state of the Government’s economic policy and where things were heading as the Government rolled out its Five-Point economic plan.

Treasury then provided Robertson with a sample briefing, detailing the state of the Government’s economic agenda.

The picture was mixed.

Treasury warned tax rises were almost inevitable in the medium term – and made more inevitable by the cost of Covid-19. Even with record-low interest rates, the rising cost of the state would eventually force a choice on the Government: increase taxes, or cut back on spending like superannuation, benefits, or other public services.

“The cost of Covid-19 compounds existing long-term challenges for the Government’s fiscal position.

“Even with lower interest rates, the fiscal position could become unsustainable in the medium term if spending pressures continue to increase at historic rates and revenue is not increased as a share of the economy,”

The paper said the “pressures are driven by an ageing population and cost increases in health and education,” and while they had existed before Covid-19, higher debt had “brought the challenges forward”.

While Treasury was hopeful “measures to enhance productivity” would help the Government out of its fiscal troubles – big changes to the state would still be necessary.

“[E]ven under optimistic scenarios, higher economic growth alone will be insufficient to achieve long-term fiscal sustainability.”

“This will require higher taxes, managing increases in spending on public service provision, reductions in transfer payments, efficiency gains or some combination of these.

“Different, more effective ways of providing services could also be considered; prioritisation and value for money are more important than ever,” the paper said.

Treasury’s concerns about the sustainability of public finances in the medium-to-long term are well known. It’s He Tirohanga Mokopuna report on the Government’s long-term fiscal position warned trade-offs between taxation and spending would be necessary.

The Government has said it would not implement tax changes not included in its 2020 manifesto, which pledged an increase to the top increase, which was passed at the end of last year.

Adopting the Government’s new wellbeing approach, Treasury noted that while New Zealanders’ social wellbeing was very high, financial and physical metrics were not so good.

“Our housing costs as a percentage of disposable household income are among the highest in the OECD, and Māori and Pacific populations experienced worse outcomes across all domains of wellbeing,” the paper said.

The report highlighted five problems: poor productivity, poor outcomes for Māori and Pacific peoples, a chronic undersupply of housing, and an environment that was “approaching its capacity to absorb some types of human activity without long-lasting or permanent negative impacts”.

It warned Robertson that key policy decisions in the coming months, like reopening the border, the immigration reset, and urban development policies, would be crucial in getting the economy back on track.

Treasury told Robertson that Covid-19 vaccinations would affect the pace of economic recovery, but cautioned that supply vaccines into the country would determine the pace of the rollout and therefore the pace of recovery.

The other key variable for the recovery was the management of Government support for the economy.

Treasury said that it would like the Government’s reform programme to focus on productivity – the amount the economy earns from the time and resources put into it.

“We suggest that productivity remains a key focus as Government considers its next phase of reforms (from 2022 or 2023, varying by portfolio),” the paper said.

“Enhancing productivity will be important for accelerating the economic rebuild, given our growth (or lack of growth) in productivity will influence the rate at which New Zealanders’ wages and incomes grow in the medium to long-term and our past productivity performance has been poor,”

Treasury said the “next phase of productivity-enhancing reforms could target areas such as the research, science, and innovation system, industry policy, urban development and migration settings”.

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