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Abstract
The Covid-19 pandemic risks causing a major collapse in ‘economic confidence’ – i.e. the beliefs of firms and households that all other firms and households will maintain their economic activity – and hence in aggregate demand. Economic responses like wage subsidies may prove inadequate for sustaining confidence due to their limited scope, and because their high cost makes them unsustainable. An alternative is ex post revenue insurance, enabling firms and households to borrow against their own future incomes to top up current pandemic-related income shortfalls. Making such loans repayable through future tax surcharges (along the lines of existing student loans schemes) is administratively feasible, and likely to be both more effective and affordable – and inter-generationally equitable – than existing support measures. Government pre-committing to making such loans available for as long as they are necessary should maintain economic confidence and aggregate demand, minimising the pandemic's economic harms.
Acknowledgments
The author gratefully acknowledges helpful comments and discussions on various iterations of the economic response proposal set out in this paper from/with: the New Zealand Treasury, Reserve Bank of New Zealand, Grattan Institute, Eric Crampton, Arthur Grimes, Michael Reddell, Kathryn Ryan on RNZ National, participants on webinars organised by the Law & Economics Association of New Zealand and Auckland Rotary, and various industry bodies. Helpful suggestions from an anonymous referee have also greatly improved the paper, for which the author is also very grateful. The views expressed in this paper are those of the author and not of any organisations with which he is affiliated. Any errors or omissions in this paper are his own.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 This highlights possibly subtle, but nonetheless significant, inter-temporal trade-offs in excess mortality – i.e. saving lives now by controlling spread of the virus, but possibly losing lives later through compromising the economy (e.g. reducing resources available to future health systems), when short and sharp elimination strategies are unsuccessful or infeasible.
2 For example, due to physical distancing of workers, or increased home-working.
3 For example, due to needing to use personal protective equipment (PPE).
4 Independently of Meade (Citation2020), Milne (Citation2020) argues likewise – thanks to Arthur Grimes for alerting the author to Milne's work. Milne also distinguishes the current crisis from the Global Financial Crisis (GFC), which presented the risk of financial sector crisis being transmitted to the real economy. Here the likely transmission path is in the opposite direction.
5 To these might be added the impact on firms' demand for the outputs of other firms. Ultimately, however, all firms' demand hinges on there being demand from some ‘final consumer’, which significantly includes households.
6 For policy purposes, it is also relevant that the pandemic is not of firms' and households' making and has potentially been exacerbated by public health responses (however necessary). This reduces concerns about culpability, which can shape how policy responses are targeted.
7 In many ways, this creates uncertainties akin to those of world war.
8 Larger enterprises can be better-placed than SMEs to access capital markets for necessary financial buffers or to negotiate bespoke support measures with government (e.g. national airlines).
9 Details of New Zealand's initial wage subsidy can be found at: https://www.workandincome.govt.nz/covid-19/wage-subsidy/index.html.
10 For details of New Zealand's wage subsidy extension, see: https://www.workandincome.govt.nz/covid-19/wage-subsidy-extension/index.html.
11 The New Zealand prime minister was publicly reported as having ruled out wage subsidy extensions prior to this renewed outbreak (Stuff, Citation2020).
12 Likewise, there has been a presumption that landlords should at least partially insure tenants against lost revenues by agreeing to rent holidays or reductions.
13 This is not least because their own viability hinges on how the rest of the economy – indeed, the world economy – will also fare.
14 Supported by regulatory accommodation by New Zealand's central bank, the Reserve Bank of New Zealand. Details of New Zealand's initial mortgage holiday scheme can be found at: https://www.beehive.govt.nz/release/mortgage-holiday-and-business-finance-support-schemes-cushion-covid-impacts.
15 Details of New Zealand's Business Finance Guarantee Scheme (BFGS) can be found at: https://www.treasury.govt.nz/information-and-services/new-zealand-economy/covid-19-economic-response/measures/bfg.
16 Details of New Zealand's Small Business Cashflow Loan Scheme (SBCS) can be found at: https://www.ird.govt.nz/covid-19/business-and-organisations/small-business-cash-flow-loan.
17 Akin to the famous ‘whatever it takes …’ speech given in 2015 by the former European Central Bank chief, Mario Draghi, credited with helping to turn the tide on the financial crisis engulfing the Eurozone following the GFC and Greek financial crisis. See Bloomberg (Citation2018).
18 For example, welfare beneficiaries and superannuitants, and state employees. As above, larger firms should also be excluded, unless they can demonstrate obstacles to securing their own solutions.
19 Scheme duration could be tied to the ongoing use of pandemic alert levels above a certain threshold.
20 Contrast this with a ‘wait and see’ or ‘ambulance at the bottom of the cliff’ approach, which could be more costly because it tries to ameliorate, rather than avoid, a fall in confidence.
21 For example, being repayable from their estate if they die with a balance outstanding. This differs from New Zealand's existing student loans scheme, which forgives loans upon death. Making pandemic-related household loans repayable out of estates is likely to be more appropriate due to pandemic-related mortality risk, and more pervasive moral hazards if all households can access such loans but avoid them upon death.
22 For example, by deeming business loans to be unpaid shares, not subject to limited liability.
23 Due to prohibitions on slavery, making it difficult for lenders to secure loans against future income.
24 This makes the scheme more affordable to government and thus sustainable for longer.
25 Incentive compatibility is enhanced because any borrower is making a choice to personally pay higher taxes if they make use of the loans.
26 When introduced, the SBCS provided small, five-year loans to SMEs, with interest payments suspended for the first year, and waived if the loans were repaid within a year. The New Zealand Business Finance Guarantee Scheme (BFGS) is excluded from this analysis on de minimis grounds, due to its limited uptake (Treasury, Citation2020b, note 3).
27 See Figure 2.6 of Reserve Bank of New Zealand (Citation2020).
28 This figure is almost the same as the difference between forecast and actual company tax revenues using (Treasury, Citation2019) and (Treasury, Citation2020b, note 4), scaled up by dividing by the 28% New Zealand company tax rate to estimate assessable profits, and adding the aggregate wage subsidy (the receipt of which would have served to inflate actual company profits and taxes thereon, masking the pandemic's profit impact). These calculations produce a figure of NZ$20.3 billion.
29 Conversely, wage subsidies and loans to indemnify revenue shortfalls are not treated as assets of their recipients, since they are intended to make up for those shortfalls.
30 This compares with a figure of 34% based on initial SBCS estimates of nominal and fair values in Treasury (Citation2020a).
31 These figures represent additional nominal government debt, assuming support is debt financed, and compare with outstanding nominal student loans of NZ$16.034 billion as at 30 June 2019 (Ministry of Education, Citation2019).
32 For a summary of the German scheme, see IMF (Citation2020) or Law (Citation2020).
33 Based on data from NZ.Stat (http://nzdotstat.stats.govt.nz/wbos), average (median) weekly wages and salaries in 2020 were NZ$1,209 (NZ$1,062), implying average (median) annual wages and salaries of NZ$62,868 (NZ$55,224). NZ$12,000 represents c. 20% of those annual figures.