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Westpac chief economist says new Treasury scenarios provide a strong justification for 'massively more' fiscal stimulus

Westpac chief economist says new Treasury scenarios provide a strong justification for 'massively more' fiscal stimulus

New Covid-19 economic scenarios complied by The Treasury give a strong justification for the Government to provide "massive more" fiscal stimulus than that already announced, Westpac's chief economist Dominick Stephens says.

On Tuesday the Treasury issued its Covid-19 economic forecasts. This took the form of seven alternative scenarios illustrating how the economy might fare depending on how long the lockdown lasts.

"Our impression is that this publication contained a big hint that further massive fiscal stimulus is coming," Stephens said. 

"That should be positive for markets. The Minister of Finance is due to deliver a speech tomorrow [Wednesday], which could be the time to announce the additional stimulus package."

Stephens said the final two of the seven Treasury scenarios seemed to provide a strong justification for massively more fiscal stimulus.

"In Treasury’s baseline Scenario 1 (one month at Level 4) unemployment reaches 13.5%, but Treasury says that with an extra $20bn of fiscal stimulus (on top of what has already been announced) unemployment would reach only 8.5%, and would quickly drop back to 5%. 

"In Treasury’s Scenario 2, (three months at Level 4) unemployment reaches 17.5%, but if fiscal stimulus was boosted by $40bn unemployment would reach only 9.5%. Furthermore, Treasury says that even with massive fiscal stimulus inflation would remain below 2%, meaning no inflationary counterargument against fiscal stimulus.

"This advice will furnish the Minister of Finance with a very powerful argument to boost fiscal stimulus, and hints that another big package, possibly in the order of $20bn, could be under consideration," Stephen says.

He notes that the Treasury is much more pessimistic about the impact of the shutdown on the economy that Westpac or other private sector economists are.

"For the base case of one month at Level 4 and one month at Level 3, Westpac forecast that June quarter GDP would drop 15% and unemployment would rise to 9%. Other major bank economists issued similar numbers. Treasury is much more downbeat. Even with the roughly $20bn of fiscal stimulus introduced to date, they are forecasting -25% for June quarter GDP and 13.5% for unemployment. Beyond the immediate one-quarter hit, Treasury is also forecasting a more gradual recovery path than Westpac. For example, in the base case Treasury has annual GDP growth at -2.5% for the year to June 2021, compared to Westpac’s +0.9%."

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Ah, yes. Massive, More 'stimulus'.
The best policy would be to 'Hit it once and hit it hard". If that fails, doing 'massively more' of what didn't' work the first time seems destined to fail.
Now, where have I seen that before....? But then again, that's how bankers think.
Whatever happened to "Well that didn't work. Let's try something else?"

Indeed - more issuance of this type is inevitable - taxation to service it will hit the poor hard.

bw, when will you stop writing the same posts time and time again and finally accept that the Government and RB are going to do everything they can to soften the blow in the short term?

He's right to question the approach of the authorities. That's what debate is for right?
And there's an awful lot of money at stake here.

Sure but he should then address his questioning to the authorities, why repeat the same complaints over and over again on Interest? It's just whinging, it's not going to change anything

Of course Zorro and his employer are rubbing their hands with glee at the prospect, anything that keeps his beloved housing bubble alive!!!!
Noting, I too favour a massive spend (but not for the purposes of keeping the bubble float). It would be total carnage, otherwise.

During the last crisis ,primarily in order to save our banks, the OCR was cut from 8.25 percent on 5 June to 2.5 percent on 30 April 2009. Indeed in just a short period of 12 weeks the OCR plunged 400 bps. In the decade since , our Australian banks have made out like bandits.
In all respects , the current situation appears magnitudes more troubling and uncertain ,particularly at an individual level yet the RBNZ has only lowered the OCR 75 bps some 4 weeks ago , when at the same time the kitchen sink and forks and spoons are being thrown from every other corner.
Why, the inaction ? Is the RBNZ simply more concerned about outdated banking IT systems and bank profits .

Nonetheless, the OCR was cut in half twice from 1.00% to 0.25%.

I have family in the UK and Sweden who have mortgage rates at about 1.5%. My family in Japan, about 0.3%.
Imagine how much difference those sorts of rates would make versus 3%.

In NZ? Double the house prices?
We've already seen the effects and it's not good.

Redcows , cutting the OCR in most scenarios, will also immediately weaken the currency at a time New Zealand desperately needs export income, (whatever remains). It will also lower existing business lending costs, immediately for those on variable rates. The flow thru to housing will provide a support at this time for those with mortgages, albeit most are fixed . House prices , house sales and in time the NZD will fall irrespective

Just do it in combination with a DTI measure on lending and the money will flow to productive enterprise. Property investors are not a charity, that wealth should be taken from savers and handed to them.

Exactly - somebody always ends up paying, its just whether they realise it or not! My money is heading off to the Perth mint as we speak. Can't face another decade (or four) of bailing the over indebted.

Interest cost saving from 8.25% to 2.5% is $57,500 per $million p.a. (A 70% reduction in interest rates)
From 0.75% to 0.25 it's just $5,000 ( or $7,500 if the rate is 0% p.a - a 100% reduction in interest rates).
The lower rates go, the less economic impact it has.
That's what lower and lower interest rates is telling us. It's not inflationary but deflationary. (Conversely, those that rely on interest receivable, rather than payable, end up with less to spend into the economy.)

it all depends BW. If the volume of lending increases, then the impact of less interest income by creditors is offset by a multiple. But if you have very low interest rate and no increase in your debt, then this would definitely be deflationary. However, with government being able to issue more and more debt that will never be enforceable (central bank buying government bonds), then that will surely mean decreasing the purchasing power of NZD (inflation). Maybe asset prices are not affected as much (as new lending will dry up) but the money the government spends finds its way into everyday prices. The question is this: whether the money destroyed by bad loans is greater than new debt (private and government). At this stage, NZ government is committed to increase its debt to seemingly greater extent than money being destroyed which will be inflationary.

I've just come from reading the article on MMT, and note the concerns here. But if it is the Government (or RBNZ) controlling the amount of money/credit in circulation can't all the problems be managed? This would require some form of Government imposed restraint on the private banks as to how much credit they can issue. What would be the problem with this (consider constraints on a finite system)?

This would require some form of Government imposed restraint on the private banks as to how much credit they can issue.

No. MMT doesn't require that the govt constrain private banks. Not sure why you think that is. Look at Japan. Private banks have been encouraging their customers to brrow. The customers will not.

JC I didn't suggest MMT would require it, but that the way forward to prevent the errors of the past would possibly include the RBNZ imposing those constraints.

I don't think you can compare us with Japan. we're different cultures. The banks have proven here that if money is offered cheap enough, people will take it. The bite is when it must be paid back.


Time to put the brakes on handouts guys and let the market sort itself out. Unemployment is going to go through the roof regardless of how much money you throw at it as thousands of jobs no longer exist. Future generations are not going to want to pay for this, hell they already think they are paying for the Boomers retirement. Sounds like a great way to create a revolution down the track, just keep on throwing free money about the place.

Good point Carlos67. It’s discussed in this interview with Danielle DiMartino Booth. The clip is about 6 minutes long but the full interview lasting 1.5 hrs is well worth the time too.

Throw as much money as is needed at the economy and keep it circulating to soften the blow. The Treasury can print money and loan it to the reserve bank then write off the debt once the economy comes right. I would have thought that In times of stagflation or even deflation it will not have any effect on our dollar or inflation. Its only when you enforce repayment of the said debt you will have a revolution. Take the 1930's in Germany the austerity measures imposed on Germany after WW1 saw the rise of Hitler.

The average life expectancy of a fiat currency is 27 years. I think the NZD has had a good run, but it's time to dump it into anything that remains scarce.

Buy yourself a job, you mean?
Fiat is going to come in mighty handy for all sorts of things from now on. "You have cash? Have I got a deal for you!"

Hey it worked last time. Last time the banks threw a number out there (15b), the Reserve Bank came back a few days later doubling it. Westpac are just trying to do the same.

Announcement in a few days: 40b of more stimulus! Wheee! Money and debt is free right?

Welcome to GR strip joint

The NZD is dog tucker. Shutdown the economy and print money to try and compensate, impoverish the nation.

Might seem late in the piece but NZers should back up the truck and buy offshore currencies (and Gold) to get ahead of this wealth destruction.

an extra $20B is pretty much an extra $4000 debt for every man, women and child in the country, to paid back by future taxes and the old hidden tax of inflation, lets hope it wont be hyper inflation.

Of course the government is always open to inflating away debt but when you cant afford for interest rates to inflate.......... oh dear

This spending really needs to be only for essentially holding together the economy, if we get carried away we will end up like Argentina, Venezuela, Zimbabwe and the like

I am checking my bank account daily.

The OCR needs to be cut again to negative rates.There needs to be a huge interest rate reduction and very cheap loans available for NZ businesses and households to get through what's coming economically to NZ.And it will show that Capitalism and democracy can work in these difficult times spreading the historically high amounts of the worlds capital from the wealthy to those that need It most!

LOL. And do you expect savers, and international investors, to accept it and keep money in NZ? One of the international rating agencies has already lowered the rating of all major NZ banks. The latest report on the financial stability of Australian banks has mentioned first instances of run on the banks in late March, which fortunately has abated (for now). Money to subsidize over-indebted entities does not grow on trees.
If interest rates in NZ decreased any further, many investors would simply move their money to safer countries, where there are bigger and more sold economies (like Germany) and where there is a deposit guarantee in place. And, as a result of that, interest rates would start increasing to attract the hugely reduced pool of investor's money left in NZ. Alternatively, of course you also have the Zimbabwe approach, to destruct the economy by printing money like there is no tomorrow - we all can see the results of this approach.
The existing pool of invested money should, in my opinion, be directed towards productive investments and away from parasitic house speculation: it is time that we thought about introducing some sort of further tax relief on mortgages paid by businesses, balanced by increased taxation on houses other than the genuine first home, even if this is not necessarily straightforward.

Ha ha.. even it's still at 'scenario' level, not even forecast? - the paid economist keen to light up the F.I.RE economy - yip you just spot on one of the neo-liberal actors, they played the same tune...avoid a spotlight on their past reckless lending, channeled into future en mass borrowing... socialised/minimised the future loss.