Will we need to borrow more to pay for this Covid-19 outbreak?

Grant Robertson confident the Government won't need to borrow more to pay for this lockdown - for now; We take a closer look at the numbers

25th Aug 21, 12:30pm by Jenée Tibshraeny

Finance Minister Grant Robertson says the Government doesn’t need to borrow more than already planned to cover the cost of the lockdown - for now.

“If the lockdown went on for a considerable length of time and we needed to borrow more to get New Zealanders through this we will, but that is not needed right now,” he told interest.co.nz.

Robertson said $4.7 billion of the $62.1 billion set aside for the Covid-19 response is available.

Furthermore, some initiatives unveiled last year haven’t ended up costing as much as expected. This means funding can be reallocated to cover costs related to the current outbreak.

Robertson didn’t detail exactly how much could be reallocated, but pointed to $1.6 billion from the Business Finance Guarantee Scheme and “previous unspent allocations for wage subsidies.”

So, there’s at least $6.3 billion effectively sitting there, ready to be used.

ANZ economist Miles Workman estimated there is an additional $10 billion in the Government’s kitty due to the tax take being higher/expenses being lower than expected.

He also pointed to the $37.6 billion sitting in the Government’s Crown Settlement Account with the Reserve Bank (RBNZ), as at July. The balance represents funds built up by the Crown that can be used to meet its spending needs. Much of the balance (we don’t know exactly how much) will have already been allocated to initiatives.

It’s very high because the Government has been borrowing at a faster rate than it has been spending.

How much is this lockdown costing so far?

As at Wednesday morning, Work and Income had paid $575.1 million in wage subsidies to businesses, further to approving 156,428 applications.

The payments are made in two-weekly lump sums.

The value of wage subsidies paid out during previous lockdowns was $14 billion. This was by far the largest expense of the Covid-19 response.

As at Wednesday, Inland Revenue had paid businesses $123 million in Covid-19 Resurgence Support Payments further to approving 40,165 applications.

The Short-Term Absence Payment and Leave Support Scheme are less costly.

See this story for more on these payments.

While it’s good to know these costs, it’s important to realise there are also costs associated with the Government not helping people remain employed, or take time off work for health reasons.

Where is the money coming from?

The RBNZ has bought most of the debt (via the secondary market) issued by Treasury to pay for the Covid-19 recovery to date, via its Large-Scale Asset Purchase (LSAP) programme.

The RBNZ currently owns $54 billion of New Zealand Government Bonds.

However, the RBNZ, as at July, stopped actively trying to increase the size of its bond holdings, because it no longer wants to keep trying to put downward pressure on interest rates.

So, the bulk of bonds being issued now won’t ultimately end up being owned by the RBNZ. Rather they’ll be owned banks, pension funds and other investors in New Zealand and abroad.

Treasury at the May Budget forecast it would issue $30 billion of debt in the year to June 2022.

Analysts at the time expected this forecast to be lowered, because the economy was performing better than expected and the Government’s tax revenue was higher than expected. But Treasury stuck to this relatively large sum.

It then planned to cut back issuance in the following years.

To put this $30 billion in context, Treasury in 2019 forecast issuing only $8 billion of debt in 2021/22.

Coming back to ANZ’s Workman, he said, “Yes, there is a point where the Government’s ability to borrow will be curtailed by its projected ability to pay that money back.

“But with core Crown net debt projected to peak below 50% of GDP (based on the Treasury’s now too-pessimistic Budget forecasts) we’re not even close to that scenario. The Government is well placed to respond to this.”

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49 Comments

by Foxglove. | 25th Aug 21, 12:45pm 1629852349

Tell us something we didn’t know Grant. Point is you can’t tell most of them that have to pay it back can you. They haven’t been born yet. The border shouldn’t have been opened until vaccination had progressed to a percentage that offered sufficient protection. Then this lock down would likely not have been necessary. Vaccination would have reached that level then if a short sighted and unnecessary decision to limit to only one vaccine had not been made by who exactly? That’s a couple of please explains in itself.

by Gareth Vaughan | 25th Aug 21, 12:48pm 1629852511

NZ government debt these days is NZ-dollar denominated government bonds. If you have KiwiSaver you probably hold some. When the bonds mature they are typically rolled over to the same or new investors. Currently the biggest holder by far is the RBNZ. IE one arm of government holding bonds issued by another, being Treasury. On the supposed open border, remember this Covid outbreak appears to stem from someone who was in quarantine.

by Foxglove. | 25th Aug 21, 1:34pm 1629855279

Then the security of quarantine must have been defective. Where have we heard that before. The government’s isolation policy was dependent on that security not being breached otherwise they would have seen that it was imperative that NZrs had the opportunity of vaccination as soon as possible. But they didn’t, or didn’t want to, see that did they because while that parlous state lasted, there was no virus in NZ and no need to even order vaccines let alone administer them. The isolation policy was highly flawed, lasted only by luck and failed as was inevitable and here we are with covid in and out and about an we are all locked in our homes as a result. Let us though all hope that this lockdown works , because the numbers vaccinated is still way too low and even though this rate is lifting it should not be overlooked that the vaccine still takes time to become effective.

by HouseMouse | 25th Aug 21, 1:42pm 1629855725

Totally agree.

by Gareth Vaughan | 25th Aug 21, 1:48pm 1629856093

A 100% guarantee of no quarantine failures would require no flights, ships or boats coming into NZ at all. That means no trade with the rest of the world.

by Foxglove. | 25th Aug 21, 2:34pm 1629858848

Exactly. Given that requirement that simply confirms the reliance on the border and isolation was ill judged. I mean you are simply saying it was always likely to be breached by the interaction of such necessities. Why then did the government insist that vaccination was not necessary because there was no covid but knowing full well that it might enter at any time meaning there would then no longer be no covid?

by Gareth Vaughan | 25th Aug 21, 5:18pm 1629868730

I don't recall anyone, other than anti-vaxxers, saying vaccines weren't necessary...

by Foxglove. | 25th Aug 21, 5:59pm 1629871179

Well apologies , let me correct my obviously very poor syntax, by way of expansion, and spell it out. The government repeatedly said there was no rush, not even reason to bring vaccines in, ie import them, because NZ did not have any cases in the community at least, you know that word “zero” that was popular at the time. Good heavens , that has been too the catch cry of many posts regularly on this site eg Mr Lathanthide.

by AKLCrusader | 26th Aug 21, 8:49am 1629924549

Jacinda Ardern January 28, 2021: "It is only right that those countries that are seeing devastating rates of death are receiving those vaccines and have given emergency approval for them to be distributed. New Zealand's in a very different position and I think everyone in New Zealand understands that."
https://www.stuff.co.nz/national/health/coronavirus/300216022/covid19-a…

Deprioritising vaccine supply is as good as saying we don't need it now. The fact that we didn't order early enough, then accepted delays in delivery is an indictment on this government and their planning.

by AndrewRiddell5886 | 26th Aug 21, 9:13am 1629926027

Jacinda Ardern is right - there are others who need the vaccine ahead of New Zealand. This is a global pandemic and we need to be looking at needs across the globe, not this myopic selfish approach advocated by some.

So we get vaccinated but large parts of the world don't get vaccines or suffer otherwise unnecessarily high death and long covid rates -- all that happens is that the novel corona virus has a larger petrie dish in which to continue to evolve into meaner forms.

by powerdownkiwi | 25th Aug 21, 12:49pm 1629852598

"They haven't been born yet"

Which means it isn't borrowing. That's done by agreement. So it's theft. And theft without agreement is?

This is an increase in inter-generational colonialism; more and more we aren't paying our own way. To paraphrase Kipling: How long? How long?

by youngdumbandbroke | 25th Aug 21, 1:02pm 1629853350

It's the trickle down effect PDK. The debt trickles down onto coming generations in exchange for poorer quality of life.

by Foxglove. | 25th Aug 21, 1:11pm 1629853906

good semantics pdk!

by Jonny.Foe | 25th Aug 21, 1:50pm 1629856229

As you often tell us, the money is irrelevant in comparison to the real resources. The question is: will the next generation have the resources they need to live well? Govt 'debt' is *not* a liability on future generations.

by youngdumbandbroke | 25th Aug 21, 2:42pm 1629859337

Could you explain to me in layman terms why is govt debt not a liability on the future generations?

by Jonny.Foe | 26th Aug 21, 9:48am 1629928117

Govt 'debt' is made up of $8bn in hard currency (the notes and coins in our pockets), $30bn in commercial bank settlement deposit accounts, $70bn in Govt bonds, $7.5bn in Treasury Bills etc. Govt can choose to restructure this debt at any time - as it has done over the last year when it moved $58bn of debt from 3% payable bonds to 0.25% (OCR) payable bank settlement accounts (LSAP / QE).

Govt effectively has an unlimited interest-free overdraft - who cares whether it is $100bn or $150bn if the debt servicing costs are zero (or negative when the OCR is lower than inflation)? What does matter for future generations is what Govt spend money on, but that's another story.

by Noncents | 25th Aug 21, 1:51pm 1629856297

"Then this lock down would likely not have been necessary."

Based on what the PM has said, we are likely to continue having lockdowns regardless of vaccination numbers.

From what I can ascertain, any widespread breakout would still likely overwhelm our poorly maintained hospital system due to the vaccine not stopping Covid, rather minimising it.

by Foxglove. | 25th Aug 21, 3:03pm 1629860591

And to add to that how much thought has been given to the possibility that the numbers of those that cannot or will not be vaccinated might still be sufficient to overload those already creaking facilities? In other words if we are locked down now as a priority, to try and prevent such overload, then NZ is going to have to be locked down whenever that prospect is in play. Based on today’s priorities ,therefore it stands to reason, if that situation occurs NZ will be locked down forever.

by Audaxes | 25th Aug 21, 1:14pm 1629854078

Where is the money coming from?
The Reserve Bank (RBNZ) has bought most of the debt (via the secondary market) issued by Treasury to pay for the Covid-19 recovery to date, via its Large-Scale Asset Purchase (LSAP) programme.
The RBNZ currently owns $54 billion of New Zealand Government Bonds.

The Government liability that banks monetised (Crown Settlement Account) when buying new government debt issuance remains in a floating rate format:

A comment from Michael Reddell - ex RBNZ economist.
One of the incidential curiosities of the bond purchase programme is that at times like this you hear a great deal of talk about how it is a wonderful time to borrow and the government can lock in very cheap long-term funding. And yet what do really large scale central bank bond purchase programmes do? They transform the liabilities of the Crown from quite long-dated to increasingly quite short-dated, exposing the Crown (us as taxpayers) to really substantial interest rate risk. Perhaps at the end of all this the Reserve Bank will have $50 billion of government bonds, with a representative range of maturities. On the other side of its balance sheet, it will have a lot of very short-dated (repricing) liabilities – all that settlement cash (see above). Whether the Bank eventually sells the bonds back into the market – which hasn’t happened a lot in other countries – or holds them to maturity, the interest rate risk doesn’t go away. It isn’t obvious what public interest is being served by skewing the Crown’s (net) debt so short term. Perhaps interest rates will never rise again……but that won’t be the view many people will be taking. Link

by Jonny.Foe | 25th Aug 21, 1:29pm 1629854962

The settlement cash that Michael is referring to is sat in the reserve accounts that commercial banks have with the RBNZ - nothing to do with the Crown Settlement Account, which is inflated due to higher than expected revenue, lower than expected spending, and bonds sales that didn't slow down enough.

by Audaxes | 25th Aug 21, 6:59pm 1629874778

Every $dollar dispensed to a qualifying beneficiary bank account from the Crown Settlement Account will be added back to Bank Settlement Accounts. The latter were debited when the record of what banks owe the government ("deposits") after purchasing NZ government bonds at tenders and syndicates were transferred in the first instance to the former.

by Jonny.Foe | 25th Aug 21, 2:55pm 1629860110

Yes, that's my understanding.

by xingmowang | 25th Aug 21, 1:06pm 1629853592

I thought that Boomers will be taxed on their excessive profits from selling their properties to pay for this and any coming lockdowns.

by FCM | 25th Aug 21, 1:11pm 1629853891

I was thinking about this, maybe they should decrease the superannuation payments by 20% this way everyone is contributing to the repayment not just our youngest. Seems fair that it's this demographic that is most vulnerable to the virus and I don't see them having an issue in contributing?

by powerdownkiwi | 25th Aug 21, 2:02pm 1629856933

Not often we agree, but we do there.....

by CWBW | 25th Aug 21, 1:19pm 1629854379

The musical chair only works if the currency is in demand backed by strong exports.

by Foxglove. | 25th Aug 21, 1:26pm 1629854786

Not inaccurate. traditionally NZ has relied heavily for such backing from the export of primary production. but this government, prodded and egged on by the Greens is hell bent on limiting the role and activities of our farmers in general. that then does not bode well for backing from this quarter anymore.

by powerdownkiwi | 25th Aug 21, 2:03pm 1629857007

It was still based on extraction, so was unsustainable. See the Barber thread.

by Big Jim | 25th Aug 21, 1:34pm 1629855240

Yip
probably to pay for the legal fees coming ...

https://www.medsafe.govt.nz/COVID-19/safety-report-22.asp

"Up to and including 31 July 2021, a total of 22 deaths were reported to CARM after the administration of the Comirnaty vaccine. Following medical assessments by CARM and Medsafe it has been determined that:

15 of these deaths are unlikely related to the COVID-19 vaccine
2 deaths could not be assessed due to insufficient information
5 cases are still under investigation."

To end this bulletin on a brighter note

"To date, the observed number of deaths reported after vaccination is actually less than the expected number of deaths"

by HouseMouse | 25th Aug 21, 1:40pm 1629855644

How about local government Jenee, a very important part of our lives.
The debt of councils is maxed out, and they don't get the wage subsidy. This government seems to detest local government.
So what will a long lockdown mean for local government finances and therefore community services, infrastructure development and maintenance etc????

by FCM | 25th Aug 21, 1:59pm 1629856762

means our rates will outstrip mortgage repayments soon.

by HouseMouse | 25th Aug 21, 2:34pm 1629858846

Rates will keep rising and / or important infrastructure will be deferred / cancelled.
But as I say, central government seems to care little for this, but is happy to throw daggers at local government for not keeping up with infrastructure and planning for housing etc.
It would be great if the Interest team could look into this. Auckland council's revenue will be getting hammered again.
This is the elephant in the room.

by Foxglove. | 25th Aug 21, 2:45pm 1629859518

The GST collected on rates should be dedicated and returned to local body works. It is after all ratepayers money in the first place.

by HouseMouse | 25th Aug 21, 2:46pm 1629859579

Agree

by AndrewRiddell5886 | 26th Aug 21, 9:19am 1629926361

Ratepayers' money is the money left over AFTER paying rates.

by treadlightly | 25th Aug 21, 2:56pm 1629860189

Economist Prof Bill Mitchell has this to say,
There is no need to issue public debt.
" the central bank can maintain any interest rate policy target it desires through the use of a support rate on excess reserves.It requires no public debt in this regard.
There are many other arguments that are put forward to justify the ongoing issuance of public debt. All of them can be reduced to special pleading by speculators for risk free assets"
http://bilbo.economicoutlook.net/blog/?p=31715.

by Carlos67 | 25th Aug 21, 2:55pm 1629860152

Bloomfield said while the number of cases was growing (up from 41 on Tuesday) "it is not exponential" due to the level 4 lockdown and he believed we would see the case numbers slowing.

Well its not exactly linear either. Looks like it really took off before we even got into lockdown. It looks 10 times more contagious than the earlier version in an enclosed space with close contact. Predictions suddenly a 1000 cases before we get a handle on it. This needs to level off fast now and go into decline rapidly. I recon we have about another month before we can make the final call.

by HouseMouse | 25th Aug 21, 3:04pm 1629860654

Yep, long lockdown on it's way.

by Rosenstein | 25th Aug 21, 3:00pm 1629860411

I was just perusing the Iceland stats. They really ramped up their vaccinations in around Feb/March. At the time they were getting about 1 case a day. Now they are at 70+ percent and getting around 100 cases a day. A six month lag between mass vax rollout and big spike in cases. Same as in Israel. So if ADE is a thing, which it is in mRNA vaccines, I'm going to go for a prediction that as immunity wanes in NZ around January/February en masse, we're going to get a nice fat spike of severe cases. And house prices up another 10%.

by Fairlyfrank | 25th Aug 21, 3:16pm 1629861414

I see the Israeli's are getting 7500 cases per day and up to 150 deaths per day this is in a largely vaccinated population if this is the outcome after vaccination then we are in for a world of hurt . In this scenario I don't see people living anything like the life we have taken as normal returning until a cure is found restaurant and pubs are going to do it tough if everytime you go out you are taking the risk of covid and maybe death especially when our health system will be overwhelmed in no time .

by fat pat | 25th Aug 21, 7:04pm 1629875060

If only we hadn’t closed the border over a year ago. We’d have taken a hit, but would have widespread natural immunity to the more manageable alpha strain. As we know natural immunity produces long lasting “ultrapotent antibodies” superior to vaccinated immunity. https://science.sciencemag.org/content/373/6556/eabh1766.full

by AndrewRiddell5886 | 26th Aug 21, 9:21am 1629926507

Stop spreading misinformation.

by fat pat | 26th Aug 21, 11:00am 1629932423

Is it misinformation to quote findings from journal articles? science journal noless.

by AndrewRiddell5886 | 26th Aug 21, 9:15am 1629926125

Debt? public debt when we area sovereign currency issuing nation. Financially there is no problem. Hang wringing over public debt and who has to pay it back is just deluded ranting.

by Bluekiwi Prope… | 26th Aug 21, 12:39pm 1629938367

Dont panic people, I am sure the Socialist Communist party of NZ will find the funds from somewhere.
Darth Jacinda apprentice to Sith Lord Clarke and Shade Cullen, with her death star commander Robortson and leg spreader Hipkins, will simply borrow from oversease or steal from any hard working asset holders still left in NZ who havent activated their escape shuttles yet.

by treadlightly | 26th Aug 21, 3:34pm 1629948844

Monetary sovereignty is the power of the state to exercise exclusive legal control over its currency, broadly defined, by exercise of the following powers:
Legal tender – the exclusive authority to designate the legal tender forms of payment.
Issuance and retirement – the exclusive authority to control the issuance and retirement of the legal tender.
https://en.wikipedia.org/wiki/Monetary_sovereignty

by DaveRennie | 26th Aug 21, 1:42pm 1629942147

How in hell can you get away with misappropriating $20 billion dollars and not be accountable.
We are being absolutely fleeced by this government. Time for a change.

by TonyBarnett | 26th Aug 21, 11:08pm 1629976107

“Grant Robertson confident the Government won't need to borrow more to pay for this lockdown”

This is typical PR spin from Grant Robertson. He stated that a Level 4 lockdown cost $1.5 billion a week. The budget forecasts show a deteriorating position for a few years before debt starts being paid back.

Clearly the small amount remaining in the budget for Covid-19 outbreaks will not be sufficient to pay for the lockdowns NZ will have to endure until NZ has high vaccination rates. It is unlikely that the rate that the Prime Minister requires (probably 90%+) is not achievable because young children & anti vaxers will not get vaccinated.

The chances of Auckland having zero cases for a week or two & getting out of Level 4 is highly uncertain & unlikely to be achieved in the next couple of months. Even if zero cases can be achieved it will be very difficult to keep Delta out because MIQ will run out of space like we have started to see this week. People catching Covid-19 in the community will be delayed as they wait for a space in MIQ. Not great when we are trying to get cases back to zero. The tail is likely to be very long indeed.

What is the maximum debt as a % of GDP is Grant Robertson is prepared to go to? He won’t set a limit because he is fiscally irresponsible.

It is easy to pretend you are doing well when you live on borrowed money. Asset values just keep going up when you keep interest rates artificially low. That is exactly the message Grant Robertson is signalling. It’s going to be a total disaster for renters as rents go up to artificially high rates. Good luck on finding emergency accommodation at less that $1200 a week. Great to see the government solving the problem efficiently.

by AndrewRiddell5886 | 27th Aug 21, 7:32am 1630006344

New Zealand is a sovereign currency issuing nation so does not need to borrow - rather borrowing is a choice.