By Gareth Vaughan
In the midst of Auckland's recent COVID-19 level 3 lockdown, a strange thing happened. The National Party and one of the country's biggest trade unions found themselves in agreement. Topping it off they were on the same side against traditional union ally the Labour Party.
This unusual event occurred when National called on the Government to cover 100% of a worker's wages or salary when they're forced to self-isolate.
“The ‘stay home, save lives’ mantra sounds simple enough, but it’s not always that easy for people who can’t afford to not be working," National leader Judith Collins said.
"The current Leave Support Scheme pays full-time workers $1176.60 and part-time workers $700 as a lump sum for a two-week period, with the money going to their employers. This is well below the minimum wage and below what a full-time worker would earn from sick leave,” added Collins. “We must make it easier for people to stay home when required."
The E tū union, formed in 2015 through the merger of the Engineering, Printing and Manufacturing Union, the Service and Food Workers Union and the Flight Attendants and Related Services Union, agreed.
"E tū assistant national secretary Annie Newman says workers need to feel confident that they will not be penalised financially should they need to stay home to keep themselves and others safe from the virus," E tū said in a statement.
"Other organisations are joining the call for 100%, even including the National Party, who are now calling for the Government to directly pay workers 100% of their wages when they have to self-isolate," the union added.
In the midst of a global pandemic and with normal enemies National and a trade union agreeing, you could certainly argue they had a reasonable point.
But COVID-19 Response Minister Chris Hipkins was having none of it.
"We've got quite a range of support out there available at the moment. I do note that the National Party haven't indicated how they would pay for these additional things that they're proposing. We're not proposing to make any further changes," Hipkins said at one of the Government's regular daily COVID-19 press conferences.
This story was covered by TVNZ on the day. (See video below).
The Crown Settlement Account
Watching the TVNZ report at home during the lockdown I was left wondering to what extent Hipkins understands government finances.
The Government has a Crown Settlement Account (CSA) with the Reserve Bank, you know that government owned entity that, among other things, issues the New Zealand dollar. The CSA is an account provided by the Reserve Bank for the Government, via Treasury, to use to deposit surplus funds into. Funds held in the CSA earn overnight interest from the Reserve Bank at the Official Cash Rate (OCR), currently 0.25%.
The most recently available Reserve Bank data shows the CSA's balance, at the end of February, stood at $38.445 billion. A Reserve Bank data series dating back to December 2001 shows the current CSA balance is the highest it has ever been.
It also means the Government has more than $38 billion available. Although payments such as welfare benefits and interest and principal payments on government bonds create outflows from the CSA, this $38 billion is money the Government already has.
I'm not sure what, if any, source National had in mind for the money to pay 100% of self-isolating workers' wages. But the point is the Government could do so.
Thus this discussion really needs reframing. The reality is the Government could find the money to cover 100% of self-isolating workers' pay but is choosing not to. Why is that? We'll come back to this question soon.
What would you do with a slice of the $38 billion?
Now, I'm not suggesting all of the $38 billion is available for spending or should be spent. But the Government could certainly cover a lot more than merely self-isolating workers' pay.
RNZ reported on Wednesday that the NZ Nurses Organisation isn't ruling out striking during the COVID-19 vaccine roll-out if it can't reach an agreement on satisfactory pay agreements, with contract negotiations or work on collective agreements going on across the health sector. Few would begrudge the Government dipping into that $38 billion to give our hard working nurses a reasonable pay rise.
Then there's the whole range of other issues NZ faces. Anyone seen all those ageing water pipes bursting in Wellington this summer? And what about the ongoing calls for another harbour crossing in Auckland?
Heck, if it was available a slice of the $38 billion could help tackle the big kahuna that is our housing affordability crisis. And then there's the push to wean the agriculture and transport sectors off carbon emissions.
Of course, none of this could be done overnight. But there are plenty of needy projects around the country that could use funding. So what about some good old fashioned long-term planning?
Remember this is a Government that's basking in a sovereign credit rating upgrade. That's because S&P Global Ratings recently upgraded NZ’s foreign currency credit rating to AA+ from AA, and its local currency rating to AAA from AA+, making NZ the first developed country with investment-grade debt to receive a sovereign credit rating upgrade since COVID-19 hit.
The key benefit of a higher credit rating is it supposedly lowers your borrowing costs. See credit ratings explained here, and there's a wide ranging explanation of what government debt is and what it means here.
Once again, let's reframe this conversation. Why is the Government so reticent to spend surplus money? Are they worried there may be a really nasty sting in the tail of the COVID-19 pandemic? Are they worried about unleashing rampant inflation? Is their key priority looking fiscally conservative and prudent against inevitable claims from the opposition that Labour's the tax and spend party? Are they austerians, who like Disney's Scrooge McDuck would rather swim in money than spend any on anyone else? Or do they not realise there's money available?
The Reserve Bank primes the pump for the banks
With monetary policy and financial stability outsourced to the Reserve Bank, it's interesting to look at what it's doing in response to COVID-19. Obviously it cut the OCR to that record low of 0.25%. But there's much more going on.
The pandemic has seen the Reserve Bank join many other central banks and embark on quantitative easing, or QE. Through this large scale asset purchase programme valued at up to $100 billion, the Reserve Bank is buying government bonds and local government bonds in an attempt to keep borrowing costs to households and businesses low. It's buying these bonds in the secondary market from a range of banks.
"When we buy assets, this increases their price and so reduces their yield. That means the interest rate, in this case on government bonds, fall. This has the effect of ‘lowering the tide’ on other interest rates in the economy, particularly longer-term interest rates of two years or more. It also reduces the cost of borrowing for households and businesses," the Reserve Bank says.
"Secondly, when we buy these government bonds, it encourages the sellers of assets to use the money they receive from us to switch into other financial assets like company shares, bonds, or new lending – helping to inject money into the economy."
This explanation makes QE sound like a version of trickle-down economics, through which tax breaks and benefits for big corporates and the wealthy are expected to trickle down to everyone else. And as with the trickle-down economics theory, after more than a decade of experience with QE in the likes of the US and UK, there are plenty of questions over whether it's helping widen wealth and income inequality between asset owners and non-asset owners.
Additionally the Reserve Bank is offering banks up to $28 billion of three-year funding priced at the 0.25% OCR through a funding for lending programme (FLP). Banks can borrow the equivalent of up to 6% of their total outstanding loans, meaning big banks such as ANZ, ASB, BNZ and Westpac can potentially borrow billions through the FLP at 0.25%.
The FLP is designed to provide additional stimulus in response to the COVID-19 pandemic, with the aim of reducing banks’ funding costs - including the deposit rates they pay savers - and lowering the interest rates banks charge their borrowing customers. This, the argument goes, will encourage banks to continue creating credit by lending in an uncertain world and stimulating economic activity.
Thus the banks are offered more largesse that's supposed to trickle-down through them as intermediaries to borrowers, but not savers.
So far just three banks have accessed the FLP, for a combined total of $1.14 billion. And while carded, or advertised, fixed-term mortgage interest rates may currently be as low as 1.99%, most floating mortgage rates and some credit card rates remain outrageously high in such a low interest rate world. The big four banks' floating mortgage rates range from 4.44% to 4.59%. And Reserve Bank statistics show the weighted average interest rate on personal interest bearing credit card advances was 18.1% as of October last year, the last time the statistics were updated.
Thatcher was wrong
In a 1983 speech to the Conservative Party Conference, British Prime Minister Margaret Thatcher said it was a "fundamental truth" that "The State has no source of money other than money which people earn themselves."
"If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay - that 'someone else' is you. There is no such thing as public money; there is only taxpayers' money," Thatcher said.
Thatcher's stance remains the prevailing viewpoint in NZ. But it's not true. No government borrowing or tax take is required to fund quantitative easing or a funding for lending programme.
Both QE and the FLP involve new money from the government owned currency issuer. If money can be created to ensure banking system stability, could it not also be created for other purposes? And would it be desirable to do so? These are issues we should be discussing.
Last June strategy and risk consultant and ex-Christchurch City Councillor Raf Manji argued, in an interest.co.nz article, that New Zealanders need to talk more about how our money system works. This Manji said, is because the outcomes of the decisions on money production, distribution, exchange and ownership are matters of interest to all of us.
Manji was, and remains, right. Perhaps we could start by educating our politicians.
*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.