Liam Dann: A lockdown is the safest economic choice right now

The strength of New Zealand’s fiscal position both highlights the economic merits of a cautious lockdown approach and reassures that we can afford it.

The Government still has more than $10 billion in firepower to support the economy through a new outbreak – if it’s needed.

That’s money that is accounted for and Finance Minister Grant Robertson effectively has up his sleeve, without the need for any new borrowing.

On top of that, the Government’s position is stronger than it expected in its half-year Budget update.

The latest Crown Accounts – for the five months to the end of November but released at the end of January – were $1.9 billion better than that forecast.

If this outbreak can be contained in three days it won’t dent the Government’s fiscal position at all.

Of course, there is a cost to lockdowns and it will be severe for the businesses at the front.

There will understandably be a great deal of frustration and disappointment within the Auckland business community.

The impact of any lockdown, however short, is significant to those businesses that cannot operate at all – like event management, hospitality and tourism.

The Government says it will put in place financial support for businesses if the level 3 lockdown goes on longer than three days.

Many will need it.

A macro-economic view smooths the impact and views it from the perspective of our collective wealth.

But the big numbers don’t look so bad.

According to estimates by the ASB economics team last August, as we went into a similar lockdown – the measures will cost the economy about $440 million per week – or 0.15 per cent of annual GDP.

The ANZ team put it another way:

“All else equal, we estimate that under Alert Level 3 the economy is able to operate at around 80 per cent capacity and around 90 per cent at Alert Level 2.

“Given Auckland accounts for 38 per cent of GDP, we estimate that with Auckland under Alert Level 3 and the rest of NZ at Alert Level 2, nationwide activity can run at around 85 per cent of pre-crisis levels.”

On that basis the current outbreak, if contained, won’t alter New Zealand’s economic outlook.

Writing this morning about the likely financial market reaction – (currency and bonds)BNZ’s Jason Wong says it will “barely cause a ripple unless the restrictions are extended”.

That’s not to say the economic merits of locking down hard and early have not been contentious.

We never have the benefit of knowing how alternative scenarios would have played out and comparisons with other countries are messy.

But the risks – especially in light of the new more transmissible virus- are clearly asymmetric.

In other words, the cost of a widespread outbreak, or of the virus taking hold, are far far greater than cost of a short lockdown.

A report by the International Monetary Fund in October compared 52 countries and concluded as much.

“More stringent lockdowns are associated with lower consumption, investment, industrial production, retail sales, purchasing managers’ indexes for the manufacturing and service sectors, and higher unemployment rates,” the IMF said.

There’s no dodging the immediate and direct fallout.

But it rejects the argument that lockdowns are a trade-off between health outcomes and economic outcomes.

“This characterisation of lives vs livelihoods neglects that effective lockdown measures taken early during an epidemic may lead to a faster economic recovery by containing the virus and reducing voluntary social distancing,” the report says.

“These medium-term gains may offset the short-term costs of lockdowns, possibly even leading to positive overall effects on the economy.”

The IMF goes on to say that more research and more data is needed.

Clearly, New Zealand’s strong economic performance since October will provide that.

It adds to the argument for “going hard and going early”.

Government spending so far:

The Government has so far signalled $62.1 billion of funding to support the
COVID-19 response and recovery.

That consists of:

– The initial $12.1 billion March 2020 Support Package

– The $50 billion in the COVID-19 Response and Recovery Fund (CRRF) allocated in Budget 2020.

– As of the Half Year Economic and Fiscal Update (HYEFU) the Government has allocated $51.8 billion.

– This leaves $10.3 billion available to allocate in the future.

The Government has signalled that the unallocated portion of the CRRF will largely be held in reserve to cope with another outbreak of the virus.

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