April 20, 2020

The role of government

COVID-19 and beyond

The extent, spread, and length of the COVID-19 public health crisis remains uncertain. If commentators were honest, they should acknowledge that the level of unknown uncertainty, along with the unprecedented nature of this situation, may make our conventional models redundant.

An indication of just how different this situation is illustrated in the IMF’s latest World Economic Outlook here.

 

"This crisis is like no other. First, the shock is large. The output loss associated with this health emergency and related containment measures likely dwarfs the losses that triggered the global financial crisis. Second, like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock. Third, under current circumstances there is a very different role for economic policy."

And, in words that many privately feared, but no one wished to hear:

"It is very likely that this year the global economy will experience its worst recession since the Great Depression …"

This level of uncertainty is also why the most valuable commodity required by all now is a clear head. Yes, it is difficult, but only bad decisions are made when you are overwhelmed by stress and/or not thinking clearly.

In addition to a clear head, is a clear focus on your kaupapa as noted here. Just as relevant now, as it was before the crisis, are a clear understanding of your objective(s) - What are you trying to do? Why are you in business? What is your kaupapa? That needs to remain uppermost in our minds and should guide our decisions.

Context

Across all scenarios, it is clear that government will play a much greater role in future economic activity - as argued in here and here.

Private sector businesses are likely to concentrate their efforts to maintaining cash flow. Despite such efforts, ongoing uncertainty and international upheaval is likely to limit confidence. Consequently, there will be little appetite for investment in renewal or expansion opportunities. Similarly, families, whānau, and households will face uncertain employment and income prospects. Their appetite for spending will similarly be constrained.

It will be left for government, both central and local, to underpin spending (the demand side) and also to reinforce confidence in future plans. The latter includes maintaining confidence in social and community networks as the safety net for businesses and for families (the supply side). Continued spending and levels of operations in the economic and social infrastructure of communities will be critical to enabling a return to some confidence in future opportunities.

Central government has shown a commitment to the recovery. Early signs are that government may look to loosen the restrictions on local government finances. Additionally, the Reserve Bank has announced that is now purchasing local government bonds.

Local government

Local government can ensure local demand remains strong. Increased (or, at the least, maintained) investment by local government will support the local recovery. Local government has closer levels of engagement and stronger relationships with local business.

Consequently, the role of local government is just as critical as that of central government. Front and centre for local government must remain the four wellbeings. The kaupapa remains unchanged.

It is pertinent to restate here the purpose of local government:

  • To enable democratic local decision-making and action by, and on behalf of, communities
  • To promote the social, economic, environmental, and cultural wellbeing of communities in the present and for the future. 

The role of local government is just as critical as that of central government.

As well as short term support for households and families, central government have indicated that it will make significant investment in infrastructure. The Government has tasked the Infrastructure Industry Reference Group to seek infrastructure projects that are ready to start within six months of the construction industry returning and will put forward projects to Ministers from the private and public sector.

Local government must play a significant role in promoting local projects to central government. To show that these projects are ready to proceed it will be important to have business cases to support investment. Local political support along with completion of initial design work would assist in the case to central government.

To reduce funding pressures, alternative financing options – such as special purpose vehicles or growth zones should be explored – to enable local government to bring forward projects. Government has shown a willingness to do this before COVID-19.

Government investment presents the opportunity to prepare for climate change. The importance of a strong utility network has been highlighted before and during the COVID-19 pandemic. Broadband and phone lines have been essential to ensuring that some of the economy can continue to operate in an emergency.

Accessing government funding to prepare for the future impacts of climate change could enable the region to support multigenerational wellbeing.

Longer term there are likely to be significant changes in the roles of central and local government, and potentially the funding sources. Given the level of government investment expected to support the economy through the recovery the role and activities of government will likely broaden. This may mean that local authorities are given more opportunity to access funding and financing.

It will be a world that is different, and will require different thinking, different behaviours, and different models. But local government kaupapa of inter-generational wellbeing need not change.

Rates

We are aware of pressures across councils for zero rates increases. This ‘kicking the can down the road’ will jeopardise the delivery of future services. This will act directly against the kaupapa of ensuring the wellbeing (across all four dimensions) of current and future generations.

This will act directly against the kaupapa of ensuring the wellbeing (across all four dimensions) of current and future generations.

Similar comments can be made regarding suggestions of across-the-board pay cuts, redundancies, and/or austerity type cost-cutting exercises and service delivery reductions by local government bodies. Some may wish to reduce their own remuneration as a reflection of their leadership role. Depending on the circumstances, this may be appropriate. However, imposing such actions on those with less power and in more vulnerable positions is the antithesis of leadership. Furthermore, reducing the incomes of employees acts diametrically against the objective of underpinning local demand as well as supporting confidence into the future.

We understand the need to put a long-term plan together, but the use of deferred payment schemes (rather than zero rates increases), should be explored. Similarly, the use of debt funding should be explored (as should a revision of the debt-ceiling constraint) – given the likelihood of incredibly low interest rates for the foreseeable future. Further, alternative funding mechanisms from central government should be actively pursued (together with LGNZ).

Conversely, an untowardly narrow perspective on protecting Council finances will be reflected in deficits across other wellbeing domains – as has been experienced in recent years.

Who is at the table?

In recessions of the past, the unskilled and least paid were most vulnerable to job loss and community dislocation. Further, without doubt, Māori have been disproportionately represented in such groups. Some suggest the current focus on ‘essential work’ may mitigate this impact, due to the concentration of Māori in such work.

However, given the scale of the reduction in jobs – and many in non-food manufacturing, not to mention forestry, and also retail and tourism activities – it is difficult to see how Māori would escape. Even if Māori did escape from large job losses this time around, a post-crisis scenario where Māori are stuck in the same 'essential', but low-paid jobs is likely to be unappetising to many.

Further, the impact of COVID-19 on the many Māori currently residing in Australia is unclear. There is a possibility that some (or many) may move back to New Zealand (and this could be a result of pro-active encouragement) to be closer to home, whānau, and whenua in this time of uncertainty. The situation and state of social and cultural networks, services, and infrastructure would likely be important in influencing such an outcome (as would the presence – or not – of support structures in Australia).

Should infrastructure be neglected now, the population of young Māori will bear more of the load of restoring, repairing, and overhauling infrastructure and our communities in the future.

Longer term, the impact on Māori will be acutely felt by their currently young population. The different demographic structure of Māori is important when considering the inter-generational aspect of decisions made now. In particular, decisions to defer infrastructure spending (whether on social networks, community facilities, or physical and natural capital) will impact disproportionately more on Māori. Should it be neglected now (or ‘kicked down the road’), the population of young Māori will bear more of the load of restoring, repairing, and overhauling infrastructure in the future.

In this context, the growing role of government (both local and central) will also be a factor in the impact on Māori. With Māori at the table, a longer-term horizon for decision-making may be encouraged.