Question

Write the Policy Responses in New Zealand (~600 words)

Outline the key fiscal and monetary policy actions, respectively, of New Zealand against the COVID-19 shocks, and use appropriate macroeconomic models and theories covered in this course to explain their expected impacts. Discuss any limitations of these policy actions.

TIPS: ⮚ The IMF Policy Tracker records the policy responses to COVID-19 by country.

⮚ If there are many policy actions, you could list all of them but focus on the key ones for discussion.

⮚ The government may take multiple actions (e.g. subsidising firms; providing cash handouts to households) and each action may have different impacts and effectiveness. ⮚ Fiscal and monetary policy actions have different limitations (e.g. effect lags; ability to target specific sectors). You should discuss their relative effectiveness in dealing with the pandemic shocks.

⮚ You could discuss how the behaviours of households and businesses, and the prepandemic macroeconomic conditions (e.g. very low interest rates) may affect the effectiveness of the policy actions.

⮚ You could discuss the potential drawbacks of the policy actions (e.g. building up of debts; inflating asset bubbles).

⮚ You could contrast the policy actions of your countries with some other countries if that helps to explain the pros and cons of the policy actions of New Zealand

Answer 1

The first confirmed COVID-19 case in New Zealand was reported on February 28, 2020. On March 25, 2020, New Zealand moved to Alert Level 4 restrictions after domestic transmission of the virus was found. The authorities declared a state of emergency and implemented strong containment measures, including the closure of all non-essential businesses, cancellation of all events and gatherings, and closure of schools. This followed the closure of all borders to non-residents on March 19, with returning residents required to enter into two weeks of supervised quarantine since April 10. After a gradual reopening through Alert Levels 3 (April 28) and 2 (May 13), New Zealand moved to Alert Level 1 on June 8, lifting restrictions on personal movements, gathering, workplaces, and services. The border closure and quarantine requirement remain in place.

Following the emergence of new COVID-19 cases, Auckland returned to Alert Level 3 restrictions on August 12, and restrictions were subsequently eased to Alert Level 2.5 (Alert Level 2 with extra gathering restrictions) on August 30 and to Alert Level 2 on September 24. The rest of the country was placed under Alert Level 2 on August 12 and returned to Alert Level 1 on September 24. Auckland joined the rest of New Zealand at Alert Level 1 on October 7, 2020. People are no longer required to wear masks in public but must continue to keep records of locations they visit.

New Zealand’s economy contracted by 9.8 percent q/q in Q2, 2020 (expenditure side), and high-frequency indicators point to an incipient recovery in Q3.

Key Policy Responses as of October 8, 2020

FISCAL

• With the FY2020-21 budget and previous fiscal packages, the government has announced fiscal measures amounting to a total of NZ$58.5 billion (19.5 percent of GDP) through FY2023-24. The total amount includes the COVID-19 Response and Recovery Fund, of which NZ$14.1 billion have been set aside as contingency for a possible second wave. Announced fiscal measures include: (i) healthcare-related spending to reinforce capacity (NZ$0.8 billion or 0.3 percent of GDP); (ii) a permanent increase in social spending to protect vulnerable people (total NZ$2.4 billion or 0.8 percent of GDP); (iii) a wage subsidy to support employers severely affected by the impact of COVID-19 (NZ$14.8 billion or 4.9 percent of GDP); (iv) income relief payments to support people who lost their jobs (NZ$0.6 billion or 0.2 percent of GDP); (v) a permanent change in business taxes to help cashflow (NZ$2.8 billion or 0.9 percent of GDP); (vi) infrastructure investment (NZ$3.8 billion or 1.3 percent of GDP); (vii) transport projects (NZ$0.6 billion or 0.2 percent of GDP); (viii) a temporary tax loss carry-back scheme (NZ$3.1 billion or 1.0 percent of GDP); (ix) support for the aviation sector (NZ$0.6 billion or 0.2 percent of GDP); (x) a tourism recovery package (NZ$0.4 billion or 0.1 percent of GDP); (xi) a government housing program (NZ$0.7 billion or 0.2 percent of GDP); and (xii) school infrastructure upgrades (NZ$0.2 billion or 0.1 percent of GDP). The government has also approved a NZ$0.9 billion debt funding agreement (convertible to equity) with Air New Zealand to ensure continued freight operations, domestic flights and limited international flights. The New Zealand government also provides loans of up to NZ$100,000 to small businesses that employ 50 or less employees (NZ$5.2 billion). In addition, on March 28 the government announced temporary removal of tariffs on all medical and hygiene imports needed for the COVID-19 response.

MONETARY AND MACRO-FINANCIAL

• The Reserve Bank of New Zealand (RBNZ) kept the official cash rate (OCR) at 0.25 percent on September 23, unchanged since the OCR was reduced by 75 basis points on March 17. In August, to further ease monetary policy, the RBNZ expanded the Large-Scale Asset Purchase program (LSAP) to purchase government bonds and Local Government Funding Agency (LGFA) in the secondary market from up to NZ$60 billion for 12 months to a maximum of NZ$100 billion by June 2022. It also announced that a package of additional monetary instruments will remain in active preparation for a possible need for further monetary stimulus, depending on the outlook for inflation and employment. The package of additional instruments includes a negative OCR supported by a Funding for Lending Program (funding retail banks directly at near-OCR) and purchases of foreign assets.

  Since March, the RBNZ has been providing liquidity in the FX swap market and re-established a temporary US dollar swap line (US$30 billion) with the U.S. Federal Reserve. The RBNZ has established a new Term Auction Facility (TAF), which allows banks access to collateralized loans of up to 12 months, and announced a corporate facility in which the RBNZ will offer up to NZ$500 million per week in open market operations with banks against corporate paper and asset-backed securities for 3 months. The RBNZ has also introduced a Term Lending Facility (TLF), a longer-term funding scheme for banks at 0.25 percent for up to 3 years duration initially for six months from May 26. From August 26, the lending term of the TLF has been extended to 5 years and the facility has been extended to Feb 1, 2021. Access to the TLF is linked to each banks’ lending under a NZ$6.25 billion Business Finance Guarantee Scheme (BFGS) in which the government covers 80 percent of the credit risk and will require approved eligible collateral. The BFGS was expanded in August, increasing the maximum loan amount from NZ$0.5 million to NZ$5 million, lengthening the maximum term from three to five years, and allowing more loan access by medium-sized firms. The RBNZ has reduced the banks’ core funding ratio requirement to 50 percent from 75 percent to help banks make credit available.

  To further support the stability of the financial system, the start date for a regulatory change requiring higher capital for banks has been postponed for 12 months, to July 2021 (to support up to about NZ$47 billion of additional lending), with other regulatory initiatives in the pipeline also put on hold for at least six months. The RNBZ has also agreed with the banks that during this period there will be no dividend payments on ordinary shares and redemption of non-CET1 capital instruments. The RBNZ has removed, effective as of May 1, mortgage loan-to-value ratio (LVR) restrictions for the next 12 months.

  The New Zealand government, the RBNZ, and the New Zealand Bankers Association have also announced a number of financial measures to support SMEs and homeowners. These include six-month principal and interest repayment deferrals to mortgage holders and SMEs affected by COVID-19 and the BFGS.

  Other related measures taken by the government that could contribute to financial stability include a six-month freeze on residential rent increases until September 25 and restrictions against tenancy terminations during March-June. The Business Debt Hibernation process allows businesses to place their existing debts on hold for up to seven months.

EXCHANGE RATE AND BALANCE OF PAYMENTS

• The exchange rate has been allowed to adjust flexibly.