The Blame Game: A $14 billion Debate

Today we get stuck into a debate about the Kiwi wage subsidy scheme. Like all good debates it combines a variety of opinions, in this case from billionaire entrepreneur, Nick Mowbray, an academic (myself) and a government official (Finance Minister, Grant Robertson). To read about it, see:

https://www.stuff.co.nz/business/industries/122797339/time-to-tax-big-companies-who-made-windfall-off-wage-subsidy

Here are some parts of the argument reproduced:

.... In a recent LinkedIn post, Zuru toy company founder, entrepreneur of the year and Rich Lister Nick Mowbray said large companies with strong balance sheets that could easily financially sustain themselves had exploited and abused the wage subsidy to benefit shareholders.

“They are happy to privatise profits in good times but are very quick to socialise any potential losses,” Mowbray said. “When large corporate companies exploit the wage subsidy and then report huge profits it makes me sick.”

But University of Auckland business school professor Robert MacCulloch said politicians and policymakers, not businesses, were to blame for the “botched” scheme. Directors of private companies had a legal objective to shareholders to maximise profits, he said. Therefore, if free Government money was on offer and a revenue drop was expected, business had an obligation to take the money, he said.

“In my opinion the scheme was flawed in how it was set up,” MacCulloch said. He said it should never have been extended to big, publicly listed companies, which already had access to large amounts of capital via credit loans and share issues ...

Wage subsidies for large companies should have been granted on a case-by-case basis, and the scheme should have had a “claw back” clause, he said. “They should have added a clause in the scheme which said something like ‘if your revenues are not lower over the year ended March 31, 2021 compared to the previous financial year then the Government reserves the right to claw back these funds.’ That would have been a simple clause to have put in the initial contract that should your business be booming in a year we’ll claw the money back".

Richard Prebble has it Right !

Former ACT Party leader, Richard Prebble, has been arguing that we have four Labor-like Parties standing in this election (being National, Labour, Greens and NZ First).

The National Party tax announcement today proves his point. Why? Since National are trying to out-do Labour by announcing tax cuts - but these tax cuts are only temporary, lasting 16 months. In percentage terms, they favor low and middle income earners. The Nats are saying that they would like Kiwis to go out and spend, not save, the proceeds. Such a move is defined in the jargon of economics as a temporary "expansionary fiscal policy". This policy is what John Maynard Keynes proposed when economies were in recessions. Such Keynesian "demand management" policies are often associated with more left-leaning parties.

Right wing parties, by contrast, tend to support smaller government, which corresponds to lower (permanent) levels of taxation and lower (permanent) levels of government spending. The only political party in New Zealand going into the election offering those kinds of polices is the ACT party. So in this sense, Richard Prebble is on the mark.

Is National's policy good economics even on Keynesian grounds? No. Why? Since Keynes recommended such policies when the economy was in the midst of a recession. But our recession is in the past ! GDP is rebounding sharply upward now. Furthermore, the wage subsidy scheme was more of an insurance policy, like disaster insurance, which paid funds to insure workers and firms against an unexpected shock. Demand management was not its focus, since the recession was a recession "by design". The government didn't want people to go out and spend their money - since that may have spread the virus.