More economic freedom will be the key to surviving the next phase of the COVID-19 recovery, and the Government should step aside as soon as it can, according to a new report For better or for worse: How governments respond to crises by The New Zealand Initiative.
Research fellow Dr David Law says empirical data from previous recessions and economic downturns shows the more a Government keeps its hands off the regulatory levers, the faster the economy can return to normalcy.
“Though it is understandable the Government wants to move quickly, it can’t rush policies.
“Past crises reveal the danger of choosing grand-sounding projects which end up being wasteful and potentially causing even more long-term harm. New Zealand needs a sustainable plan if it is to secure a lasting recovery,” he says.
Dr Law pointed across the Tasman to programmes chosen by the Rudd Government after the 2008 global financial crisis. While the goal for many of its projects was to stimulate Australian consumers back into spending to avoid a recession, it led to some bizarre and expensive boondoggles.
For instance, some sleepy towns suddenly found local council workers using taxpayer funds to build enormous public playgrounds. The Government also set up a project to put insulation in every Australian home.
But without enough regulatory oversight and proper training, much of the finished work was unsafe and, in some cases, led to deaths.
Then there is the notorious “Cash for Clunkers” scheme in the US – again, to help stimulate consumer activity after 2008. Under the programme, the US Federal Government offered incentives of between $US2500 and $US4500 to anyone trading in a gas-guzzling, older vehicle to buy a new, more fuel-efficient car.
Unfortunately, about 60 percent of the funds went to people who would have bought a new car anyway. Since many environmentally-friendly cars already had subsidies to encourage people to buy them (making them cheaper), the overall consumer spending dropped as a result of the scheme.
Dr Law says these examples would be worth keeping in mind as the Government plans its new projects.
“Thankfully, New Zealand had very low public debt before the COVID-19 crisis, which will help insulate it. The Government should try its best to maintain those low debt levels.
“But this country is also known for its economic freedoms and light business regulations.
“Coming out of this crisis, the empirical data clearly shows the best path to recovery is to retain those freedoms – and ideally even expand them,” he says.
He adds that the Cabinet’s decision to suspend the Regulatory Impact Analysis framework (RIA) – a tool used to conduct cost-benefit estimates on Government proposals – is not a good sign.
“New Zealand’s strong institutions will be crucial now. The Government’s looming post-pandemic decisions will be some of the most pivotal any administration has ever made in this country.
“The Government should not jeopardise this country’s long-term economic health by carving those institutions away for some quick wins.”