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Hansard transcriptInquiry into Government response to COVID-19Epidemic Response Committee13 May 2020MembersHon Simon Bridges (Chairperson)Kiritapu AllanTamati CoffeyHon Ruth DysonHon Paul GoldsmithJo HayesJan LogieHon Todd McClayChris PenkFletcher TabuteauMichael WoodHon Michael WoodhouseWitnessesCameron Bagrie, Bagrie EconomicsRāhui Papa, Iwi Chairs ForumGeof Nightingale, PwC New ZealandMichael Reddell, independent economistIan Harrison, Tailrisk EconomicsBridgesWell, mōrena. Good morning to members, to participants, and to New Zealanders at home watching this. We’re simply online today, not on Parliament TV, because, of course, Parliament is sitting and debating a law under urgency. Today we are speaking to a variety of prominent New Zealanders. We’ve got Cameron Bagrie of Bagrie Economics. We’ve got the National Iwi Chairs Forum, represented ably by Rāhui Papa. We’ve got Geof Nightingale, a well-known tax specialist from PwC New Zealand. We’ve got Michael Reddell, an independent economist. We have Ian Harrison, also an economist, at Tailrisk Economics. We were to hear from the Hon Grant Robertson, Minister of Finance, but he is unavailable. So we’ll start hearing from Cameron Bagrie of Bagrie Economics—obviously, a very well-known economic commentator and economist; formerly chief economist at ANZ. Cameron, we really appreciate having you with us. We look forward to your comments on the economic state of play, your insights, and then I’m sure there will be questions. I think also we’ll, with your leave, have you back right at the end to give a wrap-up, if you like, of what you have seen and heard today. So, welcome. We look forward to hearing from you. BagrieThanks very much. Look, what I thought I’d do is just three quick points upfront. Point one: just the scale of the hits that the economy has taken. Economists tend to confuse things by looking at, sort of, GDP. If you look at total sales and income across the New Zealand economy, across the business sector, it’s $700 billion. You divide that by 12, there’s a sales pool per month of $60 billion. And, if you’ve got the economy 60 percent operational—which is what we were at level 4—there’s a $20-$25 billion hit. Now, even if we get down to alert level 1, where the economy’s about 95 percent operational, 5 percent not, you’re talking a $3 billion hit every month. I guess, we’ve been told borders are going to be up for a long time, so $3 billion month after month is going to add up. Look, point two: don’t just think about COVID-19. Obviously, it’s having a massive impact, but there were numerous super cycles that were coming to an end. We’re at peak globalisation, and globalisation is now unravelling, and that’s a major risk to New Zealand. We’ve loaded up the private sector balance sheet for 30 years. I think we’re at peak debt, and now we’re going to be replacing private sector debt with public sector debt on the other side. Interest rates are now, basically, at their lowest. They’ve been on a downward trend for 30 years. Personally, I’m not a big believer in having negative interest rates. Demographics are shifting as the population ages across the Western World. Now, these are big structural changes, and there’s a whole lot of other things that are going on, but a lot of those were tailwinds for the past 30 years, and they’re going to turn around and potentially be headwinds going forward.Finally, just in regard to the Budget tomorrow, look, obviously, it’s part of a rolling maul in regard to the response, but it’s going to be pretty critical in regard to detailing a plan or a bit of hope going forward. Hope is not a strategy, but New Zealand is going to need some. Now, obviously the focus will be on health and extending the support packages, but the numbers are going to be absolutely terrible—deficits in excess of $30 billion next year, Government debt issuance of more than $40 billion next year. I think net Government debt is going to be in excess of $180 billion at the end of the projection period. Now, we’re doing the right thing, leaning off the Government balance sheet in the near term, but boy do we have one hell of a fiscal repair job that we’re going to need to undertake on the other side. And at the epicentre of that, we’re going to need to get the economy back on track, we’re going to need a plan, and we’re going to need that hope to be credible. To me, there’s a couple of things that are going to be essential that I’ll be looking for. The response needs to be microeconomic-based, not just built around a massive spend-up. The temptation’s going to be to think big as opposed to small and throw money around like confetti. Look, the quicker we get the economy back on a firm footing, the better. Ultimately, that growth is going to have to come from the private sector. More infrastructure spending, turbocharging shovel-ready projects—yes, but it’s not going to be enough. I’m going to be looking at whether we can start to turbocharge what I call those small things. Small things are things that we overlook, but they’re pretty critical: streamlining the Overseas Investment Office process; beef-up the Commerce Commission to undertake more market studies; look at local government, composition of their balance sheets; develop closer ties between the tertiary sector and the private sector; for the tourism sector, shift the school holiday periods for regions so that we don’t have those peaks over the July school holidays; right down to things such as making managing money compulsory in schools. You know, there’s an adage I’ll be looking at: don’t just think big; think small to stand tall. The other thing I’m going to be looking for in the Budget is some signs that we’re going to be prepared to make some hard decisions, and that includes spending being re-prioritised, and some sacred cows need to be put on the table. The retirement age is going to need to have to go up at some stage. KiwiBuild—that money needs redirected into Housing New Zealand. I want to see signs that it will be a pragmatic economic plan as opposed to an ideology-driven one.BridgesThank you, Cameron—very, very interesting. Hey, just on that $3 billion you were talking about, was that a month, and that’s your ballpark estimate even at level 1 of the economy, from retail, etc.?BagrieYeah, that’s at level 1. So if we’ve got an economy that is turning over $700 billion in a year, and we’ve still got about—depending on whether you look at Treasury or the Reserve Bank—4-5 percent of the economy is still, effectively, shut down, you’ve got a potential hit of around $3 billion. Now, to put that in perspective, the New Zealand economy contracted around 2-3 percentage points during the global financial crisis. At alert level 1, say we’re 95-96 percent operational, we are going to still see economic challenges that were bigger than what we faced during the global financial crisis. So, yes, we’re aspiring to get back to alert level 1, but let’s not sugar-coat this in regard to what the challenge is we are still going to see on the other side.BridgesTo state the obvious, that’s—what is it—negative growth, deficits, debt—all the bad stuff?BagrieYeah. Technically, we’re turning the corner. Things are looking better, but it’s probably a little bit of an easier characterisation—it’s less bad. Now, one of the big things that I’m looking at is how quickly is it going to be to take the economy to get back to levels we experienced pre-COVID? And I think the answer to that is an incredibly long time.BridgesYour $180 billion figure, talking about in the—what is that, over four years or something, is it? And that’s—in debt. I mean, this is taking us to, what, 70, 80, 90 percent debt to GDP—have I got that right?BagrieNo, that’s not—the economy’s going to contract—well, it’s contracting now—but we will get a bit of growth over the next 3 to 4 years. So if I have a look at where net Government debt is going to be by 2024, it’s going to be up around 50 percent of GDP. Now, those are levels we last saw in 1990 and 1991. Now, that necessitated a very harsh fiscal adjustment on the other side. Do we want to go down that route in regard to fiscal repair? I think the answer is very clearly no. The route we want to be pulling to try to get fiscal repair under way—debt down to more sustainable levels, build up that war chest for the next rainy day, because odds are there is going to be another rainy day in 10-15 years. We’ve got to get the economy back on track. And that’s just not about thinking big; it’s thinking about what the Government can do in regard to all those little levers they can pull to make it better for the private sector to flourish. And the Government can fill a bit of hole in the near term, but they’re not going to drive growth for the economy over the long term.BridgesAnd accepting a point that I think probably all of the committee accepts, that we don’t want some sort of 1920s or in any terms austerity here—there will be some significant spending and there would be under any Government Budget—I suppose you probably made the point, but nevertheless, does debt matter, and I suppose you paint a picture for us of why it matters and why, if this is your view, we need to keep it within reasonable bounds.BagrieWell, the optimist will point to the fact that New Zealand has got lower levels of Government debt than pretty well most of the OECD. So we’re actually in really good shape, and taking net Government debt to around 50 percent of GDP is still going to be world class at the right end of the spectrum. And, of course, we’re in a low interest rate world, so if you look at borrowing costs as a share of expenditure or tax revenue, they’re not going to be overly problematic. But New Zealand’s also got a problem on the other side. We’ve got net external debt across the private sector. Our net external liability position is minus 55 percent of GDP. We are absolutely loaded up, and that’s a structural problem. That means we need to be a bit more squeaky clean in regard to the fiscal accounts than an awful lot of other jurisdictions around the globe. The other thing about the debt: it’s not just the level of debt that you’ve got; it’s the rate of deterioration or how quickly you’re loading it up. Because if you’re loading it up pretty quick, it tends to take a lot more to unwind it or get it back down on the other side.BridgesIs there, in your view, good debt and bad debt?BagrieThere’s nothing wrong with having debt. Debt can be really healthy in regard to smoothing intergenerational burdens. Obviously, at the moment we’ve got bit of a probably once in a lifetime opportunity, because your interest rates are incredibly low. So we’re making the most of that opportunity. But, yeah, debt is still debt. You want to be getting a return on a lot of that investment, and we don’t just want money going out the door that’s going to be wasted. Now, what we’re seeing with the near-term fiscal policy response supporting businesses—is some of that being wasted? Yes. But, in all honesty, it was probably the right thing to do because we needed speed to market. But if I have a look at we get into the process of rebuilding the economy, helping it recover, yeah, we want to make sure that we’re getting quality spend, quality on the other side. There’s got to be some sort of return. Now, that doesn’t necessarily need to be an economic rate of return; it can be a social rate of return. But we need to make sure that we’re getting that value proposition. It was a little bit disturbing when I saw that your Treasury’s not going to be providing assessments of whether those numbers actually stack up in regard to those COVID-style projects. Now, that to me is a real dangerous sign.GoldsmithYeah—hi, Cameron. Thank you for that. Look, you’re talking about putting on an extra hundred billion dollars of debt, and, for many people, of course, the eyes glaze over. You know, you’ve got a hundred billion, 50 billion, 150 billion—it’s all just a big number. So can you give us a sense of what you—I mean, what does a hundred billion dollars of extra debt mean in terms of the average New Zealander. I mean, you could say it’s roughly 50,000 per household extra debt. It sort of gets it a little bit closer to home. But how would you sort of characterise it in terms of what impact it actually has on the lives of New Zealanders?BagrieI guess the way I’d think about is that that is a hundred billion dollar liability, plus interest, on the next generation—i.e., our kids. Because they’re going to have to pay it back.GoldsmithAnd the second thing is: you talk almost as if whatever happens we’re going to end up with this debt, but presumably there is a big bit comes down to the quality of the decision making over the next couple of years. And it seems to me the two relevant questions for the Budget are—you know, we’re in a hole. Are we making it worse than we need to, and what’s the path out? So having a good, clear plan is critical, but the question of whether we’re making it worse than we need to in the meantime is highly relevant, and that seems to me to be around the speed with which we reopen the economy, the attention that we put on making the 1-metre world reasonably productive, and the quality of the spending. If we’re adding to that debt with very poor-quality spending, then that will be compounding the problem. So I just want to get a bit of a sense from you as to the ability to reduce that worst-case scenario that you’re talking about.BagrieWell, that scenario that I’ve painted is not the worst-case scenario. That’s based on what I think Treasury’s ballpark figures are going to be in the Budget. Now, realistically, if I have a look at what the response is going to have to be to COVID, it’s going to be ongoing. It’s going to be a rolling maul. There is the potential threat. Have a look at Korea, China, Singapore. They thought they got rid of the thing; well, it’s come right back in. Now, the impact on the New Zealand economy is going to be felt for years to come.I think about what needs to take place within. There’s sort of three stages.Stage one is crisis management, stage two is recovery, and then stage three is sort of a bit of blue-sky thinking. Because we’ve got to get this economy cranking up. Now, people tend to think about them as being mutually exclusive. They’re not. There’s a huge degree of overlap. If you’ve got a firm at the moment that’s involved in the tourism sector, they’re facing a pretty hard decision: do they hang on? Is there hope? Is there credibility in the economic plan? Is there some blue-sky thinking on the other side that means it’s going to be worthwhile for me hanging on? So there needs to be a lot of overlap between those three stages in regard to how we think about it. And this is why the Budget tomorrow is critically important, because it’s going to set the scene, and I’m going to be reading between the lines in regard to: is it credible? Is it sustainable in regard to where we are going? Once again, we’ve got to see pragmatism as opposed to idealism.WoodhouseThanks, Cameron. A really good introduction. I like your sense of thinking small, and, when you say that, I think small business. And there’s no doubt that the wage subsidy may have delayed things, but what I’m hearing is that it’s delaying the inevitable. What’s you sense of the degree to which small business, or any business for that matter, can more quickly scale up to trade in the post-lockdown world, and are we being too hard on them? It seems to me we’ve all got a bit spooked by social distancing and the COVID issues, and they will sprout up. But it seems to me the best thing for the economic health of the country is to start trading again. Can you give me a sense of what you think’s possible at this stage?BagrieThe big issue for small businesses, or any business at the moment, is cash flow, and they don’t have it. Technically, we’ve turned the corner so things are less worse—doesn’t mean things are actually better or good. So if you have a look at a construction firm, for instance—and there’s 61,000-odd construction companies across New Zealand. There’s almost as many construction firms as we’ve got in the entire agriculture, forestry, and fishing sector. Construction firms got paid in April because they worked in March. No money in May because they didn’t work in April. In May they’re back at work in partial sense, and they’re not going to be as productive because of the rules that need to now take place on site. Now, they’re going to invoice partially at the end of May. Are they going to get paid in June? I suspect the answer is no. We are seeing payment terms are being shifted. So odds are they’re probably going to get paid in July.So the cash-flow squeeze that we’re seeing at the moment, it’s ongoing, and it’s going to continue until we get the New Zealand economy back to the same level, or the sales line back to what it was pre-COVID. And I think that is a very long way away. So the message here for any business: brace for a different sales line. If you’ve got a different sales line, you need a different cost line. You’ve got to take costs out, because this is a major reset. Obviously the Government is supporting businesses through the wage subsidy scheme. My personal view is that I’d like to see a derivative of it extended, but I’d probably make it a loan-style scheme, and I’d probably take the wage subsidy up to the equivalent of the minimum wage. But make it a loan as opposed to a pure cash handout, and the first cab off the rank in regard to what sector you’d be supporting in regard to that would be tourism. But you want to see a bit of skin in the game from both sides. The Government’s giving you more money technically per employee, but it needs to be a loan. And then, of course, IRD, if something goes pear-shaped, well, IRD is a preferential creditor.WoodhouseLook, we heard from the tourism industry yesterday, and they and a number of people I’ve been speaking to are saying, look, any extension of the wage subsidy would be great, but it’s not going to prevent the bow wave of redundancies that are being lined up right now. Isn’t the best thing to do to create the conditions to get them back to whatever trading normal looks like as soon as possible?BagrieYeah, and this is where we’re into that tricky trade off in regard to how much risk do you want to take on, because the last thing we want is to go back to a 3 or a 4. And we’ve seen the experience with China. We’ve seen the experience with Singapore. We’ve seen the experience with Korea. Now, you go have a look at America at the moment and the fact that they’re seeing parts of their food supply chain—i.e., production of meat—getting shut down. Why? Because workers are turning up at the factories. If you’ve got a whole lot of workers on the line that turn up with COVID, well, you shut the thing down. Now, ironically, there might be some opportunities out of that in regard to New Zealand on the other side, we hope. We’ve got to keep the economy functioning, or try to get cash flow in, but, of course, we can’t make the economy go broke, and that’s the real tough balancing act.TabuteauThank you, Mr Chair, and thank you very much, Cameron. I actually really appreciate your, kind of, honest and pragmatic approach this morning. It’s hard to hear, but appreciate hearing it.There’s a few things I want to come at you on. The first: you mentioned we’re leaning on the Government balance sheet to spread the cost of this pandemic, but then you mentioned in some of your earlier work around the need for there to be courage for the people with big balance sheets to help people with small balance sheets. Could you explain what that means and what your goal is there when you’re saying it.BagrieSo if you look at what’s going on at the moment—and the reference you’re referring to is because I’ve had a bit of a pop at a couple of local authorities, in the background. If you have a look at what’s going on across New Zealand at the moment, who do we need to step up to the plate? Yeah, we’ve obviously needed the central bank to step up to the plate. They are. We’ve needed the Government to step up to the plate because they’ve got one of the biggest balance sheets out there. We need the banks to step up to the plate and, in the words of the Governor of the Reserve Bank, be courageous, because they’ve got big balance sheets as well.We’ve needed to see pragmatism between landlords and tenants in the commercial arena. Look after your tenant—if that means you can afford to give a bit of a rental holiday, well, work with your tenant because it’s going to be a better option than having no tenant.TabuteauExactly.BagrieSame with residential property investors—work with your tenant. You’re better off to have a tenant paying something as opposed to, say, nothing. If I have a look across New Zealand at the moment, who else has got big balance sheets out there? Local authorities. Local authorities in New Zealand have got balance sheets of $150 billion. Now, some of them are up pretty close to the debt limits, so they’ve got some constraints, although they’ve now relaxed that debt constraint; they’ve given them a little bit more flexibility. But, once again, big need to be helping the small. If you’ve got the ability to lean on your balance sheet, lean on the balance sheet. So the magic number for a lot of councils out there, for rate increases over the coming year, it is zero. TabuteauYou mentioned the Reserve Bank’s response in your answer just then, and they’re undoubtedly about to move into more stimulus by buying up bonds on the secondary market, and then you mentioned in your original statement about negative interest rates. Could you just touch on those two aspects and why you don’t like the negative interest rates, and then commentary on the Reserve Bank response.BagrieWell, if you look at what the Reserve Bank will announce—I think this afternoon—I don’t think the cash rate is going anywhere, but their QE programme is probably going to go from slightly over $35 billion to something up towards $60 billion.TabuteauYeah, locally—BagrieAnd they’re going to need to do that because there’s such a gigantic amount of Government bonds that are going to be issued. Now, the Reserve Bank cannot buy all the Government bonds. Now, they can act in the secondary market and give cash into the private sector to redeploy into other assets. It’s just another mechanism by which the Reserve Bank is supporting the economy, and they’re helping to keep long-term interest rates incredibly low.Now, in all honesty, I think the cost to credit interest rates is really a big deal at the moment. The big deal for a lot of businesses out there at the moment is accessing cash. We are seeing a very tightening of what called the credit channel of monetary policy. Banks are right to be tightening up, because, of course, we’re in a different economic climate. Yes, the Reserve Bank’s relaxing loan-to-value ratio restrictions. Is that going to have a big impact on the market? The answer is no. Why? Because the big thing for a bank in regard to issuing a mortgage or issuing debt: do you have a job? What sort of job security do you have? Obviously, we know at the moment those numbers are deteriorating pretty quickly. If I had a look at potential for negative interest rates, it’s been interesting. Last week or so we’ve seen numerous members of the US Federal Reserve in America have come out and been pretty vocal in regard to they’re not big believers in it. And, if you look at the experience of Europe and Japan, it hasn’t worked.BridgesWe better keep moving for the moment, but, Cameron, thank you very much for those insights and that perspective. We really appreciate that.TabuteauThank you, Cameron.BridgesI think, as I say, if you’ve got the time, we’ll get you back at the end, where we thought Mr Robertson might be.So now we’re going to move—it’s my pleasure—to Rāhui Papa, who is representing the National Iwi Chairs Forum. Rāhui, it’s great to have you to get, really, your perspective, on behalf of Iwi Chairs, of COVID-19, what it means for Māori and iwi and the response. So we’ll just hand over to you and look forward to your remarks.PapaKia ora. E te tiamana, e ngā mema o tēnei komiti whaiti, tēnā koutou. Firstly, on behalf of the National Iwi Chairs Forum, I acknowledge the invitation from the Chair, Simon, tēnā koe. During the trying times of COVID-19, whānau, hapū, and iwi have stood up across the country to protect the wellbeing of the people. We went hard and we went early. We have stood up quick and efficient responses, especially in the COVID lockdown. We were on the front line providing care and kai packages to the whānau, protecting our tribal boundaries, facilitating mobile testing and vaccination, providing comms, and managing the grief of tangihanga conditions through trying times. And these are just a few examples, e te komiti.Whānau, hapū, and iwi see ourselves as advocates for whānau, whenua, and wai, and we’ve often been perceived as barriers to development. What we want to constantly remind everyone: that we are developers, we are employers, we contribute strongly to the GDP in our country, and we also fiercely protect the environment and all of the taonga that have been guaranteed under Te Tiriti o Waitangi. We are focused on the health and wellbeing of the whakapapa and our people and the rebuild of our nation. But while we’re doing our part to look after each other in our communities, there is a growing feeling that the efforts of the Government are determined to undermine iwi, whānau, and hapū. And this is starkly evident in the fast-tracking bill that sees an alternative to the provisions of fair opportunities of voice in the RMA, with iwi being including only after the eleventh hour. So a timely engagement is the point there.And the public health response bill that is before the House today, that signals out maraes, that employs a totalitarian enforcement right, and, above all, smacks of discrimination. You know, there’s some phrases being coined around that. This is an affront to our way of life. It is also an attack on our way of death. Just in December last year, the Governor-General came on to Maungapōhatu to pardon Rua Kēnana for exactly the type of situation that we are getting into now—that police entered the marae without warrant and without cause, and caused havoc that caused an apology some 105 years after the event.These recent examples highlight the absolute need to outline iwi imperatives and demands in any academic response and recovery discussion, and then give effect to partnership and good faith—an essential to Te Tiriti o Waitangi.We recognise that legislation must sometimes change to meet the challenges we face, but, while we are not necessarily opposed to legislation or policy development, we insist that there should be a notion of co-design with appropriate advice and that it provides time to comprehensively engage at the front end and not after the fait accompli of legislation going through.Iwi are partners. We are essential to the success of regional recovery, regeneration, and rebuilds in our respective rohe. We are the only ones who have the capacity, capability, and know-how to establish, monitor, implement, and enforce tikanga. An example is the tangihanga procedural guidelines, that is causing an uproar at the moment. Government agencies and advisers should rightfully defer to iwi, hapū, and whānau who are working on the ground. This is putting undue strain on well-founded relationships with Government agencies, especially with the New Zealand Police.Iwi have shovel-ready projects that provide business growth, employment, community, regeneration, and environmental security. These projects should be given a high level of consideration for support. Iwi must be involved in the national epidemic response if we are to profoundly move the dial of normality to a better standard of living for all of Aotearoa New Zealand.Iwi will be taking a keen interest in the Budget announcements tomorrow, and in particular what resources and associated measures will see a rejuvenation and regeneration of regional growth that include iwi imperatives. E te tiamana, tēnei te mihi atu ki a koutou. To all of the members of the committee, these are but some of the views—the key and salient point here is to plant the seed for comprehensive and definitive engagement and discussion going forward into the rebuild, into the regeneration, and into the rejuvenation of Aotearoa, and iwi must play their part in this as well. So, tēnā koutou. I’m happy—I’d really relish if there were any questions or discussion points, Mr Chair. Tēnā koe.BridgesKia ora. Thank you so much, Rāhui, and thank you for that very timely reminder about engagement and partnership—it’s a good one. There’s so much in what you’ve said. Let me start the ball rolling. You mentioned, I think, Rua Kēnana, and you likened what is happening now. I would be interested in your description or sense from a Māori and iwi perspective of the bill before Parliament at the moment as it pertains to police and policing, given the powers in it for warrantless searches of vehicles, homes, and, I believe, marae.PapaYeah, so it’s very disappointing that Māori are being viewed as different and can’t control our own spaces, especially in a tikanga space as it relates to marae and as it relates to tangihanga. One of the key and salient points here is that Māori have been protecting their whakapapa and their people for generation upon generation, and we don’t see that we should be singled out in any of the bill. So marae are particularly singled out. There are no provisions for other entities, and, quite frankly, there are some catchphrases going along that we should have our tangi at the pub because you’re allowed 100 people there, we should have it at a mall because you’re allowed more people there, and you’re allowed to have a kai, but for our marae, the restrictions are such that it makes it impossible for us to employ our tikanga.BridgesI’m not meaning to be facetious, but I’m asking you this genuinely: could you be trusted to continue with marae gatherings, tangihanga, and the like? Yeah, that’s the question: could you be trusted to do that?PapaVery much so. We don’t need the Ministry of Health; we don’t need the New Zealand Police to regulate the tikanga on our marae. If you’ve ever been to a marae, you will know that the nannies rule, and when the nannies rule, the nannies’ rules are followed. And that’s about the protection of them. And so our nannies, our kaumātua, are adamant that even if marae do open, there will be strict guidelines, there will be social distancing, there will be sanitisation, there will be, in some cases, one day tangihanga so that everything can comply with the protection of whakapapa and the protection of our people.BridgesLook, final one from me for now, but I think it’s very clear what you’re saying. But let’s just not leave anyone in any doubt on the tangihanga and the requirement, as a matter of policy from the Government, about a limitation of 10 people—your view on it.PapaLudicrous. It’s ludicrous because there are other examples—so you can have people on a rugby field that smash each other over and then can’t shake hands afterwards, and so there is just some inconsistent messages, and only restricting tangihanga to 10 is ludicrous, in my book.BridgesActually, look, let me push my luck one more—ha! The future of the hongi?PapaIt’ll come back, eh. In 1918, when Te Pūea led the response to the Spanish flu epidemic in the Waikato, tikanga changed for a time, but we returned because there are spiritual elements within the hongi, and so, in time, those things will come back. We have put them aside for now, but this is a temporary measure that Māori have made the call on that. It hasn’t been because of Ministry of Health guidelines or Government guidelines; it’s because Māori saw the value in the protection of whakapapa and the protection of the people.HayesThank you, Mr Chair, and tēnā koe, Rāhui. Nau mai, haere mai ki te Komiti i tēnei ata. My question to you, Rāhui, and thank you for the information and the kōrero that you’ve provided to us today, and your concern around the Government—and we’ve all seen this—actually leaving Māori out of the whole COVID-19 response, and especially around this particular bill. Why do you think that is? I know the chairman talked about, you know, do we trust you—do we trust Māori? Would you like to kind of expand that a little bit further around why you think, why the Iwi Chairs think, that Māori have been missed out of all of the post - COVID 19 recovery planning and this particular bill?PapaWell, it’s our particular view that iwi should be there. Iwi have stood up in regions and protected regions and worked collaboratively with local councils, with corporates, with philanthropic organisations, with community organisations, with health providers, with DHBs, and the list goes on. So Māori do have a model and a message that will be able to aid and support a regional recovery, and, if the regions are strong, then the country will be strong.There is some notions, though, Jo, about some of our leaders are asking, “Actually, was this the intent?” Was it the intent of a COVID-19 screen to be able to get back to the 1920s and the 1950s where Māori were marginalised and not participating? In my heart of hearts, I don’t think so, but I do think that there are some things afoot, and with iwi, hapū, and whānau, right there in the design phase of some of these things, then the mountains will become molehills and they will be palatable and acceptable across the country.HayesKia ora. You talked about the Budget tomorrow—expectations around the Budget. As the lead for the Iwi Chairs, what are you expecting from Māori? Do you expect any support through this Budget tomorrow?PapaVery much so. We think that there should be regional development. We think that there should be rohe development that includes and encapsulates iwi imperatives as well. There are huge successes, like Te Pae Oranga, for example, in the justice sector, that are having Zoom hui, and, actually, the statistics are going really well. So those types of things should be funded, and funded and resourced properly, so that those successes can continue. Look, we’ve got economic imperatives, we’ve got cultural imperatives, we’ve got social imperatives. All will be scrutinising what the Budget will provide for those imperatives in those areas.HayesAnd if it doesn’t come through, then what?PapaWell, that will be just another example of how—so, quite frankly, iwi haven’t got anything in this country without agitation, and so there will be some strong agitation. It could even be through tribunal and courts. But our strongest desire is in the co-design phase of legislation and policy.HayesKia ora. Kia ora Rāhui.CoffeyTēnā koe, Rāhui. He mihi tēnei ki a koe, ki a koutou ngā rangatira o ngā iwi o Aotearoa, o Aotearoa whānui. [Thank you, Rahui. This is an acknowledgement of yourself, and all of you the leaders of the iwi of New Zealand, of all of New Zealand.]Rāhui, I just wanted to challenge you just on some of the kōrero that you’re putting out in terms of there being no, kind of, interaction between Government and Māori. Of course, we saw the health and safety checkpoints. We had one up the road in Maketū, which some said was staffed by gang members, but it wasn’t the case; in fact, it was a really proactive partnership between the local Māori community and also the police. We saw it up at Te Whānau-a-Apanui as well, and at other of these checkpoints around the country too. Also, when it came to the CBACs going into some of our smaller remote communities, actually, that was a strong partnership between the Ministry of Health, our DHBs, and Māori again. You were talking about the kai packs, and, actually, that was made possible because of Government partnering with our Whānau Ora providers around the country to be able to allocate $15 million dollars so that care packs could be distributed out there into the community. So I kind of wonder if you’re being a bit selective about how you’re framing this, because from where I sit, there has absolutely been a really strong partnership—I’d almost say innovative, as well. What’s your response to that?PapaYeah, so tēnā koe, Tamati. Ngā mihi nui ki a koe. I just wanted to take your points around checkpoints, CBACs, and kai and care packages, in that whānau, hapū, and iwi stood up those well before—actually, as it relates to checkpoints, there was some disagreement with members around this committee in particular and your parliamentary colleagues. So iwi said, “Nah, we’re just going to do this.”, and then it struck the relationship. So it was instigated and originated—AllanRāhui, I just want to challenge you on that, because the iwi checkpoints did start in my electorate, and from the very get-go, I understand—and I’d be interested if you can correct me if I’m wrong, but from the get-go, those were well supported and led by iwi, and support was provided by those of us that could, so I just want to challenge you on that statement.PapaNo, that’s fine. I’m just talking about the, actually, origination of the idea and standing them up in advance of any of the support. I’m not saying that it wasn’t supported in the end, and the end did justify—AllanNo, I’m saying from the outset. PapaIt was about, though, Kiri—AllanRāhui—BridgesAll right. Let’s let him finish.AllanI just want to be very clear, because I don’t think—it’s not useful if there are misstatements said in this public fora. So I just want to be very clear that from the outset you’re saying that they were unsupported, or—because that’s what I’ve just heard you say.PapaI’m saying that the instigation of them came from whānau, hapū, and iwi, and that those plans came up and we relied on the wonderful relationship that iwi had formulated with various—so DHBs and the New Zealand Police and Government agencies. But the origination and the instigation was framed under mana motuhake in the first instance.AllanWhile I don’t disagree with that latter statement, I would challenge you on the first part of that statement and say that relationships, of course, are key across the board, but, when iwi said—in particular at the first iwi checkpoints that were stood up—when iwi said, “These are important to us.”, I would challenge you to say that they were well supported from everybody across the board within those specific regions, and it wasn’t a latter afterthought that people came along at the end, but rather right from the very inception.PapaThat’s your view, and I respect your view, Kiri.CoffeySorry, just coming back to my line of question. So my standpoint is that whilst there may have been some ideas where the inception came from some of our iwi—in fact, some of our hapū, to be honest, were the ones that stood up first, and, actually, I respect that in that equation. But sometimes it’s our hapū, sometimes it’s our iwi, sometimes it’s Government, and sometimes it’s some of our Māori within some of our Government agencies as well. I was just listening to your kōrero, hearing that you think that there’s been no engagement with Māori at that kind of level, but I’m very aware of a lot of our very passionate Māori people that have dedicated their life work to be working inside some of our Government agencies, and I sometimes feel that there’s a bit of a—that they’re ignored just because they are suddenly inside Government. Have you got any whakaaro on that?PapaNo, I totally respect all of our people that are—you know, and it’s not just Māori; it’s everyone that is seeking to protect whakapapa and to protect our people. All I’m saying is that sometimes there was some talking past each other. Sometimes there were dual actions happening. But, for a lot of our whānau, they felt that they were being—well, they weren’t receiving as much support as they possibly could, and that’s why whānau, hapū, and iwi stood up to go hard and to go early. CoffeyYep—as did we all. Thank you. Kia ora.AllanTēnā koe Rāhui. Look, and it’s always good to see you and have you before this committee. And I do want to come back to the issue of iwi checkpoints, but you’ve raised about four different issues that are relevant, but I’ll start there since we did just have that brief discussion. Look, I heard you make some proclamations in affirmation of the chair in Opposition this morning, but did the iwi leaders forum have a particular view on the Opposition’s very clear and loud opposition, at every single stage, to those iwi checkpoints? BridgesCan I just say that that’s our position, but, of course, it’s also Minister Nash’s position, so the Labour Party—AllanNo, that’s incorrect, Mr Bridges, and I don’t think it’s appropriate for you to create a misstatement about what Minister Nash has said. [Inaudible]Bridges[Inaudible]PapaWhen you two have finished, just to say that it was disappointing to hear negative comments, because we felt that it was extremely positive that in a whole lot of areas, those particular areas have proven to be COVID-free, and that’s in no small part to the working together of the border closures.AllanThank you. With respect to your comments around marae being included in the particular piece of legislation today and the warrantless powers of entry, you’ll be aware that an SOP was tabled this morning, which the Hon Kelvin Davis spoke to, which removes that express reference to marae.PapaYes. We have heard, yes.AllanAnd my understanding is that the Iwi Chairs Forum was given the opportunity to review the exposure draft, probably well in advance of many of us Māori MPs—is that correct?PapaNo, that’s not my understanding at all.AllanMy understanding is that there was an exposure draft sent to the Iwi Chairs Forum the night prior, when other various groups that had views and should have been consulted were consulted. So I guess what I’m—but you’re saying you don’t know about that.PapaYeah, and that’s my point about timely engagement, about—so it was the night before that it went through the first and second readings.AllanYes. I take that point. So yesterday it went through the first and second readings, but the day prior was when the exposure draft was released to those for comments. And, look, I accept that timing has been an extremely swift, and I don’t think anybody would debate you on that fact, but, in order to transition to level 2, to enable the economy to open up in the ways that we want it to be, you accept that this piece of legislation needed to be introduced under extreme urgency to enable things to move on.PapaYeah. So my point there is that we understood that under the state of emergency those were already in train and those were already there. What our concern is this adds a bit of permanency to some of those powers that are unilateral decisions from Ministers or commissioners or—if one complaint about a marae, then there’s going to be a bit of a whakatumatuma. There’s going to be a bit of a protest and push back.AllanAnd, look, the other thing, I note there’s been some discussion about the Budget tomorrow, and, again, there was loud opposition from Opposition members, including the Chair, about the Whānau Ora - specific payment made to iwi Māori. BridgesI’ve never talked about it—not once.AllanI apologise if I incorrectly state your position, but there was certainly a sentiment that I’ve heard in the House from Opposition members specifically referring to the provision of funding for Whānau Ora providers. Did the Iwi Chairs Forum have a view on whether it was appropriate to make a specific allocation of funding to Māori to provide a specific response to Māori?PapaVery much so. The National Iwi Chairs Forum has, time and time again, resolved to support the notions of Whānau Ora in its entirety. We have presented to various Governments, both National and Labour, on that point—that long may the funding and resourcing of Whānau Ora continue.AllanKia ora, Rāhui. Look, I know that you do an immeasurable amount of work for our people up and down the country. I want to thank you and all of our iwi and whānau and hapū on the ground that have been doing the mahi over the past seven weeks in these extremely turbulent times now.PapaKia ora, Kiri.BridgesWell, Rāhui, thank you very much for your time. We deeply appreciate it. It’s been candid and, at points, robust, but we would expect nothing less, and we wish you a great rest of your day—on that backdrop, a very sunny Waikato. Although, I wonder if you—well, no, we won’t get into that, actually. Thank you very much.PapaKia ora, Simon. Ngā mihi nui kia koutou.BridgesWe’re now going to move to, I think, Michael—no, I’m sorry, Geof Nightingale. Of course, Geof is a tax specialist and partner at PwC New Zealand, and Geof has been—I think I’m right to say, Geof—on nearly all of the significant tax working groups that successive Governments have ever had and that have been implemented with varying degrees of success. But that is as it may be, we just welcome your remarks. I’m sure there’ll be a raft of questions.NightingaleTēnā koe, Simon, thank you, and tēnā koutou to committee members. Thanks for the opportunity to talk about the tax system in the COVID crisis. I’m sorry to bring you to this level after some really fascinating and important comments from Cameron and Rāhui. So I apologise to bring you into the nuts and bolts of the tax system, but I do believe it’s got a very important role to play.You heard from Cameron about the size of our public debt—you know, the appropriate fiscal stimulus the Government’s going to do, is doing, the good condition our public finances were in as a result of successive Governments efforts that allows us to do that, which is great. But the short reality is that we’re going to have an enormous blow-out in our debt levels, perhaps to 40 or 50 percent of GDP, and at some stage we’re going to have to pay that back, and that’s where the tax system will come into play.There’s two ways to reduce our net debt to GDP ratio over time. One is we can repay some debt from tax revenue, but the other is to grow our GDP so that that debt becomes less significant as a proportion as GDP rises.And it’s a really delicate balance, because increasing tax on the economy can hinder or slow economic growth. We may need to do that at some point, but the timing and the design will be critical. If you’re thinking about the tax system in supporting an economic recovery, I think there’s three key principles worth keeping in mind, and they are, firstly, we should continue to try and collect from the widest base possible but at the lowest rates possible; secondly, we should minimise tax compliance costs; and, third, we should minimise tax distortions to investment decisions. Let private sector lead the investment decisions and try and keep tax out of the way.The tax system’s already played a really significant role in the Government’s initial response to the crisis. Inland Revenue systems of employer records have supported the $10 billion in wage subsidies by MSD. The Government’s brought back depreciation on buildings and the low value asset write-off. That’s $2.8 billion of tax assistance over the next four years. There’s the new tax loss carry-back rules, which were about $3 billion of, effectively, allowing businesses to cash up their COVID tax losses and putting cash flow back in, plus the small business cash-flow loan scheme, administration through the tax system, and sort of discretionary powers granted to Inland Revenue to deal with the compliance requirements of the crisis.And all of these policy ideas have come from an idea to legislation, and then to implementation on a fully digital basis, in just a few short weeks. It’s actually been remarkable. Clients of ours that elected into the tax loss carry-back scheme that was legislated on 30 April went live last Monday. They were having their refunds—and these are tens of millions of dollars—by Wednesday or Thursday last week.I think it’s worth reflecting that the ability of Inland Revenue to stand up the administration of these processes really quickly on a fully digital basis is actually a dividend from the benefit of successive Governments’ investment in Inland Revenue’s Business Transformation, and that’s been over a number of different Governments. And it’s been very successful and it should continue. There’s another stage left yet, but I think that you’re seeing the benefits now of that ability to move at speed.Looking forward to the recovery, I think it’s going to be important to resist the temptation to try and balance the books with significant tax rises or changes in the short and medium term. Recent history would tell us that we’ve got a strong and well administered tax system. And tax revenues will grow strongly as economic growth returns, but first you’ve got to bring economic growth back.If we look back 10 years ago to the global financial crisis, tax revenue stalled very fast initially, precipitously. But economic growth got re-established. The tax revenues grew strongly again, and that was without the need for new taxes or increases in rates. There was a bit of rebalancing but no overall increase in rates. In fact, from 2012 to 2016, GDP was growing again at about 2 to 3 percent per annum, but the tax revenues grew at nearly twice that—over 5 percent per annum—and that allowed a gradual return to Budget surplus.You know, the OECD is saying that they’ve released a recent report on tax measures from around the world being used to deal with COVID—the initial impact and then the recovery—and they’re saying that, you know, some economies may need to raise tax revenues in time to service the debt, but the best way to grow that revenue is to return to solid economic growth.There may be a question in the future about what the correct mix of taxes is for a post-COVID economy. The Tax Working Group did identify we are light in our tax base on capital income and we’re light on the use of environmental taxes. Maybe those need to come back on to the agenda at some point when we know what the shape of the recovery looks like. But, first, I think I would say, look, let’s focus on a strong recovery. We’ve got a good tax system, and, as that recovery gathers momentum, the tax revenues of the current tax system will rise, and therefore the worst thing we could probably do is start to increase tax rates or new taxes too early, despite this big debt that we’re running. Thank you.BridgesHey, thanks very much, Geof. That’s brilliant. I think your praise, really—and I concur with you about the transformation project in IRD—it would be music to one-time revenue Minister Todd McClay on the committee. You know, I just ask you this. You made the point about the big blow-out in debt. Potentially if Cameron is right tomorrow 50 percent of GDP, which is big numbers we haven’t seen—I think I’m right—since the early 1990s. I suppose the question is, simply: what do we do? But let me put a bit of context on that, because I’ve heard what you said about not in the short term you wouldn’t have tax, and so on. I’ve asked the Prime Minister about this at question time. She’s explicitly—I think I saw this in a column you wrote—ruled out a capital gains tax, but she explicitly wouldn’t do so in relation to a wealth tax. If you were designing it—a wealth tax—what would you do? Or are there other ones—you’ve mentioned environment, etc.—that they would be your go-tos, if you want to put it that way?NightingaleLook, I think a wealth tax is an appealing thing from an equity perspective, but they suffer from real practical difficulties. There’s a valuation issue. You’ve got to value assets every year to be able to impose the tax, and values are—who knows where values go. And values are opinion, really. They can be a range. And then, secondly, there’s a cash-flow issue. Wealth taxes will affect people who are asset rich but may not have strong cash-flows off those assets. So I don’t like wealth taxes. They’re not widespread around the world.But I do think there is an equity issue around the taxation of capital income. Now, the capital gains tax recommended by the working group failed, and that failed politically, and it’s gone. It’s not going to be back on the table. But in time, as values recover and as the economy recovers, we will need to think about tilting our tax system away from taxing just consumption and labour income, and think more about the capital income base in a way that doesn’t wreck economic activity or cause poor incentives for investment.And environmental taxes is the other leg of the stool. The European economies use those extensively, not just for behavioural changes but also as a way of raising revenue. And, again, we need to be very conscious of the shape of our economy, our reliance on agriculture and those sectors, but it may be that a measured thinking about where environmental taxes can play in the future would allow us to raise some revenue in a way that’s both helpful for the environment, not too damaging for the economy, and might help us deal with some of this debt.BridgesFinal one from me, and, to be clear, I don’t favour this, but there has been some whispers, I think, commentary, around, I suppose, a fourth higher income tax bracket. Views on that.NightingaleThat gets a tick from a progressivity sense, so a good equity ticket means that those of us that earn more pay a bit more of our fair share. It doesn’t actually raise a lot of revenue. It’s material but it’s a couple of billion dollars a year, even in a very steep rise—maybe only 1-1.5 billion, against a total tax take of 80-odd. Not immaterial but not huge.The problem is New Zealand’s got a really efficient tax system, because our rates cluster together in a narrow band—so 28c company rate, 33c top marginal personal rate—and that means that a lot of the design of the system is much more simple than if you go across to Australia or to Europe where they’ve got very different rates. The minute you raise those gaps between the two rates, you need to buttress that with anti-avoidance measures, with compliance, and special rules, and the tax system rapidly gets more complicated than it already is. So there is a trade-off there.If our experience of last time’s recovery tells us anything, it’s that we don’t need to do that to generate enough revenue. We need to get economic growth started to generate the revenue.BridgesGreat. Understand.McClayGeof, good morning. Thank you very much, and thanks for a very, very clear presentation. Just two areas I want to ask you about. The first is really, I suppose, around that simplification of the tax system and less compliance. I absolutely agree with you, and I think we really need to resist everything possible where it comes to complicating the tax system. But can I ask you for small businesses, because they often will bear the brunt of that cost of compliance. It’s much more significant on them, based on their turnover, than many others. What do you think the focus should be right now to ease burden on smaller businesses—because it’s going to be quite, quite some period of time, I think, before any of them actually have profits whereby they’re going to be paying taxes and there won’t be anywhere near as many of them as the Government has hoped have been able to take advantage of some of the changes to the tax system we’ve seen through the lockdown to try and help them. They’re going to need cash flow. So what around reducing the cost of compliance—not less compliance, reducing the cost in compliance—and further simplification of the tax system?NightingaleLook, it’s a continuing conundrum, because we use the same tax rules for a half-a-million-dollar family retail business as we do for Fletcher Building, basically. And you’re absolutely right. It’s challenged us on a policy sense for ever. I think, increasingly, the answer is twofold. One is to be very permissive around thresholds. So safe harbours for deductions, you know, higher thresholds of provisional tax, and try and take as many of those obligations and judgments away from the small business. That’s the first area to focus on.And then the second area is back to the Business Transformation of IRD. Automate all of their engagements. Make them failsafe. Take the cost out, so if you log into the system, if you supply the right information, the system does it for you, and it both reduces compliance costs but it also manages their risk. If they’re in the system and the system’s doing it for them, they don’t have to worry about getting it wrong, which is one of the big psychic costs of being in business. It’s easy to say, hard to do, but those are the two things that I would concentrate on for small business.McClayThank you, and with Business Transformation we’re 10 years in now, and I know you were very involved in the early days of the direction IRD went in. It’s not as complicated as it used to be. You’ve given the example of some of the losses being brought forward.The second area is around the tax treatment of foreign investment, foreign direct investment, in New Zealand. We’re a small economy that needs to attract foreign investment, but the whole world is going to be looking for it now. The whole world is going to be looking for it as they look to regrow their economy, and New Zealand just absolutely can’t miss out. So can you tell me a bit around the tax treatment of foreign direct investment—what we should be thinking there—because I must say, and I’m not being political but I have had observations that there has been so much uncertainty over the last two or three years and that that has started to look to flow in to the tax treatment that many investors are not looking at New Zealand in the way they used to. And they’re imperative to growing our economy, getting back on our feet, and making sure Kiwis have job.NightingaleYes. Yeah, I agree on foreign investment. I think foreign investment is utterly critical to our recovery and our continued economy. We’ve got a large pool of foreign capital here already. And that means our foreign tax settings on that investment have to be competitive. And so we want our—you know, we want our fair share of that revenue, but we have to be competitive internationally. We may have added to our investment advantages in recent times with our response to the crisis. You know, we’ve seen some inquiries from offshore investors who are interested in New Zealand because it seems to have got a good response to COVID. And so, you know, that’s part of the mix, too. But we need to be competitive.And the really critical rate there is the Australian corporate tax rate, basically, because that’s where we compete most for investment, foreign. So at the moment they’re still above us, mainly—bit low for small businesses at 25, but they’re sitting at 30. But if they started to reduce their corporate tax rate significantly to attract investment, we would have to respond or risk being left out.So, you know, the other big area on foreign taxation is the digital tax. And that’s up at the OECD at the moment, hoping to have some reports by the end of the year. But I think that as the world becomes less trade friendly but more digitised that’s going to be increasingly important. We do want some share of tax revenues on that but only on a sensible basis. We don’t want to drive those services away from New Zealand. They’re very valuable to us. And we don’t want to have that tax turn up in the costs that consumers pay either. So it’s a delicate balance.McClayAnd this final one: we need to resist the urge to do something so that New Zealanders who are trading online or traditionally overseas are not hit punitively in those markets and in some cases will end up being taxed twice.NightingaleWell, that’s right. We always think about the digital taxation as the inbound from the large techs, the Facebooks and things, but New Zealand’s a massive exporter of—and increasingly of—gaming and software and Xero accounting software. And so we’ve got to think about it on an outbound sense because the foreign tax that they might incur on their revenues is just a cost to the economy.McClayYeah, I was in the OECD talking about this stuff eight years ago. If they actually conclude it by the end of the year, I’ll buy you a beer as soon as we’re allowed to go and sit at the same table in a bar.NightingaleI think you’ll be safe, but thank you.WoodThank you, Mr Chair, and good morning, Geof. Nice to see you. A couple of things I wanted to raise with you. The first is around tax loss carry-back scheme, which you mentioned. And it was really good to hear about the speed with which some businesses are receiving that back. I just wanted to get a little bit more detail from you around the efficacy of that scheme, the extent to which you’ve seen it as being an effective and useful way of getting cash flow into businesses at the moment. Is that your take on it—that it has been a useful way of getting cash flow in at a difficult time in the short term?NightingaleYes, it is. It is certainly useful. Like any of these things, it has its imperfections. So it very much depends when your balance date sits because COVID has hit us at a fixed period. It smashed us in April and May, basically, and it depends where your balance date sits. Most businesses were operating very strongly up until mid-March in New Zealand. And so they might have a couple of months of losses, 10 months of good, and not be in an overall loss, so they can’t access the scheme.There’s always issues around the design at the margins, but, by and large, it’s been a very powerful scheme, I think. And the beauty of it is it’s really just a loan. Three billion dollars—these tax losses that are getting carried back and cashed up, that’s about $3 billion over the next couple of years, but, by the time we get out to four years, that’s been recovered because those tax losses have been extinguished from the system and they don’t get used against future profits. So it’s really, again, the Government using its balance sheet to create cash flow for businesses, but in the medium term it won’t cost us as much as it looks like.WoodSure. And have you’ve got any other suggestions or thoughts about use of the tax system to be supporting cash flow in the short to medium term, beyond that and beyond the depreciation and other measures that have been put in place already?NightingaleNot in terms of specific recommendations but using the tax system, its architecture, to deliver support—because all of New Zealand’s businesses are already connected into the tax system and Inland Revenue has a significant amount of information on them. Therefore, you know—and IRD has digitally transformed, so the architecture is in place. It’s a very efficient, responsive way to consider cash-flow support in an administrative sense. The key issue is not to distort decision making, in my view, because we want businesses to find their new norm based on the markets, not based on being steered by the Government. I think the businesses’ collective wisdom will be better in the long run than the Government choosing them. So if you deliver support through the tax system—cash-flow support—you’ve got to find a way to do it that doesn’t distort their investment decision-making.WoodSure. The final thing I wanted to ask you goes to your comments around wealth tax, and I preface this by saying I’m not over the line on it either. But you did sort of dismiss it and say, look, not many other people around the world do it. Well, you know, 110 years ago, not that many countries relied on income tax; 30 years ago, hardly anyone used environmental taxes to any great degree. Sometimes ideas come in response to changing conditions. And I think you understand where the calls for looking into this have come from. It’s been around the accumulation of private wealth and significant inequalities that have been measured pretty objectively. If you’re not in favour of going down that line, can you give us a few more strong reasons for that? And, if not, are there other policy responses that you can see to the problem at the core that people are responding to when they propose a wealth tax?NightingaleYeah, those are great and difficult questions. My objections to the wealth tax are really based on administration and practicality not principle. I think there is an equity principle that a wealth tax adds to progressivity of the tax system. But, you know, it’s just so hard to value. If you look at the big wealth in New Zealand, most of it’s in unlisted businesses, and who knows what those values are? You don’t know what they’re worth until—accountants like us can give you a range and stuff, but you don’t know until you test the market, so you could be paying tax under or over because of valuation issues every year. And the second thing is cash flow. I think taxation—and this is a bit philosophical, but, really, taxation is easiest to levy when people have the cash available. And that’s why I support, in principle—and I know it’s a dead duck—but a realisation-based capital gains tax, because at that point in time, the valuation’s certain, you know what the market’s given you for it, and you’ve got the cash, and it just feels—but, you know, so that’s where I would look. In the absence of being able to do that, and the absence of a wealth tax, then I think where you need to go is to continue to plug obvious gaps where income is getting converted to capital, and we do that with the land rules, we do that with the financial arrangement rules. So you continue to fire well-designed rifle shots at specific gaps in the tax system to keep that tax base as broad as you can. That doesn’t go a long way to addressing wealth inequality, and I’m personally just not sure how to solve that.WoodWe’ll keep working on it. Thank you, Geof.BridgesVery interesting. Well, Geof, there are tax consultants all over New Zealand who’ve been riveted to the screen, but regrettably, despite the fact that many of my colleagues still want to ask you questions, we’d better keep moving. I want to thank you for your time—really appreciate it. NightingaleThank you for the opportunity.BridgesWe now move to Michael Reddell, and Michael is a respected economist and former Reserve Bank economist. And you can pay me later for this, Michael, but he, of course, has a blog, Croaking Cassandra, which has a cult following amongst people interested in monetary matters. So we just thank you, Michael, for your time. We really look forward to your observations on the issues we face as a country before I’m sure there will be questions.ReddellThank you. I was asked to, sort of, look a little bit at the Government policy response so far and looking forward. Four months ago, on 13 January, no one in New Zealand had much conception of the havoc that coronavirus was about to wreak, and that was the day the very first case outside the People’s Republic was reported. Locally, not even the rock lobster industry was yet in focus. Unfortunately, two months later, 13 March, our economic officials and Ministers still appeared to be reluctant to recognise the magnitude of what was about to break in full force on New Zealand. A day or two earlier, the Governor of the Reserve Bank had given a speech in a press conference which minimised the issue. When the bank finally cut the OCR a few days later, weeks late, he was still reluctant to concede that a recession was even upon us. The Government itself was mostly focused on the disruption to our exports to China, and that sort of thinking seemed to shape the economic package they announced a few days later. In time, they were all—officials and Ministers—simply overtaken by events they weren’t ready for. Now, that’s all water under the bridge now. In the end, the modified wage subsidy scheme ended up serving mostly as a more generous income support scheme, and, if some portion was poorly targeted, at least it was disbursed quickly. Whether it will end up saving many jobs and firms, only time will tell. Well, where do we stand now? Well, we’ll have undergone the sharpest, deepest economic slump ever. GDP in the so-called level 4 period was probably 40 percent below normal. It’s probably still 30 percent or so below normal now. June quarter GDP could be 25-30 percent lower than it was late last year. In the 2008-09 recession, by contrast, I think Cameron mentioned, GDP fell by only 3 percent. GDP often can seem rather abstract, but this means lost jobs, and you could see that, for example, in the unemployment rates reported for the United States and Canada last week—around 15 percent. So as the restrictions continue to be wound back, there will be some further rebound in economic activity, but even if 95 percent or more people in firms are lawfully able to work, we can’t suppose for a moment that economic activity is going to quickly snap back to 95 percent of normal. Hotels in Rotorua have been able to open, but they’re unlikely to have many customers. And even if there’s little or no COVID in New Zealand, that isn’t so abroad. It’s a savage and deepening global recession unfolding. Even at home, people are going to be poorer and will be cautious, nervous, and uncertain. This isn’t like a normal recession that results from something that’s already happened. The virus is still stalking the earth, and even vaccine optimists talk in terms of another 12 or 18 months of that. So on current policies, even if we get back to so-called level 1, even if trans-Tasman travel is freed up later in the year, GDP could still be 10 percent less than normal. Left to themselves, economies heal themselves, but they do so very slowly. Active macroeconomic policy has a crucial role to play, not picking winners, not planning for this sector or that, but getting in place the broad-based support for demand—stuff that only Governments can do—and then leaving it to the energy of the private sector to generate the new activity and jobs. Now, monetary policy typically takes the lead there. It can be deployed most quickly, it operates pervasively, doesn’t cost the Crown money, it influences voluntary private choices, and it works without Ministers or officials deciding who or what is favoured. But monetary policy in New Zealand is doing almost nothing. Real interest rates have barely changed since the start of the year. The Reserve Bank will tell you—you’ll hear it this afternoon—that they’re purchasing lots of Government bonds. That’s nice, but it’s almost irrelevant to New Zealand now. In past serious recessions, real interest rates here have fallen very sharply. Exchange rates have fallen a long way too. But, right now, our exchange rate is only about 5 percent below where it was late last year; 25 percent would be more normal. What we need is a deeply negative OCR of the sort the former IMF chief economist Ken Rogoff was calling for in the US context last week. That would get retail interest rates down much nearer zero. Right now, we’re in a weird situation where the Government is lending at zero interest to businesses that can’t get funds elsewhere, while the existing stock of borrowers are still paying materially positive interest rates. Is fiscal policy an alternative? Well, it has a place, including letting the automatic stabilisers work, but it’s not a realistic substitute for monetary policy; it’s got to be a complement. Fiscal measures could help provide some certainty, they can buy some time, they can offer some support, but fiscal policy is not going to grow sales abroad. If anything, a heavy reliance on fiscal policy will continue to skew the economy inwards and reinforce an overvalued exchange rate. Letting monetary policy sit on the sidelines, either doing little else or emphasising fiscal policy, also means that our older citizens, those with more bank deposits than most, keep on earning reasonable returns, while our younger people, who are hardest hit by the downturn and are the future taxpayers, are stuck with the sorts of real interest rates that made sense last year but don’t make sense this year. Of course, we’ll recover eventually; even world wars didn’t put us on a permanently lower path of GDP, but remember too that in a New Zealand context we’ve had decades of relative decline, poor productivity growth, no success in growing foreign trade as a share of GDP.So, looking forward, we need macro-policies that put us aggressively on a path back to full employment, but they need to be working hand in glove with an approach more broadly that looks outwards not inwards, that looks to secure a favourable climate for business investment and productivity growth. That’s the only secure foundation for higher incomes. And we need hard-nosed prioritisation of what new spending the Government does do, recognising that, for now, we’re poorer.Finally, I just want to note in 2008-09 we threw a lot at the economy. We responded to a recession that also wasn’t home-grown. The OCR was cut by 575 basis points, the exchange rate fell sharply, there was a lot of fiscal stimulus in the works, but it still took us 10 years for the unemployment rate to get back even to 4.5 percent. This is a much, much bigger economic disruption. We must do what it takes to prevent any repetition and all the scarring of individual lives that such persistent unemployment would entail. That will have to involve both fiscal and monetary policy. There isn’t limitless fiscal capacity, and, at present, monetary policy is largely spinning its wheels, doing little that makes much difference where it counts. That simply can’t be allowed to continue. Thank you.BridgesThank you very much, Michael. I think it’s very persuasive. I certainly—well, amongst the many things I agreed with, I agree with you about the power of the private sector and unleashing that.Let me just sort of throw you to something that’s not quite your focus—but that discussion we’ve been having today that you, perhaps, heard a bit about, where we’ve got big debt coming and, with that, the prospect of tax and so on. Where do you sit on all of that and Government spending?Reddell I mean, in terms of fiscal policy in the long run, I’m probably less worried than some people are. I think, as Geof made the point, as the economy recovers, tax revenue will rebound considerably. If we get back to a balanced Budget in four or five years’ time, which is probably quite plausible, over time debt ratios will erode as the economy grows.I mean, I am uneasy about some of the permanent deteriorations in fiscal conditions that have been put in place in the last few months. In the scheme of things, they’re probably small. My own emphasis—and I’ve made this point in various articles over the years—is, if anything, we need less tax on business income, not more. I mean, Geof drew the comparison with the company tax rate in Australia. On the other hand, with the broader OECD, our company tax rate is now among the upper quartile of rates, and that’s the rate that affects foreign investors. The company tax rate isn’t critical for New Zealand companies because of the imputation regime. But, overall, I would be looking at lower taxes on business income, because business choices around investment really are very tax sensitive. And our business investment rates have been low for decades.BridgesGreat. And you’re clear about the need for monetary policy to do more work—I suppose is what you’re saying. So we make you Reserve Bank Governor tomorrow; what do you do?ReddellStart by cutting the OCR from where it is, remove the pledge the governor made six weeks ago to not cut the OCR for the next year or so. But the bigger issue is that we’ve got to remove the floor on interest rates. I think Cameron made the point earlier that he argues that negative interest rates haven’t worked. Actually, in Sweden I think they worked pretty well. Even in Europe, they’ve got back towards semi-full employment prior to this crisis. But they haven’t taken rates very negative at all; they’ve taken them to minus a half a percent.Ken Rogoff, the former IMF chief economist, last week argued that we should be looking at something more like minus 5. That requires some changes to the physical cash system. We can’t allow investment funds, for example, to just get around lower interest rates by converting to large amounts of physical cash. That’s technically easy to achieve. The Reserve Bank has been reluctant to engage on those issues so far. In fairness, other central banks have been behind the game as well, but it’s one of the real challenges that we’re facing globally: is that not enough effective monetary support, loosening monetary conditions, lowering interest rates, lowering exchange rates is actually happening. And, therefore, we’re at real risk of taking a long time to get back to anything like full employment, and that’s a really bad prospect.GoldsmithLook, you’re talking about comparing the 500 basis points, or 5 percent, drop that we had at the last recession, roughly, with now. I mean, part of the issue, of course, is that rates were lowered substantially last year, and people could argue about the merits of that, which left less room for manoeuvre. But do you have a sense as to why the Reserve Bank is so resistant to the idea of considering further reductions in the OCR? I mean, it was on the table and then suddenly it came off the table. What’s your, sort of, thinking behind what’s going on there?ReddellIt’s very surprising. I mean, it’s not as if the governor a the long-term reputation as a monetary hawk. I think he genuinely believes the concerns about employment that he uttered last year.Clearly, the bank was totally taken by surprise by these technical obstacles that they seem to have found from some of the banks. The documents they released to your committee a month ago show that they didn’t ask the banks about those obstacles until the end of January; that’s just inexcusable. They had 10 years’ notice of this as a coming issue. So I think they were wrong-footed there. The governor was very slow to realise the significance of what was coming as well, and so, in a way, I wouldn’t be surprised if there were some backtracking this afternoon.I think they tend to believe some of the rhetoric around what the bond-purchase programmes are doing, in a way that I don’t believe and that just isn’t really supported. So they quote, and quoted to your committee, some estimates that the bond-purchase programme is equivalent to, I think it was, about a 200 basis point cut in the OCR. I mean, that just doesn’t stack up because, for most New Zealand firms and companies, long-term interest rates aren’t particularly important. Even if the company issues a corporate bond, they swap it back to floating-rate debt typically. It’s retail interest rates—you know, floating rates, one- to two-year rates, and the exchange rate that really make the difference. Nothing’s changed there. Inflation expectations are falling. It’s a puzzle. We’ll look for answers, hopefully, this afternoon.GoldsmithI mean, a lot of people will say, “Oh, well, look, I mean interest rates are incredibly low at the moment and a further reduction wouldn’t make much difference.”, which is a bit of an odd thing to say but, you know, even home mortgage rates at the moment around sort of 3 and 4 percent, if you got it down to 1 or 2, it would make quite a big difference, wouldn’t it?ReddellAbsolutely, and particularly on the business side—as you know, many business base rates are materially higher than that. And, as I made the point, the Government’s IRD loan scheme, which has considerable merit, is lending at zero to people who can’t get cash in other places. And yet we’re saying credit-worthy borrowers are stuck with paying these 3, 4, 5, 6 percent loans even though, in many cases, they signed up to a contractual arrangement that envisaged that interest rates were variable would fall.I mean, there is a lot of argument that sort of says somehow negative interest rates are unnatural. In a way they are—they’re historically unusual. None the less, in this environment there’s no demand for investment and there’s a high demand for savings. People are nervous, they’re spending less money, so savings just aren’t worth that much to others these days. We should be looking at at least zero retail interest rates for now, not the three, four, five we’ve got.It’s not the only part of the story. I think someone said earlier that access to credit’s really important. Yeah, sure it is, but they’re not alternatives. We can have lower interest rates and we can make sure that the cash flow is supported through things that both the Government is doing and the banks are doing.GoldsmithAnd, finally, and are you more worried about the prospect of deflation or inflation in the, sort of, medium term?ReddellOh, definitely the deflationary risks. I mean, this is a huge deflationary shock, and, I mean, I think as other people have said, we’re going to be running well below capacity for the next few years. But it’s not only me. If you look at the economic surveys, if you look at financial markets, the indexed bond markets, those expectations have fallen away a long way. And that’s why, even though the Reserve Bank cut the OCR by 75 basis points, expectations of future inflation have fallen already by about that much so that real rates—the inflation-adjusted rates—haven’t come down at all. It’s the point that the governor was rightly emphasising last year when he cut by 50 basis points. We can’t afford to see that mentality of permanently lower inflation expectations become entrenched, and it’s why he acted aggressively then. The chances of inflation down the track are something we always have to keep an eye on. They’re pretty limited now; the people who worried about it 10 years ago when the US started QE were decisively proved wrong. I don’t see any reason why that wouldn’t be the case here now, either.GoldsmithAnd, finally, do you have any comments on the Minister of Finance’s role, engagement, with the Reserve Bank. I mean, there are directions that he could offer the Reserve Bank. What’s your sense of the Government’s attitude to how this has been unfolding over the past few months?ReddellIt seems to have been very hands-off. I mean, I did hear secondhand that early in the process the Minister was a bit concerned that the governor was rather cavalier in his disregard for this. But, where we are now, the legislation was written—passed by Parliament 30 years ago, renewed by Parliament in 2018. It allows the target for the bank to be directly set by the Minister of Finance and allows explicitly for the Minister to override the Monetary Policy Committee. I mean, that’s not a power that you want to use lightly, but these are exceptional circumstances.During the Great Depression, central bankers were often actually an obstacle to getting the monetary support that you needed to see a robust recovery. There is some risk that we’re getting towards that situation again, and so I would like to see the Minister putting quite a lot more pressure on the bank if the Governor and the Monetary Policy Committee will not move themselves, not behind the scenes but openly and transparently as the law envisaged, as Parliament has consistently provided.BridgesThank you. Todd McClay, briefly.McClayNo, Mr Chair, actually my questions were covered.TabuteauThanks, Mr Chair, and thanks, Michael. Good to see you again. Just a practical question, carrying on from Mr Goldsmith’s line of questioning around the OCR and your conversation around the negative interest rate proposals. What’s the practical likelihood of banks actually being able to—let alone be inclined to—pass those decreased rates on in their retail market?ReddellWell, I think for the first several hundred basis points the problem doesn’t really arise. I mean, as you know, interest rates for retail borrowers and indeed retail depositors are still materially positive at the moment. So even if the Reserve Bank were able to take the OCR to minus 2, say, mortgage rates might still be around 1 percent; deposit rates might be around zero. Beyond that, it’s hard to tell. The evidence from Europe is that in time eventually they will pass through. It can be a slow process. So what might need to happen is that you might need to cut the OCR by more than you normally would to get those rates through.You can also protect retail depositors from headline negative rates. You can achieve the same effects through fees, for example. So I wouldn’t envisage that retail deposit rates would be likely to go materially negative, even if the sort of approach that I’ve argued for were to be adopted.TabuteauCheers.BridgesHey, thank you so much, Michael. We really appreciate your time. It’s been very insightful.ReddellGood, thanks.BridgesNow we move to Ian Harrison of Tailrisk Economics. Ian’s written some very interesting analysis on COVID-19 and also is a, like Michael, former Reserve Bank economist and worked with others such as the World Bank and the like. So, Ian, we really appreciate having you. We look forward to your remarks, and then I’m sure some questions.HarrisonThank you, Simon. I think the perspective I want to bring to this discussion is the need to focus on the importance of a robust analytical approach to decision making on COVID-19 interventions, and, in particular, we need to focus on both the costs and the benefits of those interventions.I sort of accidently got involved in this. It’s not my day job, but I was locked down about five days before the lockdown because I had COVID symptoms, so I was in the back room. And I happened upon the ministry’s website, and like everybody I was broadly supportive of what had happened but concerned about some of it, in particular the lockdown of businesses. And the one that struck me, because my kitchen was half finished, was that why on earth would you want to stop a builder coming in here and doing a little bit of work.So I went to the website and looked through it and I didn’t see what I expected to see. I would have expected to see a robust risk assessment process. I would have expected to see some cost-benefits. There’s something else there but we’ll leave that.So I didn’t see that, and when I went through the actual modelling, I found all they had was some projections based on an online calculator. Of course, you can take those calculators and run up disastrous sorts of scenarios. So we went through that, just inserted some different numbers, which I thought were much more realistic and took account of the full range of policy variables you had, in particular contact tracing, testing, and so on. And then the disastrous outcome went away, and the situation looked more manageable.But, because the model they were using is not really fit for purpose, you can’t use it to model the kind of nimble kind of changes and actions you’d want to do. You might want to put on level 3 for four weeks, go to level 2. That model doesn’t allow you to do that. You can switch an intervention on, but once you switch it off it goes to zero the rest of the time. So it didn’t work. So we built our own model and then inserted a cost-benefit module to that, and then asked the question: what if we didn’t close down the building industry—building and construction? Two hundred and fifty thousand workers—a kind of a wild guess to $3 billion cost for the month. So we ran the model and we found the benefits, in terms of lives saved, sicknesses, and so on was $7.6 million and the costs were $3 billion. Now, I could be out by a margin of 10, but it was fairly obvious where the answer lay. We shouldn’t have done that, and, if you look at the Australian situation, they didn’t go to a level 4; they kept businesses open that could stay open, and they got pretty much exactly the same result.When I talk about having a robust risk assessment process, it’s the idea of looking at the major interventions making an assessment of how much that contributes to local risk, and you will get a kind of ladder of possibilities. You don’t have to be very smart to think, if I’ve got a bar of 200 boozy people, that’s a big risk and you’ve got to deal with it. If I’ve got a tradesman finishing my kitchen, it’s not a big risk. But the cost of getting rid of the tradesman for a month is just quite large.So that’s where I was there. Then we had that big document dump on—was it Friday? I’ve been going through the documents which were relevant to me, trying to figure out, you know, what kind of device the Government got that made that decision, because we went from level 2 to level 4 very fast. The key document is the 23 March decision document. When I went through that, I couldn’t see any cost-benefit. I couldn’t see any robust risk assessment process, and I really couldn’t see any arguments.The key paragraph in that document was the following: “Our assessment is that the impact of moving from level 3 is unlikely to be sufficient to achieve a break in community transmission and that the conditions of moving from level 3 to level 4 may now be met or will be met in a few days.” Now, they just simply didn’t have any analytical framework to work with to make that kind of judgment, because it’s a very complex judgment. You’ve got a lot of costs on one side, options about where your instruments are on the other side, and you’ve got to work it all together. There simply wasn’t anything there.If we do go to the evidence, I think what was behind it was a fear that there was this silent transmission, and sitting out there weren’t just the 66 cases, which they had at the time, but this secret tsunami which is coming to us with a wave. So what was the evidence for that? Well, of the 66 cases, four had not been traced. So that was a 94 percent success rate, but, apparently, 94 percent was a fail.The second was a reference that they said we’ve had advice that for every one you see there are nine out there. They don’t say who told them that, but they do reference a paper on the Chinese experience, where, indeed, there was some modelling that said that only 14 percent of cases had been discovered. Now, that looks kind of impressive on the surface, but that modelling was from 10 January to 23 January in China. On 23 January, they did the big travel lockdown so everyone knew it was going on. Prior to that, the medical profession and people didn’t really understand what was going on, so they couldn’t report it. They didn’t have reporting frameworks and so on. They ran the model again—from 24 January till 8 February—and they found that for every case there was only half a case that wasn’t discovered. Now, if you think if that’s the evidence you’re going to use, you should have used that second one, because that best fitted the New Zealand experience at the time. We knew what COVID was. We had the reporting requirements and so on. My point here is really that that evidence was really exploited, not very fairly or with integrity, just to pump a point of view, not to get to the truth. So, in a sense, that was where I’m at. Possibly the more concerting quote was from the 15 April documents, initial monitoring report. It says the following: “The approach taken to future decisions about alert levels should reflect the broader approach decision-making taken to date.” Now, that’s not a comforting thought. And, to continue, “This is a risk-based approach”—well, it wasn’t—“that applies judgment looking at a range of factors.” Now, I really disagree with that. Oh, no—I’ll just finish the quote: “The approach is more appropriate to a complex situation than alternatives such as cost-benefit analysis.” That’s the point I disagree with.So what you’re saying is you’re going to make these enormous decisions, which have impinged on New Zealand’s economic viability or stability, it impinges on civil liberties, and you’re going to make all those decisions without thinking about the costs and the benefits. That’s a genuine concern. Now, I know a lot of people don’t like cost-benefit analysis because it does make you more accountable, it’s more transparent, but those are the things we need more than ever. The Government’s got enormous power and it can just say, “Well, I’ve done that because I think it’s the best thing to do. And believe me and trust me, I’ve looked at all the considerations, and what I say should go.”I think a cost-benefit framework is an accountability mechanism that Governments should fill in the numbers and then let people see those numbers very quickly. They can come to a different view from the cost-benefit, but then that’s out in the open. So that’s where I would come from.BridgesVery much, Ian. I’m perhaps stating the obvious here, but what you’re telling us is that we’ve had lockdown for several weeks without benefit-cost analysis from Treasury, MBIE, etc.?HarrisonThat’s right. Well, it might be there somewhere but it’s not in any of the documents.BridgesSo that means we—as a nation, from Government—weighed the benefits of the lockdown. There’s undoubtedly those. But we simply didn’t weigh any of the costs on the other side, and, on the costs, I think we can all understand very readily your economic point, which is, you know, the cost of a builder not going to work or a painter painting your kitchen. Are the costs of lockdown wider than simply economic?HarrisonOh, the social costs could go beyond that. Well, everyone has their personal experience, but we know from, you know, the children’s education [Inaudible] support. We’ve got people [Inaudible] who are being locked out. [Inaudible] I can understand people wanting to say we don’t want a death, but there are social costs in that and they go on and on. You’re going to have the social costs that are consequent on the economic costs. People are stressed; they’re probably going to be unemployed—those things will flow on possibly for years.BridgesYou have done reports—and, again, I’m not trying to be funny; I haven’t read them in preparation for this, although I do remember reading them at the time that you wrote them. Is your clear conclusion that the benefits, or, rather, I should say, the costs of lockdown exceed the benefits?HarrisonI think you’ve got to be clear about what you mean by lockdown. I think a good case can be made for the bubble concept. You did want to break the chain of transmission. But, the lockdown of the workplace, certainly the cost went well beyond the benefits.BridgesYeah, I mean, to be clear, on—no, not that—I’m just asking questions. But my position is the lockdown was worth it but it was extended too long, but we don’t need to get into that. Finally, you mentioned the document dump last Friday—hundreds of pages and you’ve gone through the ones that you think are salient to the questions you’re talking about now. As a very experienced economist, what is your view on the quality of the advice the Government has received?HarrisonPoor—it’s non-existent.BridgesWell, I don’t think you can be much clearer than that.GoldsmithYeah, I mean, I think your points are well made about the initial Cabinet paper for the big decision on 20 March, but I think a lot of New Zealanders would accept that at a crisis everything was changing so rapidly, one day after the other. There may have been an argument for taking the plunge, as we did going into level 4.What’s less justifiable, I would have thought, was, actually, the 14 April paper where they were outlining the thought process for coming out of level 4 and into level 3 and beyond. I looked at that Cabinet paper and there was no reference at all in that paper to what we’d learnt from Australia. I think most people would say, “Well, hang on a moment. You know, you’ve had several weeks where you’ve seen the country that is most like us in the world—similarly isolated, sparse population spread over large areas—who had kept construction going and many other things going and were having similar outcomes. How on earth could you have a paper going through the thinking of how you come out of this with no reference at all to Australia? I don’t know if you saw that, but does it strike you that we were rather reluctant to be open about the possibility of different approaches in coming out of this?HarrisonI think so, yeah. I mean, what more can you say, really? I think you can argue the detail. I think a level 3.5 would have been sufficient, but the problem was that there wasn’t a robust framework to think about this stuff. You could see it in the papers. There was a kind of a panic over two days. People were rushing to do things. The balance of power and the bureaucracy was probably shifting around. Someone got the upper hand and then we went, bang, to level 4. People don’t like to admit they’re wrong, I guess. So you’re not going to say, “Yeah, there I was wrong. There’s the evidence.”WoodhouseThank you, Chair. Ian, thanks for the presentation. I think what you’ve done is highlighted that the public, at least, are probably a bit squeamish about the measurement of cost and benefits when it comes to people’s health and lives. But it seems to me the Government does that all the time, particularly—well, I’ll get you to, sort of, give an example of where, I’m thinking of transport, road safety, or something like that, where there’s a consideration of a roading improvement compared to what that might mean for reductions in harm. Is that a fair enough example? What are other examples, where the Government actually has to consider the health benefits against the economic costs?HarrisonWell, they always are in a sense. You know, you’ve got a limited budget in your health system and you’ve got to prioritise how you spend that money. And implicitly, or sometimes explicitly, we will let people not be treated—because someone who’s 90 years old is getting into hospital, we’ll say, well, the resource are better spent elsewhere. So in roading there is an explicit value on that, in pharmaceuticals there are explicit values. Governments don’t like to make that too apparent, but there are. So that’s how we did the cost-benefit. We sort of value a life year. You put a value on it, people can argue about the number, but there’s the value. So you can say, “Well, we’ve saved two lives - three lives.” Probably most of those would have been in retirement homes where the average life expectancy is 1.7 years, so we may have saved 0.9 of a year, and we can put a value on that. WoodhouseYeah, the difficulty with that—Harrison[Inaudible] to argue, but then you can compare that with the cost of doing it.WoodhouseOne of the things we can’t do though is predict the future, and it seems to me that the Prime Minister’s description on 23 March that there was the potential for tens of thousands of lives to be lost, which is kind of Spanish flu multiplied by population growth, was a rather blunt—and dare I say it, lazy—analysis, but suggested a binary approach: either we’re all completely locked down or we’re all completely out there hugging and hongi-ing. What’s your assessment—you may have kind of implied that in your answer, but what’s your assessment of the quality of the analysis that was done to inform that kind of rhetoric?HarrisonIt was done to inform that kind of rhetoric. If you go to the paper on the 16th, they were looking at nine to eleven thousand lives. Suddenly, a week later, nothing’s really changed; it’s 27,000. WoodhouseAnd, to be clear, that was an analysis if we did nothing and made no changes to the way we lived our lives.HarrisonNothing—yeah. And what we’ve seen in New Zealand is that we have a relatively low percentage of people in their 70s-plus caught the disease. I think it’s about 7 percent compared to a population share of about 12 percent. If you go to, I think, Italy, the share of older people is 36 percent. So I think, you know, people aren’t stupid. They got the idea that it’s old people at risk—you know, the young people are not at risk—and that they took care to protect themselves. They locked down early and hard by themselves.BridgesYou’re on mute there.WoodhouseSorry, I don’t know how that happened. Thank you.Finally, one of the things that I’ve looked for—and I haven’t had a lot of time, but it was an analysis of the non-COVID and economic costs compared with the health benefits. So there’s been a massive reduction, for example, in the amount of cancer treatments, diabetes treatment, cardiovascular disease, the mental health impacts of lockdown and job loss, before we even get to the economic costs. Are you satisfied that the Government did enough work to understand not only the costs in COVID but the other costs to the health system of locking us down? HarrisonI wasn’t close to that. All I can say is that they were slow to react. We had a hospital system which had hardly any COVID patients in it, had no ordinary traffic accident and so on, and the system was sitting empty. People were twiddling their thumbs. They could have much more rapidly gone back and got those discretionary surgery things going again. There was probably two or three weeks lost there, but I’m not at that [Inaudible]. WoodhouseSo in response to this kind of perception that there was no alternative, there are always sensible alternatives, would you agree? HarrisonExactly. WoodhouseThank you. BridgesThank you—Ruth Dyson. DysonThanks, Mr Chair. Thanks, Ian, for your contribution to what’s been a really interesting morning. One of the key and consistent messages that we’ve heard is about the way we build back. This morning we heard from Michael Reddell and Geof Nightingale about the issues of full employment and equity. I think they’re really important as we look at how we go through. You’ve done comparisons with other countries and talked about our response. I think it’s really interesting, if you look at Australia and their response, where they would have had a builder coming into your house despite you being symptomatic—but you would have got your kitchen finished. I’m not sure of how the builder may have felt about that. But in Australia they did allow construction to continue, and their unemployment rate per capita is much higher than ours. So, you know, there’s huge risks in whatever approach you take. The Victorian Government is really closing down Victoria this late in May because of the outbreaks. They’ve had 85 new cases in the meatworks they had open. It’s just exploding. So, you know, you can always do this “What costs? What benefits?”, but I suppose the most concerning thing for me in the contribution you made was—dare I say it—“They’re gonna die soon anyway.” I find that a really harsh approach. It feels to me more like it’s the Government’s responsibility, when you know the risk, to take every possible precaution for every citizen—frankly, regardless of whether they’re 19 or 90—because they are citizens of our country. So from my point of view, my big question is: what’s the value of a life, and what’s the cost of a death?HarrisonWell, we do put a value on it. You know, as I said my paper, the death of a 17-year-old with their life in front of them is a tragedy, but we all go through the experience of grandparents and parents who die when they’re 80 or 90, and you’re equipped to handle it. You know it’s going to come. I’ve been through it, and you don’t like it at the time, but, you know, with the passage of time, you say, “Well, it had to happen.” But if you lose a 17-year-old, that is tragic and you may never get over it. So I think there’s a big distinction. But where you get to is: how do you deal with this? Do you close the whole economy down, or do you put your borders around those rest homes much more robustly? Now, as it turns out, I think New Zealand’s done pretty well in that respect. I think we’ve got about 35,000 rest home beds. I think there were four clusters in rest homes. That was, you know, bad luck on those affected, but, if you look across how we performed in rest homes compared to Sweden, they didn’t perform very well at all. So that’s where the resource goes in that. If you’ve got a good model, a good structure, and you’re ahead—where do we need to protect and do it in the most effective way—you would be putting those boundaries around that rest home and you would’ve been thinking in February and March, “How are we gonna do this? Because this is going to be critical because we know it’s the older people who are most affected.” So you design your system, saying, “Look, we don’t have to go to level 4, because we think we’ve got really robust protections around there. We think we have got good contact tracing, so, with that mix that should give us the best outcome.”—if you like, bangs for your buck.McClayThank you very much. I wonder if you just can help me here, because Ruth Dyson just mentioned that the Australian unemployment level was higher than New Zealand’s and she then used an example of abattoirs—of course, abattoirs were open in New Zealand during the lockdown. But have you got a view of what you think is likely to happen to the unemployment level in New Zealand, and, I suppose, compared to Australia? I would make the case that the Government has just sort of released, you know, the workplace survey in New Zealand, which in hospitality showed a fall in the unemployment rate, but, of course, that was at the beginning of the year, before the lockdown, and I’m not sure that anybody in the country believes that unemployment is lower now than it was. So that comparison between what you think might happen with unemployment and job and business failures in Australia, who have been tried to keep their economy open to the degree they can safely, as opposed to the approach in New Zealand, where all but a very fortunate few had to close. Harrison I’m simply not close enough to the data. I think Mike Reddell would be your better man on that. It’s something I can go away and look at, but I guess, as I’ll go back to it, my main point was that without a robust analytical framework, we’ve been casting about and possibly open to a bit of panic unnecessarily. If you’ve got the framework there, then you keep your sense of proportion and you preserve a capacity to respond in a measured way. So how this thing pans out—there’ll be economists who’ll be arguing about who did best economically and who did worse and why. So I just think we don’t know yet how this is going to pan out. We know it’s gonna be pretty tough here. How much tougher here than Australia, I don’t know. McClaySo the use of good analytics; good, sound science; and, for instance, people being able to go to a restaurant or in larger numbers to go to the cinema but not a funeral. HarrisonWell, I don’t get that. And, when I talk about a risk assessment framework, I don’t get how you have to restrict a funeral to 10 people. I think the Government should release the advice it had on that, which seems pretty—I can understand why you don’t have a big party afterwards, but I don’t know why 10. Why not 20, 30, 40, 50? And I think, in the interests of transparency, I think the Government should make that advice available, because it’s been a pretty harsh call. It was no funerals; now we’ve worked our way up to 10. But my guess on the risk—I had a back-of-the-envelope think about it, and the risk from a 10-person funeral, if you look at the number of interactions and so on, is maybe less than a thousandth of the interactions you have in supermarkets.McClayWell, I would suggest there’ll be very little evidence to demonstrate why that’s happened. And I make a prediction the Government will cave and change, and that’s the right thing to do.BridgesWell, time will tell. Ian, thank you so much. That’s been incredibly interesting. We really appreciate your time.We’re now, if he’s still about, going to come back to Cameron Bagrie. Cameron, to wrap us up with some wise economic words prior to Budget 2020 tomorrow.BagrieYou there? Am I back online?BridgesYou’re on! Bagrie Economics—there you go; there’s another free plug.BagrieYeah, right. Look, there’s an awful lot going on. It’s hard to put a benchmark in regard to what we’re going through. You know, people are comparing it to the 1930s. It’s not like the 1930s. The 1930s was three years in a row of negative GDP growth. Yeah, what we’re facing at the moment is that it’s a bigger hit right up front, a quasi-quick recovery, but then a bit of a long slog out the other side. Now, I tell people don’t think about the Asian crisis or the global financial crisis; probably think a lot more about what New Zealand went through between 1987 and 1992, which is a pretty tough slog out the other side.We can’t separate COVID from an awful lot of other things that have been going on. And we’ve got these big battles going on internationally, the returns to the capital versus the returns to the labour; young versus old; housing affordability was at the epicentre; now it’s likely to be jobs; a big shift away from what’s called shareholder-based capitalism towards stakeholder-based capitalism—now, that’s really a fancy way of saying think more about the long term, less about the short term.But, no illusions, New Zealand is facing a challenge—and that’s putting things politely—like we’ve never seen in our economic history. But there’s that old adage: never waste a crisis. It’s actually the time where you can actually get things done. My wish out of this is that we embrace pretty aggressively some microeconomic reform. Now, once again, one adage I used in my opening address was “think small to stand tall”. It’s not about shovelling a whole lot of money out the door in regard to shovel-ready projects. Yes, is that going to need to be a big part of the response initiatives? We will do that. Make sure we’re getting appropriate bang for our buck. It’s not just about spend; it’s got to be about quality spend. But I’ll be encouraging, you know, all sides of the House to be coming together and thinking about whether we can see some common ground in regard to what are those little levers that we can pull that ultimately help the private sector get the economy up and running, in a strong sense, on the other side. The reality is, if we don’t get growth out the other side, we’re going to see unemployment remain double-digits for a long time. That is going to mean Māori-Pasifika unemployment potentially in excess of 20 percent, youth unemployment up in the 30s. Now, those are not just an economic catastrophe; they’re a social catastrophe on the other side. And so the economic imperative, to me, is about getting growth. This is not about growth at any costs; it’s got to be sensible stuff. The nucleus, the nuts and bolts of your economy, reside with the microeconomic things. It’s all the small stuff. It’s the lateral thinking. It’s the creativity. It’s thinking about, as I said earlier on, you know, if we’re going to get the tourism sector focused on domestic tourism, or those New Zealanders that did used to travel overseas, let’s help them out by shifting the school holidays. Let’s not have everybody rushing down to Queenstown in that narrow two-week window over July. Have different holiday periods across regions, have a different holiday period compared to Australia, so we’re not all clamouring on the mountain at the same time. But those are just your little examples about the little things that we can tweak on the other side, and they’re not hard.BridgesGreat comments, Cameron. I agree. I think your point around saving jobs—one I’ve also been making, particularly around youth, Māori—is absolutely right and is probably the number one point, if you like, right at this moment.Let’s make an executive call to have one question—and I mean a question, not a mini-speech—from each side of the Parliament. And we’re going to start with Mr Michael Wood.WoodThank you, Mr Chair. Always, I’ll do my best. Hey, Cameron, thank you. Been a really good session. I don’t want to sound too “Pollyanna-ish” about this, but most of what we’ve been talking about has been focused around the extreme difficulties that we’re facing and that we’re going to face in the coming years.I do want to ask you a question, though, about a particular opportunity for New Zealand, and that is the opportunity that if we continue going as we are going; if we eliminate this virus and become one of the few countries to do so, and if that means we track to a level of economic and social freedom that, actually, most countries don’t have, as they yo-yo in and out of higher restrictions; and if, touching big bits of wood, our trans-Tasman neighbours do that and we can look at some kind of link up there—what kind of unique opportunities does that offer New Zealand, compared to other places who might still be struggling with high numbers of cases and deaths later this year?BagrieYou’ve got two essential opportunities. One is built around what we call the “Sanctuary New Zealand”, where, all of a sudden, we’ve got the ability to attract, if we want them, the best and brightest around the globe. And I know we’ve got different migrant categories in regard to who can come in, under investor categories, or have you got X amount of money and you buy bonds-y sort of stuff or you go buy a golf course, or these sort of things. What we want is the real, genuine entrepreneurs. We want the people to come down, and the commitment has to be, well, (a) you’ve got to have the balance sheet capability to set up a business. But what we want is a commitment for those people coming down and putting 20 New Zealanders into paid work, and they’ve got to pay them above the average wage. But what we need, to use this as an opportunity, is to, basically, gather intellectual capital. You know, these people are going to be globally connected, and one of the things that New Zealand is very poor at is executing on the global stage. We need to up the ante, up our game, in regard to that, and one of the ways we can do that is to leverage the opportunity of our “Sanctuary New Zealand”. I know some people have pushed back against the idea. We’re not selling visas for cash. No, we’re not selling visas for cash. We are selling visas for creativity, jobs, and opportunities to help the New Zealand economy flourish.The second big avenue that we need to look at is, really, the leverage in regard to “Brand New Zealand”, in regard to what we produce on the global stage. If you think, at the moment, in regard to the food supply chain as being disrupted, what does New Zealand have at the moment of tremendous value? Its brand. Its safety. Its health. Now, that’s a tremendous opportunity, but, you know, there’s also a bit of a risk out there at the moment: if food supply chains are being disrupted around the globe, there is a potential for countries to become a lot more inward-focused, and then we start to see globalisation continue to reverse, and that’s one of the big concerns I have out of what we see post-COVID—is that countries look more inward as opposed to outward.WoodThank you.BridgesThanks very much. And Paul Goldsmith to finish us off.GoldsmithCameron, it seems to me that the most important driver of growth coming out of this is private sector investment, and you’ve referred to that. I mean, if you were to sort of nominate one or two things that would make the biggest difference in encouraging and stimulating more private sector investment over the next 18 months, what would you be looking at?BagrieI guess the way I think about this is don’t go looking for the magic potions or the big. You know, I think magic potions in this environment are going to be snake oil. What I would be doing is, yeah, talking with entities that have got big balance sheets. If you look at your big entities across New Zealand—yeah, central government’s obviously big; local government as well; but big listed companies—what they tend to have is they’ll have a 10-year investment programme. There’s stuff that they plan to do over the next 10 years. Yeah, we need to be talking to those organisations and start to get them thinking about, well, “What would it take; what rules will we need to tweak; what do we need to get done so you pour that 10-year investment profile—stuff you were going to do anyway—into the next two, three, maybe four years.” You know, try to get them sort of cranking up when those with lean balance sheets are basically out there fighting for survival.Another area that I’m personally pretty hot on is just right-sizing the education sector. Now, that’s more of a long-term thing that I think needs to change in regard to making New Zealand set for the future, 10 years down the track, as opposed to responding right here and now.GoldsmithVery good. Thank you.BridgesWell, Cam, thanks so much. We really appreciate your time and your input and your expertise. It’s been terrific. That ends our public hearing. Just the members are going to stay on board and discuss one or two minor matters. Thanks so much.BagrieThanks for having me.conclusion of evidence ................
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