High economic stakes for every border scenario

Dr Eric Crampton
21 September, 2020

The real fun in Treasury fiscal updates is rarely in the headlines. It’s rather in the finer print where the assumptions underpinning the main estimates are laid out, and where different scenarios are played out.

Last week, Treasury released its Pre-Election Fiscal Update – the PREFU. It was the second PREFU that Treasury this year had to produce; the delay in the election meant a second set of updated forecasts was needed. I do not envy them.

The main headline forecasts were grim, but not as grim as might have been feared in April. The unemployment rate is forecast to peak at 7.7 per cent next year, below the double-digit figures once projected, but worse than any period since 1998. Economic output is to drop by 3.1 per cent this year, and by a further 0.5 per cent next year, with a return to growth in 2022.

Those headline forecasts are always subject to change. The GDP figures released after PREFU suggest the dip this year may be smaller. But the forecasts for economic growth and for longer term debt levels depend on labour productivity growth rates rather stronger than those we have seen in recent years.

It’s the scenarios running alongside the main forecasts that look a little more interesting. The main forecasts project no more than about four weeks at Covid-19 alert levels 2 and 3 after this quarter, that border restrictions end at the start of 2022, and that some limited increase in visitor entry is enabled from the middle of 2021.

Treasury tweaks those assumptions to project what happens under a resurgence in community transmission, or if border controls have to last for longer, or if tourism could return more quickly in 2021.

There are substantial differences between those scenarios, pointing to risks to be avoided or for which to be prepared.

Being able to open more quickly to international students and visitors would reduce unemployment rates from 7.6 per cent to 6.4 per cent. GDP growth rates would also be 1.6 percentage points higher.

A resurgence in community transmission would increase unemployment instead to 8.5 per cent. And a longer period of closed borders without a resurgence in community transmission would also see unemployment hit 8.5 per cent.

And so we have numbers to put with the main kinds of scenarios pundits have argued about for the past several months.

Long periods of closed borders are terrible. Scenarios requiring closed borders are ones in which vaccines take longer to emerge and the global recession is consequently more severe, and New Zealand policy cannot affect that global situation. But closed borders are also directly harmful, so should be avoided if possible.

A percentage point in unemployment is about 27,000 workers, so being able to open more quickly would mean over 32,000 workers would not be unemployed compared to the main scenario, or almost 57,000 workers as compared to an extended period of closed borders.

But messing up border processes and getting a new resurgence in community transmission would push over 24,000 more into unemployment.

It is all rather high stakes. Tens of thousands of jobs are literally on the line. Stay too closed, and tens of thousands are unemployed needlessly, with all of the humanitarian consequences of that, as well as all of the humanitarian consequences of preventing people from being able to reunite with loved ones abroad.

Open recklessly, and a likely different, and slightly smaller, set of tens of thousands of jobs are at stake – along with the humanitarian misery of illness.

All of it suggests that investments in strong border processes, and associated public health support, are critically important both in avoiding renewed community outbreaks and in avoiding what will be very real misery as closed borders see businesses fail and jobs destroyed.

Treasury’s bleaker scenarios in which the pandemic rages for longer are precisely the ones in which New Zealand needs the greatest insurance against both of those outcomes. It could far too easily be the case that no vaccine will see widespread distribution until well into 2022, or later.

In that kind of world, scaled up border protection not only makes it a bit easier for Kiwis to travel and to come home, but also for New Zealand to take advantage of being one of the very few places in the world where businesses and people can come to enjoy a relatively Covid-free environment.

If an extended Covid scenario would have unemployment hitting 8.5 per cent, it is even more important to make sure that border processes help businesses and workers to adapt.

In that world, large-scale tourist flows obviously cannot return.

But thousands of remote workers, paid by their overseas employers in Canada, the United States, or elsewhere, could pay their own way through managed isolation. They would spend here the wages provided by their overseas employers, and pay taxes here, and help local economies.

Businesses needing uninterrupted operations could shift to New Zealand, bringing workers with them and hiring more locals here, also helping in the recovery.

Preparing for that scenario is important – there is plausibly a difference of fifty thousand jobs between longer and shorter periods of closed borders. Investing what it takes to scale up will prove a bargain.

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