6.6 The social and economic 'long tail' Te ‘whiore roa’ pāpori me te ōhanga

COVID-19 highlighted community resilience and the power of communities to respond and support their members. However, COVID-19 also exposed emergent weaknesses and vulnerabilities that had been forming in our social and economic fabric for decades – including in our governance systems, institutions, and physical and digital infrastructures. The pandemic thereby created an unintended opportunity to address some of the deficiencies it had surfaced.

When strict public health measures were imposed at the start of the pandemic, the promptness and generosity of Aotearoa New Zealand’s economic policy response cushioned the population at large (including many, but not all, businesses) from the immediate negative economic and social impacts. This approach seemed appropriate, given the high levels of uncertainty at this time. Nevertheless, it has left a long shadow on the economy and society¹⁸⁰ – a phenomenon that is certainly not peculiar to Aotearoa New Zealand nor attributable solely to our domestic policy responses.¹⁸¹

As both the International Monetary Fund and the OECD confirm, the following factors collectively contributed to high inflationary pressures (including on house prices) and will be the cause of a protracted period of low economic growth:¹⁸²

• Aggressive/generous monetary and fiscal policy responses.
• The extended duration of these generous policy stances.
• The comparably long duration of restrictions on domestic and international movements that have exacerbated supply-side constraints.
• The subsequent decision to tighten macroeconomic policy settings, with some urgency.

As a result of these factors and others, Aotearoa New Zealand’s economy has experienced many enduring post-pandemic effects – on output and productivity, employment and migration, cost of living/inflation, the housing market, government debt and delays in much-needed infrastructure investments. The structure of international trade has changed, particularly through the loss of tourism and education income. So too has the overall structure of the economy, with one-off (and sometimes lasting) systemic shifts, regional effects, and sector-specific effects.¹⁸³ There is growing international evidence that initiatives such as the Wage Subsidy Scheme – which focused on employment retention and job attachment – have led to a relative loss of productivity through their adverse effects on labour market dynamics (namely, the movement of people between jobs).¹⁸⁴ However, we have no direct evidence of this for Aotearoa New Zealand. For some, the rapid adoption of new digital communications technologies has enabled remote working on an unprecedented scale. This is leading to changing patterns in the structure of the workforce and employee expectations, and flow-on changes in spatial demands in areas where office workers have traditionally been concentrated.¹⁸⁵ At the same time, there is ongoing debate about the productivity benefits of continuing working from home arrangements, compared with requiring employees to return to offices.¹⁸⁶

Meanwhile, in his analysis of the medium-term effects of this country’s monetary and fiscal policy responses to the pandemic, commentator Bernard Hickey¹⁸⁷ drew attention to ‘the massive wealth transfers’ that had occurred at the housing market peak in September 2021:

“Official figures show the stark explosion in inequality since the onset of covid as the Government’s interventions to print $58b and give $20b in cash to business owners helped make owners of homes and businesses $952b richer since December 2019. Meanwhile, renters have missed out on that asset growth and have been hammered with real wage deflation and rents rising faster than incomes. The poorest are now $400m more in debt and need twice as many food parcels as before Covid.”

We note that by 2024, some of the asset price inflation referred to had reversed.

Related to the long-tail economic and equity effects of the pandemic, we should also be concerned about the potential weakening of Aotearoa New Zealand’s social service delivery system – particularly the NGOs and community organisations providing front-line services on behalf of government. As a result of their efforts during the pandemic and with other sector changes, many are in precarious positions due to financial and workforce (including volunteer) issues which now challenge their sustainability. Our concern is with the fragility of the overall network of providers, and what that might mean for our readiness to respond to a future pandemic.

The analysis quoted above and evidence provided in this chapter highlights the intersection between the economic after-effects of COVID-19 and its social impacts. For many individuals, families, households and communities, the pandemic is not over. They continue to struggle with its consequences – long COVID, loss of learning, mental health issues and more.¹⁸⁸ Those with delayed diagnosis or postponed treatment during the pandemic may now be facing shorter lives, or reduced quality of life (for example, young children who missed Well Child Tamariki Ora health checks are being identified in the B4 School Check as having health issues that should have been screened and treated earlier). We have heard of families separated for years due to the border closures, leading to relationship breakdowns that will impact family members throughout their lifetimes. People who suffered job losses and business bankruptcy could take years to recover.

Some of the pandemic’s impacts are only now becoming apparent. There may be others that we are not aware of which will be long-term and intergenerational, with potentially profound consequences for Aotearoa New Zealand and for future human capability more broadly.¹⁸⁹ While the measures taken clearly protected many people, others are likely to suffer from the long-term impacts of the pandemic. For example, the impact on young people on their physical, emotional and mental health from disruption to their development or education during the pandemic will take years to fully understand.

“A lot of the impacts for vulnerable whānau would likely be experienced for the decade afterwards […] It’s our job now to avoid this being intergenerational. Our response to COVID is not finished. We were clear there was going to be a long tail. We need to live up to that responsibility.”

Much of the COVID-19-related support allocated to the social sector (both to government and non-government providers) was one-off or time-limited. It has been steadily scaled back and sometimes removed altogether. Many government contracting arrangements reverted to their previous settings at the tail end of the pandemic, despite the many demonstrable examples from the pandemic of what outcomes-based, flexible contracting arrangements could achieve.¹⁹⁰ In our view, there is a risk that some of the successes of the pandemic – including positive models for Government, communities, NGOs and the private sector to work together – may be lost.

We, like a number of experienced market commentators, are also concerned about a potential for weakening of Aotearoa New Zealand’s economic institutions, and whether established principles of good fiscal discipline risk being compromised as a result of the pandemic. One such concern relates to the reduced ability of our fiscal buffers (including access to international credit markets at reasonable prices) to respond to another major crisis.¹⁹¹ Using the fiscal buffer in an emergency, such as a pandemic, is consistent with its purpose. But its restoration, consistent with what governments consider prudent, is necessary so it can be used when needed in the future. Failure to do so over a sensible period of time (without creating further economic instability or compromising infrastructural investment that promises a good social return) could severely weaken what has previously been an institutional strength.

On the monetary policy side, we heard considerable concern from some expert stakeholders about the use – or, perhaps more accurately, the extent – of the Reserve Bank resorting to so-called ‘unconventional monetary policies’, particularly the ‘large scale asset purchase’ programme.^xxxii In fact, these policies are now well accepted by international organisations (for example, the International Monetary Fund) as part of the international monetary authorities’ arsenal and were used extensively by other similar economies during the pandemic when interest rates became extremely low. However, the extent of their use in Aotearoa New Zealand was unprecedented and there is no doubt that they imposed a considerable risk to the Crown’s balance sheet and debt position. A Crown indemnity to the Reserve Bank was provided to ensure that the large-scale asset purchase programme could go ahead. As interest rates increased, the Reserve Bank suffered losses on its balance sheet that were covered by the indemnity. Although the indemnity and associated payments between the Government and the Reserve Bank (being transfers among entities included in the consolidated Crown accounts) do not make taxpayers any better or worse off, nevertheless the large-scale asset purchase programme did impose direct fiscal losses to the taxpayer in the order of $11 billion. This arose from the fact that the programme changed the private sector’s lending to the Government from bond holdings to settlement cash balances at the Reserve Bank.¹⁹²

At its peak, the Reserve Bank purchases amounted to $54.6 billion (as of June 2021), amounting to approximately 16.5 percent of GDP. We understand that the Reserve Bank’s Monetary Committee has elected to follow an accelerated programme of unwinding these purchases, which it considered the best means of meeting its remit; this contrasts with the passive approach generally followed overseas. How this will finally play out in terms of the overall impact on the Crown balance sheet and debt has yet to be determined.¹⁹³

Overall, though, we agree with the National Bureau of Economic Research¹⁹⁴ and others that the fiscal policy consequences of quantitative easing can only be assessed alongside the prior net benefits of the large-scale asset purchase programme in stimulating demand, their impact on growth and employment, and their impact on stabilising the economy and the financial system. The jury is still out on how this all played out. It is also worth noting that the International Monetary Fund 2023 report on the state of the New Zealand economy found that, overall, the Reserve Bank’s large-scale asset purchases during COVID-19 ‘had favorable effects on the fiscal stance’.¹⁹⁵

The evidence we reviewed also raised questions about the coordination and assessment of the cumulative impacts of total macro-fiscal support provided during the pandemic.

The allocation and effectiveness of government expenditure was another issue highlighted by the evidence. The initial economic response was shaped by advice from the Treasury and the Ministry of Business, Innovation and Employment; it addressed frameworks, processes, criteria and exit pathways to be used in making expenditure decisions. Once the size of the economic impact caused by public health measures became clear, as well as the number and type of different initiatives that might be needed, the scrutiny of expenditure decisions changed. For Budget 2020, the initial scrutiny was particularly fast paced, with the Treasury having four days to assess over 240 initiatives, seeking almost $30 billion in new funding. The Treasury did carry out some value-for-money analysis which involved asking some essential cost-benefit analysis questions: for example, what the initiative would deliver, how the initiative related to the Government’s plans, whether it was critical and urgent, the expected costs, the risks of not funding the initiatives, and distributional analysis. The pace at which decisions had to be made – and ongoing uncertainty over the severity, impact and length of the pandemic – constrained the appraisal of COVID-19 Response and Recovery Fund initiatives undertaken by departments and agencies.

Normally, when government is deciding whether to fund a proposed initiative, any initial concerns about cost effectiveness can be at least partially addressed by ensuring the initiative will be reviewed over time. Some economic support policies were adjusted over time – for example, who qualified for the Wage Subsidy Scheme, and the level of support it provided – but there was little review and adjustment across the portfolio of Response and Recovery Fund initiatives.

For some programmes there were value for money concerns. The Office of the Auditor-General commented on this issue in relation to the selection process ministers used for the Strategic Tourism Assets Protection Programme and the Shovel-Ready Projects Programme. While recognising that the urgency presented by the pandemic meant rapid decisions were needed, the Auditor-General expressed concern that ‘significant spending of public money continue[d] to occur without appropriate processes for ensuring value for money and transparent decision-making’.¹⁹⁶

Finally, perhaps the most difficult long-tail impact of COVID-19 is the damage to mental health and wellbeing.¹⁹⁷ The added anxiety and distress caused by the pandemic, and by some public health response measures, is compounding Aotearoa New Zealand’s already high prevalence of mental health and addiction problems. The increase in poor mental health among younger people is particularly concerning. It will likely continue for decades, and possibly intergenerationally.