We’ve heard figures of $20 billion damage from the Christchurch quakes, $5 billion uninsured for the government to cover. Now, Key has given an estimate of the lost economic output this year – $12 billion, 6% of GDP. He says that will mean $5 billion less government revenue – a hole the size of the defence and law and order budgets combined.
Speaking on NewstalkZB, Key said “From June to June, my guess is that we’ve lost $12 billion in GDP. In other words, just less activity. Crudely, from the government’s view, that’s $5 billion we don’t get.”
Frankly, these numbers seem far too big to me. Canterbury contributes only 15% of the country’s GDP and I don’t think these two quakes can have eliminated 40% of Canterbury’s annual economic activity. But, I don’t see any reason why Key would be so irresponsible as to make them up, so let’s consider the consequences.
$12 billion less economic activity implies about $5 billion less in employee compensation. The average employee gets $40,000 a year, so that’s 125,000 jobs lost – 40% of Canterbury’s workforce and enough to take national unemployment close to 13%. The extra dole bill would be on the order of a billion dollars.
The $5 billion slice out of government revenue and the billion extra dole bill is ‘only’ 12 days worth of the country’s economic output but when you ask who the government gets the cash from it’s huge, especially when you consider that the government is facing an extra bill of about a billion a year for the next five years for the rebuilding. While a disaster levy, like the one proposed by the Greens, could raise a billion a year to cover the extra costs, there’s going to have to be some extra debt to cover the lost revenue and extra dole.
Let’s be clear, cuts like National is mincing around won’t cover it. Trimming Working For Families would only save a million a year if (somehow) limited to families on incomes over $100,000. Excluding some more people from higher education, as Key is suggesting, will only save a few million too. Yes, National is planning to use the shock doctrine to do things they otherwise couldn’t but covering a $5 billion hole and the extra dole bill with cuts would be a slash and burn exercise like we’ve never seen. Thankfully, I don’t think Key has the guts.
Before anyone says ‘asset sales’, they still make no sense. We’re better off keeping the dividend stream to help pay these bills because the SOE’s returns exceed the cost of government borrowing.
The other question is how long the economy would take to recover from such a hit. You can’t expect it to slump 6% under expectations one year and shed 6% of the national workforce and then have everything bounce back the next year. Especially in the middle of a global oil/food shock. Even with insured property owners, hopefully, using the money to rebuild, we’re looking at years of economic activity well below the projections that the government’s budget is based on.
To avoid debt spiralling, National will have to make hard choices: it will have to ditch the least worthwhile government spending, the new motorway construction programme, and restore revenue to a sustainable level by reversing the tax cuts of recent years. I estimate those two moves would raise $20 billion over the coming decade, enough to cover the ongoing revenue losses and reconstruction costs, hopefully.
If the situation is as serious as Key says, there’s no other choice.
Update: Key has corrected himself – “$15 billion of lost GDP, which translates to about $5b less tax potentially (over four years).” So, that brings the job losses down to, maybe, 30,000, still a huge number. I wish Key would get his numbers right. He is a money man, after all.