The economic impact of the coronavirus in New Zealand

In a recent post I discussed the impact on the broad economy associated with the coronavirus.  However, this is only a starting point for thinking about economic impacts – the next question is how we can understand the composition of the shocks, how we can measure this in real time, and how we can consider the areas where policy is relevant.

This is something I want to discuss here.

In that regard the Spin Off just had a good article talking about economic consequences, and also had a good piece talking to the bank economists.  Finally, Westpac released a bulletin that discusses what they think is important. This is a complement to their pieces as I want to use the same “demand” and “supply” shock analysis as I did in the prior post to bring some of these concepts out.

What I’m discussing below is how I would look at this sort of crisis in real time as an interested observer – I work in research not policy, so I see this as a chance to open up a dialogue with other interested people in the comments below.  Any insights you have would be richly appreciated.

Furthermore, as I just don’t have the data on hand I would like (again I work in research, not as a forecaster, an investment analyst, or a policy person) I can only talk about what I would use – if anyone has been using this data and can discuss trends it would be great to chat about this in comments!

Note: Thanks to Matt Nolan for discussing this with me, and helping me to get the right data sources for this post.

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Tax, cost of capital, and investment

Last time I discussed the relationship between the cost of capital and investment.

Given that motivation, the goal of this post is to understand whether investment is responsive to changes in the UCC due to changes in tax settings. This does two things:

  • Provides evidence regarding whether the capital stock will ultimately be influenced by corporate tax policy changes.
  • Helps us understand how changes in the cost of capital can “shift” investment through time, thereby helping economic stabilisation. Note: The cost of capital varies with both taxes and interest rates, so this relates across to monetary policy!
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What is the cost of capital and investment link?

In this post I intend to motivate research that is underway by Lynda Sanderson and myself on the investment behaviour of New Zealand firms. [“Taxation, user cost of capital and investment behaviour of NZ firms” forthcoming]

The goal of our current research is to understand how changes in tax settings in New Zealand have influenced the investment behaviour of firms.  Doing this involves thinking about how taxation can influence investment. The key channel it does so is by influencing the price associated with investment – what is called the user cost of capital.

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The Big Australians

One of the most fortunate things about being a New Zealander is that we are close to Australia and we have the right to live and work there. This is not just because Australia does many things very well, but simply because Australia is such a wonderful place.

Looking back, I can’t believe I only lived there for twelve months, given how much I enjoyed the experience. One day I shall kick myself, or possibly ask an Australian to do it for me since they will know how to make a good job of that too.

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Small town dynamics

By international standards, New Zealand is a small town economy. True, Auckland now has more than 1.5 million people, but by global metrics this is not very large. In 2010 there were 449 cities with more than 1 million residents, and Auckland was ranked 307 in terms of population. Small beans indeed – even if Auckland is four times as large as the next two biggest cities in New Zealand.

So how does this small size influence outcomes for New Zealanders?

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Land taxes and the Zero-Carbon Act

The Zero-Carbon Act means New Zealand is to accelerate the transition to an economy that uses fewer carbon-fossil based energy sources. Given what we know about the problems of global warming, a future in which most energy is renewable is to be welcomed. (As a life-long bicycle commuter, I also hope this future involves fewer cars, to raise the probability I shall live long enough to see it.) 

However, such a transition may require public investment and redistribution to help certain groups who suffer disproportionately from the changes – implying that feasible externality taxes may not be enough. If so there may be a case for land taxes to help fill this gap.

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