The COVID-19 has severely impacted the world economy, especially the industrial economy, from both the supply side and
the demand side. International trade has been limited, and the global industrial chain and supply chain have been
disrupted. In the absence of effective control overseas, New Zealand needs to strictly control the prolonged and
recurrent economic risks caused by COVID-19 in the face of the situation that external risks are greater than internal
risks and macro risks are greater than micro risks. The country should normalize the controlling work of the pandemic
and make industrial recovery and economic growth the key tasks of our work this year. This article focuses on what other
strategies we can opt for in terms of domestic macro adjustment in the process of resuming work, production, business
and market.
Since the impact of the pandemic on New Zealand’s economy gradually wanes and economic activities gradually return to
normal, some policies have successfully completed their milestone. Does it mean that these phased policies can be
completely withdrawn in 2021? In 2021, New Zealand should continue to implement proactive fiscal policy and prudent
monetary policy; and macro policy should neither tighten significantly nor slide further towards easing. There cannot be
a “policy cliff”. Sudden policy disruptions that could make many sectors unadaptable should be avoided. There still are
many unstable and uncertain factors in the macro economy in 2021, and it will take some time for the economy to recover
to the pre-pandemic level, which requires the coordinated efforts of various macro policies, including fiscal and
monetary policies.
Support of monetary policy should be divided into three stages: pandemic control, overall prevention and control with
orderly resumption of work and production, and promotion of economic and social recovery and development. A general
upturn in the New Zealand economy in 2021 can be expected. Internationally, despite the pandemic, vaccination are being
actively carried out, and the worst situation is now behind us. Given the support from macro policies and the low base
effect, it is generally certain that the economic indicators of major powers will continue to improve. Domestically, New
Zealand economy has seen relatively strong internal driving forces, reasonably sufficient funding for micro entities,
and a generally sound macro situation. However, the impact of base effect and the weak foundation for economic recovery
should also be taken into account. The world economic situation remains complex and grim, and the recovery process is
unstable and unbalanced. Various derivative risks caused by the outbreak cannot be ignored. The anti-globalization trend
has become more pronounced since the pandemic, the global industrial chain and supply chain are facing shocks, and the
sustainable growth of the global economy faces challenges.
What should the monetary policy be like in the next stage when New Zealand’s economy is rebounding? Firstly, New Zealand
should flexibly keep the total volume reasonable and appropriate. To maintain the continuity, stability and
sustainability of our policies, we must not only maintain the necessary support for economic recovery, but also avoid
indiscriminate flooding. "Reasonable and appropriate" here means that the growth of money and credit should correspond
with the needs of economic development, and that money supply and the growth of nongovernmental financing should be
basically in line with nominal economic growth. Neither make the market lack money, nor let the market money overflow.
In this phase, monetary policy should be more flexible in balancing the multiple objectives of stabilizing growth,
reducing costs, controlling leverage and preventing risks. The government would gradually improve the controlling
mechanism of monetary supply and the long-term mechanism for the bank to regulate the liquidity, capital and
interest-rate constraints of the money creation. The government can use a full range of monetary policy tools, including
refinancing and rediscounting, to maintain reasonable and adequate liquidity, replenish bank capital, and give full play
to the incentive and restraint role of macro-prudential assessments. At the same time, we should also ensure policy
coherence and cross-cycle regulation to prevent unexpected risks arising from policy interruption.
Secondly, New Zealand could gradually build institutions and mechanisms for the financial sector to effectively support
the real economy. The government would improve the system of structural monetary policy tools, precisely allocate more
financial resources to key areas and weak links in economic and social development. On the one hand, the government can
deliberately adjust and continue the emergency policies introduced during the special period, and keep implementing the
loans extension and credit support for small and micro businesses. On the other hand, the government should innovate
structural monetary policy tools and make good use of inclusive refinancing and rediscount policies. With New Zealand’s
economy and society are recovering, some weak links are coming to the fore, such as manufacturing, small-to-medium-sized
enterprises, and scientific and technological innovation. These areas need more structural and direct monetary policy
support. The foundation of economic recovery in 2021 is not yet solid. Therefore, the policy extension is still
necessary to help small and micro businesses to tide over the difficulties and to realize the goal of protecting the
employment of market players and residents.
Thirdly, New Zealand could improve the mechanism for setting and transmitting market-based interest rates. The
government should ensure that the overall financing costs for enterprises remain stable while lowering them. New Zealand
would further promote the marketization of deposit interest rates, crack down on all kinds of non-standard innovative
deposit products in disguise, and maintain the order of fair competition in the deposit market. The government can
strengthen the policy rate system and the benchmark rate of money market, especially the short-term and medium-term
policy rates and lending facility, guide market interest rates to fluctuate around the policy rates, and improve the
interest-rate corridor mechanism.
Fourthly, New Zealand could promote the market-oriented reform of the exchange rate of New Zealand dollar and balance
internal and external equilibrium. While focusing on the macro-policy spillover effects of developed economies, we
should exert the positive spillover effects of New Zealand’s macro-policy well and take the initiative in international
macro-policy coordination. We can let the market play a decisive role in the formation of the New Zealand dollar
exchange rate, give free rein to the role of the automatic stabilizer of macroeconomic and international balance of
payments, and enhance the flexibility of the New Zealand dollar exchange rate. The government can guide enterprises to
establish "risk neutrality" and financial institutions to provide risk management services on exchange rate to import
and export enterprises based on the principle of actual need and risk neutrality. The government would reinforce
macroprudential management of cross-border capital flows and keep the exchange rate of New Zealand dollar generally
stable at a reasonable and balanced level.
We should never underestimate the power of regulatory policies for aggregate demand. There are bound to be bumps in the
road to positive feedback such as economic overheating and house price bubbles. Severe shocks like the Great Depression,
grievous unemployment and widespread corporate bankruptcies are the most disruptive to markets. A successful demand
management policy can avoid or reduce these disruptions, which is an indispensable guarantee for endogenous economic
growth. New Zealand has always attached great importance to macroeconomic stability and has been relatively successful
in this regard. But there were many lessons learned in the choice of policy tools for macroeconomic stabilization. In
the choice of policy tools to enhance aggregate demand, the standard monetary and fiscal policy tools, such as lowering
interest rate and government borrowing to expand spending, have done their job. Debt investment relying on borrowed
money that local authorities involve and lead has different degrees of government credit endorsement and is also popular
among commercial financial institutions. However this is a costly way to boost aggregate demand. First, systemic
financial risks can rise sharply. Second, local governments have to rely excessively on land finance. Third, resource
waste is hard to avoid due to the lack of standardized supervision mechanism and risk assessment.
The fiscal response to the pandemic has also been divided into three phases. The pandemic is unwinding the clock. It has
an impact on both the supply and demand sides of the economy. The fiscal policies to deal with the pandemic need to
adopt different policy combinations according to the different stages, the core of which is the expansionary fiscal
policy of reducing taxes and increasing spending. The early and most severe phase of the pandemic, when social isolation
measures to contain the outbreak led to a sharp reduction in economic activity, required a rapid and massive transfusion
of power to the economy. Countries have introduced large-scale financial subsidy measures for the middle and low income
class. In the middle and later stages of the pandemic, the pandemic is basically under control, enterprises need to
resume work and production, and the empowering policy needs to be extended to a certain extent. In order to restart and
rebuild economic activity, fiscal spending will need to be precise. On the basis of achieving continuity and stability,
fiscal policy should take time into consideration and maintain a certain intensity of expenditure to gradually realize
normalization and sustainability. However, in addition to the proactive tax reduction, fiscal revenue in 2020 withstood
the greatest test. On the one hand, we needed to significantly enlarge spending. On the other hand, the pandemic has
greatly reduced government revenue. The gap between government revenues and expenditures has become more acute.
The main themes of economic work in 2021 should be high-quality development and supply-side reform. The new specific
requirements for a proactive fiscal policy this year are to improve the quality and efficiency of the policy, make it
more sustainable and stable, while maintaining a continuous but appropriate intensity of spending. To consolidate the
hard-won situation of New Zealand's relative economic success in fighting the pandemic, it is essential to maintain a
certain level of fiscal expenditure but cannot be as loose and aggressive as the early stage. It is difficult to
accurately predict and control the changing situation of the pandemic, and it is difficult to clearly define the
derivative risks caused by it. The foundation of New Zealand's economic recovery is not firm enough, which will be
inevitably affected by the global economic recession. Therefore, the fiscal policy of reducing taxes and expanding
spending will maintain a certain degree, so that the macro economy can hedge against fluctuations caused by exogenous
shocks, and bring economic growth closer to the track of potential growth rate. However, the use of government
investment funds should be more targeted and effective by innovating its application, guiding the development of key and
strategic emerging industries, and strengthening cooperation between the government and private capital. In doing this,
new fiscal policy should focus on the following aspects: the development of science and technology, the support for
rural areas and farmers, the expansion of domestic demand, and the implementation of green economy.
First of all, the security and stability of the industrial chain and supply chain is a key area for coordinated
development and security. Increasing financial input to scientific and technological innovation is not only a way to
deal with the current economic difficulties, but also a foundation for consolidating the long-term economic growth of
New Zealand. The core of current economic competition among big powers is the competition in science and technology. New
Zealand still lags behind other developed countries in basic fields and key technologies. Finance in science and
technology should make a difference.
Secondly, open the front door to aggregate demand management policies and let the fiscal policy tools really kick in.
Expanding domestic demand is an important way to deepen internal economic ties by promoting consumptions and expanding
investment. Summarize effective ways and methods, explore new ways of fiscal expenditure to promote consumption growth
and consumption balance are critical in 2021. Investment can be enhanced from four aspects. First, pandemic is forcing
domestic supply-side structural reform and the digital transformation of enterprises to survive. Digital economy creates
many new industrial models. Digital economy needs the support of digital infrastructure. Digital infrastructure should
be promoted comprehensively in the construction of 5G and other information networks and data centres; online shopping
drives modern logistics that make the supply chain of modern distribution develops strongly; telemedicine and the
application of big data and cloud computing in the medical field need deeper exploration. New Zealand should also keep
up with the trend and pay attention to the digital finance and digital currency and strive not to be left far behind in
the fourth industrial revolution. Second, invest to develop intelligent manufacturing. Unmanned factories will not be
affected by the pandemic, and more high-tech rather than labour-intensive enterprises will survive the crisis. Third,
strengthen investment in medical infrastructure, public health facilities and related service industry development
through government investment and cooperation between government and private capital. There is still a lot of room for
growth in the demand for public services, such as medical care, education and culture, and elderly care. Some crowded
public goods can promote the supply of services by the way that public services drive market participation. Fourth,
consolidate support for export enterprises, export tax rebates, export credit and export insurance. Promote the
development of cross-border e-commerce, trade liberalization and facilitation, strengthen bilateral and multilateral FTA
construction, promote the signing and implementation of the 15-country RCEP, and intensify trade and investment with
ASEAN, the European Union, the African Union and other regions.
Thirdly, the government should improve the policy framework and incentive mechanism for green economy and direct
financial resources toward carbon reduction projects. New Zealand has made climate change commitments under the United
Nations Framework Convention on Climate Change, the Paris Agreement and the Kyoto Protocol to set bold reduce greenhouse
gas emissions goals by 2030 and 2050. The green fiscal policy system can be established to comprehensively promote green
transformation and green development in terms of tax and expenditure policies.
Lastly, in order to improve the quality and efficiency of fiscal policies, the government can carry out the reform of
fiscal itself and accelerate the reform of tax system, budget system and fiscal relationship between the central and
local governments. New Zealand can consider to explore the utilization of next-generation information and communication
technologies such as big data, blockchain, cloud computing and artificial intelligence to improve effectiveness and make
fiscal policies more precise and direct.
Manqing Cheng is a doctoral researcher at the Department of Politics and International Relations, University of Auckland
and visiting researcher, The New Zealand Centre at Peking University.