Bryce Edwards: Political Roundup – Is the Wage Subsidy still transferring massive wealth to the rich?

Bryce Edwards: Political Roundup – Is the Wage Subsidy still transferring massive wealth to the rich?

Over $15 billion has been transferred to businesses by the Government via the Wage Subsidy Scheme since Covid hit in 2020. The scheme has turned out to be effective at both keeping businesses afloat and enriching the already wealthy.

Now that the scheme is back in operation, and because it’s also likely to be used in future lockdowns, there’s a need for much more evaluation of how well the tool has been designed and implemented, and what impact it is having.

I wrote about some problems with the scheme in May – see my roundup: Have billions been incorrectly paid out in the wage subsidy scheme?. This analysis concentrated on the lack of scrutiny that the Ministry for Social Development has applied when checking the eligibility of businesses to take the funding.

One economist has now had a go at evaluating the scheme. Former Reserve Bank economist James Graham has carried out some macroeconomic research on its impact, and says it did its job well – see: Wage subsidy was essential to save jobs during lockdowns.

In giving the thumbs up to the scheme, Graham says: “the basic economic principles are sound: wage subsidies are a surefire way to prevent widespread unemployment in the face of dramatic economic shocks.” His calculations are that the “scheme saved around 175,000 jobs during the 2020 lockdown. So while unemployment peaked at 5.3 per cent, without the wage subsidy it could have risen to more than 8 per cent.”

However, the scheme isn’t beyond improvement, with Graham advocating that the government “might consider better targeting, a trimming of total costs, and more thorough auditing of recipients to prevent abuse.”

Others are much more critical. For the most trenchant criticism of the scheme, it’s well worth reading Bernard Hickey’s column from last month: The rich got richer in last year’s lockdown – and now it’s set to happen again.

Hickey points out that many businesses applied for the corporate welfare last year despite being highly profitable, simply because they had temporarily reduced revenues. He says such business shouldn’t be eligible, and must be required to pay the millions back. And for evidence that they were actually profitable, he points to IRD figures showing profits up 19 percent last year, and Reserve Bank figures showing that the bank accounts of non-financial companies were quite healthy going into lockdown last year, and then swelled by $17b a year later. He points to a list of highly profitable companies that are refusing to hand back the subsidies that he says they simply didn’t need.

According to Hickey, it’s perhaps understandable that in the chaos of March 2020 the Government came up with such a poorly designed and implemented scheme. But that excuse has passed, and he asks: “How on earth is this happening again?” Hickey argues a continuation of the scheme will fuel much more extreme economic inequality.

More recently, Newsroom’s David Williams has reported on some of the shortcomings of the overall administration of the scheme, suggesting government scrutiny of both the scheme and recipients of the cash is being keep to a minimum – see: ‘Timely’ wage subsidy review due in 2022.

Williams reports the views of a variety of experts. Tax researcher Michael Gousmett criticises MSD’s lack of scrutiny of business claims, saying “To entirely ignore that process I think is a fundamental oversight on their part.” He believes that billions of dollars may have been wrongly gifted to businesses, and such mistakes will be an ongoing liability: “This is going to cost the taxpayer a lot of money for a long time, because the Government’s had to borrow to fund it in the first place.”

Similarly, Jilnaught Wong, an accounting specialist at the University of Auckland, is quoted: “Our children and our grandkids will be paying all the debt back through higher taxes. It’s a hell of a lot of money.” And he believes “businesses could have easily gamed the system by delaying sending out invoices by a month” to artificially reduce their revenues, thus making them eligible for subsidies

According to this article, Wong has published research about the scheme which suggests “grants were, in some cases, a wealth transfer”. Wong says that in contrast to genuinely hard-hit industries like hospitality and tourism, throughout Covid “professional firms, who retain the same clients year after year, and some retailers, have done well, especially those now selling products online.”

Fraud prosecution researcher Lisa Marriott of Victoria University of Wellington also sees the behaviour of some business recipients as being tantamount to fraud, and suspects the scheme has been exploited. She is quoted by Williams saying: “I hope there are some prosecutions because I’m quite sure there are some cases that do deserve to be prosecuted.”

In contrast, Business New Zealand lobbyist Kirk Hope is cited by Williams as being influential in the design of the scheme, and he doesn’t believe that much business fraud would have come from it: “I would expect that there hasn’t been that much money paid out to people that were ineligible, and that the verification processes, if they were conducted, would bear that out.”

Inequality researcher Max Rashbrooke is also aghast that elites are getting such a generous deal from the Government. He’s particularly unhappy that MSD is tougher on beneficiaries than it is on businesses gaming the system: “the reluctance to really crack down on wage subsidy fraud parallels the Government’s general timidity when it comes to the elites. The idea that businesspeople are all battling entrepreneurs, and welfare recipients all scroungers, may be an old, tired stereotype. But it still exerts its power over public debate” – see: Why the leniency for Covid wage subsidy fraud, but not for welfare fraud.

Rashbrooke believes the wage subsidy scheme is still too generously designed: “given the miniscule number of past prosecutions, how much of the $1.2b-plus bill this time round will be properly investigated? And why don’t the rules specify that, for instance, firms have to repay the subsidy before distributing dividends to shareholders? We’re still not getting tough enough, quickly enough.”

Furthermore, he’s disappointed that the public hasn’t applied more pressure to profitable businesses to pay back their funds: “These firms should have come under far more public pressure to return payments clearly intended to help stave off disaster, not fatten ultimately healthy bank accounts.”

Pressure is also being applied by Christchurch philanthropists Grant and Marilyn Nelson via their Gama Foundation, which is taking MSD to court over its management of the scheme, which the Nelsons believe “had been a huge transfer of wealth to businesses that did not experience the drop in revenue which might have been anticipated when their subsidy was claimed” – see Nita Blake-Persen’s MSD in court on claims of failure to act over wage subsidies.

The Nelsons are seeking a judicial review to force MSD to manage the scheme more stringently: “What we want is the court to require the Ministry for Social Development to basically do their job properly and to prosecute anyone who has wrongly obtained, or retained, that wage subsidy.”

There are some signs that the Government is trying to informally dissuade some of the big companies from utilising the wage subsidy scheme this time around. Richard Harman reported a few weeks ago: “The Finance Minister, Grant Robertson, has been ‘talking’ to some of the country’s largest companies about whether they will apply for the wage subsidy. Beehive sources say he spent considerable time over the weekend talking to the companies. That sounds like he was putting the heat on some large employers not to apply for funding after the situation last year where companies like Briscoes and got the subsidy and then reported good profits” – see: Cracking down on the wage subsidy (paywalled).

However, there are also calls for businesses to be better looked after by the government. Business New Zealand and the National Party have been lobbying for more welfare measures aimed especially at small businesses – see Charlie Dreaver’s Calls for Govt to offer additional financial, mental health support to businesses.

Also, yesterday the Restaurant Association released its “Future of Hospitality Roadmap” which included a plea for an extension of the wage subsidy, and many other subsidies to help the hospitality sector – see Dan Satherley’s Restaurants call for more financial support, subsidised fine dining and a GST-free feed.

Finally, the wage subsidy scheme is part of a wider $57 billion “Covid recovery” package spent by the Government, but Newstalk ZB’s Jason Walls has been delving into what he calls “a smorgasbord of abject waste” amongst this spending, and he calls for such money to be spent on the health system instead – see: Not a single cent more for podcasts, poetry and picture books in the name of ‘Covid recovery’.


Dr Bryce Edwards is Political Analyst in Residence at Victoria University of Wellington. He is the director of the Democracy Project.

This article can be republished under a Creative Commons CC BY-ND 4.0  license. Attributions should include a link to the Democracy Project.