Do I Need To Repay The Wage Subsidy?

A few weeks ago I wrote an article about the economic future of NZ, in which I praised the government’s reaction to COVID19 and the associated financial policies arising from it. Specifically I said that I liked the wage subsidy as an implementation of Helicopter Money.

Why I liked it so much, is because it directed money straight to all businesses (small and large), and forced those businesses to ensure their staff were looked after. Trickle- Down Economics, anybody? I think this is better than Quantitative Easing because the money goes straight where it’s needed (though arguably there are better ways to implement Helicopter Money).

Every business owner I talked to, had applied for and got the wage subsidy. Comments on the no-questions-asked ease of acquiring the subsidy, along with the soft eligibility requirements of “…a 30% decline in predicted revenue…” and soft wording on repaying it, stating that you can repay it if you become no longer eligible, all suggested that the wage subsidy was actually Helicopter Money.

Now it seems that numerous large law firms are repaying the wage subsidy and the wage subsidy page on the Work and Income website is dominated by large red text talking about repayments.

So the question for employers is do i need to repay the wage subsidy? I don’t have the answer to this, but I suspect that the fact that the law firms are repaying it might be a clue.

In some ways it’s no surprise that the government is asking for the money back. In fact, I stated that there would be a need to replenish the coffers in the very same article in which I praised the wage subsidy policy. I’m just a little disappointed in the way the Work and Income website phrased the repayment, because for me, to say that you are eligible if you predict a 30% drop, then say that it has to be paid back if you are no longer eligible, I would have thought that having had predicted the 30% drop made you eligible.

Additionally I think that in the case of a growing company (especially those who have recently done capital raises or increased investment to fund growth), it’s quite possible that revenue could be up from last year, but 30% less than predicted. This could validly cause an increase in staffing costs that is not sustainable as returns didn’t fit the anticipated financial modeling, and such a company could be in need of the wage subsidy.

I think there’s scope for arguing a position here, but I suspect that increased need to replenish the coffers in the coming year may result in the IRD comparing past and present returns for those who kept the subsidy, and correspondingly auditing those who didn’t report at least a 30% drop. I expect that this will result in a lot of unpleasant words like “fraud” being thrown around.

It is my understanding that in cases where tax law is based on your opinion (such as whether you’re a share trader or share investor), the opinion of the taxman overrides any thoughts the business owner may have had on their intentions.

To leave on a positive note, while we may not have got any Helicopter Money, the alternative methods of replenishing the coffers are less attractive.

If you are wondering whether you need to repay the wage subsidy, you may wish to talk to your lawyer, accountant or ring the number on the Work and Income wage subsidy page that offers advice on whether you need to repay (though I expect in the case of any ambiguity, a ruling would not be in favor of these business).


The Economic Future Of NZ

Following the Black Swan event of COVID19, NZ is left in a state of uncertainty while we await the response of the economy to see how the recovery will look. One thing that concerns me more than the possibility of recession caused by businesses failing to survive the lockdown, is the possibility of NZ’s economy being changed for the longer term.

Firstly, while I am the last person to support the Labour government and Jacinda Ardern, I have to say that from what I can see they’ve done a great job with COVID19. The number of cases in NZ has been easily handled, there has only been one death (which represents a very low percentage, and the person had other medical complications), and I think the financial stimulus response has been excellent (QE + Helicopter Money via the Wage Subsidy) – though I have to say that I’m not impressed with the abuse of the State of Emergency which they have used to pass irrelevant social policy, but that’s beyond the scope of this website.

The negative effect of QE and the Wage Subsidy is that the government will need to replenish their coffers once all this is over, which means increased interest rates, increasing government debt, and/or increased taxes. Each of these have their own negative implications for NZ.

Increasing Taxes

The implications of increasing taxes is fairly obvious – this weakens the economy. Taxes on people reduce available income and reduce consumer demand for goods and services. Taxes on companies cause companies to make more effort to avoid taxes, such as becoming tax residents of foreign countries. Both types of tax reduce demand for goods and services, which reduces demand for labour, reduces wages, reduces demand and prices of property, which reduces consumers overall wealth and borrowing capacity, etc.

One would hope the government would only be able to do this when the economy has fully recovered and is healthy, though I expect that the idea of CGT may raise it’s head again.

Increasing Government Debt

This is also bad because it defers and compounds the problem as debt levels increase over time.

Increasing Interest Rates

This is actually the option that scares me the most. The Reserve Bank of NZ (RBNZ) could increase interest rates to recover funds back into the government coffers. This would have a direct and almost immediate effect on peoples wealth, through higher mortgage rates for property, pushing down prices and increasing costs, putting people into a negative equity situation, increasing rental costs for businesses, reducing demand for goods and services as people have reduced spending capacity, reduced borrowing capacity causing risks that weren’t previously there.

In addition to this, it could cause the value of the NZ Dollar (NZD) to increase compared to other currencies. This would be a problem for exporting companies, and cause a shift in the way NZ does business and increasing the trade surplus.

All this is a big problem because NZ relies heavily on it’s exporting industries (dairy, forestry, meat, and to some extent tourism as NZ would be more expensive to visit). New Zealanders also rely heavily on property investment, which is the staple investment for the average Joe investor (mum and dad, and many retirees).

How To Invest?

Assuming that this doesn’t cause further economic collapse, and of course assuming that this all transpires, investors might react by investing in stocks that benefit from a strong NZD, Importers, and companies with little or no debt. At the moment I’m waiting to see how the economy and government react, and building up some cash reserves so I’m ready to move when the opportunity presents itself.

Addendum (10/07/2020): Thinking about it, as things get worse, money will likely retreat to the USA, so the NZD may actually become weaker, rather than stronger. It all depends on the state of foreign countries relative to the impact on NZ, which is quite unpredictable so far out.