(Refer to TREASURY OIA RESPONSE FEBRUARY 2021)

ADVICE TO MINISTER OF FINANCE  21 March 2020 REGARDING REMOVING CAP OF $150,000

Description: This paper proposes options for Cabinet to:

Remove the cap of the existing Covid-19 wage subsidy scheme to increase the coverage of the scheme to more employees in larger firms.

Treasury supports the expansion of the cap but notes the risk of waste/fraud arising from the high trust operating model. This will need to be managed through the implementation process, which will need to include careful communications on expectations of who applies, future penalties for not meeting requirements at the start, monitoring and adapting, and significant ramp up of anti-fraud and auditing activity.

Fiscal Implications

Approving the removal of the cap will result in a $4.2 billion cost in 2019/20.

NOTE:  Treasury estimated in this paper that the wage subsidy without a cap would cost $9.3 billion.   The need for monitoring and adapting was not followed by the MSD, even though the Declaration signed by applicants allowed for this. There was not a significant ramp up of anti-fraud and auditing activity in the conventional way. MSD staff who investigated Benefit fraud were used and up to 25 Inland Revenue staff were brought in but most work involved prepayment checks.

Recommendation

Agree to increase the existing $150,000 cap of support per firm to either $350,000 or $700,000 or to remove the cap:

Note: Treasury put forward options of a higher cap of $350,000 and $700,000 or no cap but the Minister of Finance, under pressure from the National Party, decided to remove the cap despite the predicted high cost and substantial waste and fraud.

It would have been obvious to most businesses that the wage subsidy was open to abuse and many academics agreed with this, including the following:

Professors Jilnaught Wong and Robert Macculloch of Auckland University Business School said that the wage subsidy was wide open to abuse and should have been better designed.

Massey University Head of School of Economics and Finance Professor Martin Berka said businesses, not governments, should take on risk in bad times. He said that the wage subsidy should have been better designed.

In the first three weeks of March 2020, officials should have obtained independent advice from accounting, tax and legal experts who did not have conflicts of interest. This would have prevented many billions of dollars being paid out or not repaid.