Auditor-General’s report on management of the wage subsidy.       May 2021

4.80 Inland Revenue’s work has also involved looking at whether some applicants GST on taxable supplies (the supplies that a business uses and claims back the GST on when it purchased those supplies) had reduced for a relevant period. Analysis of this information might help to understand whether certain applicants revenue declined sufficiently to make them eligible for the subsidy payment.

Government and business data for 2020 shows that most businesses were much better off in 2020 than in 2019.

GST figures obtained from the IRD show that the net GST paid by New Zealand businesses for the 9 months to 30 September 2020 increased by 14% compared to the same period in 2019. The net GST is arrived at by deducting GST refunds made by the IRD from the GST payments received by the IRD. Businesses deduct the GST on expenses from the GST on income to determine whether to make a payment or claim a refund so this is a good indicator of business profitability. The 14% increase shows that, despite a short lockdown, businesses were substantially better off in the first 9 months of 2020.  The net GST was up $2.176 billion and was paid on increased business profitability of $14.506 billion. In addition to this, legislation exempted the wage subsidy from GST so it was an added bonus of $14 billion. The latest figures include many small businesses who are only required to file a GST Return for the 6 months to 30 September and to 31 March.

One reason for the big 14% jump in profitability of businesses was that during the lockdown businesses had their rent and other variable costs cut by 50% to 100%. They also had increased revenue because people could not travel overseas so after the lockdown they ended up spending up to $10,000  million in New Zealand.In the first 9 months of 2020 some businesses made losses and received GST refunds but the total losses were down by 2% in 2020 when compared to the same 9 months in 2019.

The net GST receipts assessed by the IRD for April and May 2020 declined by -21% when compared to the same two months in 2019. However, there was a big increase of 28% for June and July when compared to 2019 so this more than offset the decline in the previous two months for most businesses.

Reserve Bank figures show that in the 12 months to 31 October 2020 business bank deposits increased by $17.1  billion and businesses had reduced their borrowing from banks by $5.6 billion.  The combined total of 22.7 billion or a 24% improvement indicates that most businesses  did not need the wage subsidy. The ASB Chief Economist said that the increase was due to the wage subsidy and retained earnings with retained earnings normally being about $5 billion each year. This situation arose when the Reserve Bank was reducing interest rates to record low levels because they said that this would result in a big increase in spending and borrowing by businesses.

There has been an estimated $5,000 million to $10,000 million transfer of wealth through the wage subsidy to those who are already well off. This has increased inequality and flowed on to higher house prices and rents and to greater child poverty.

Now that the Government is well aware that most businesses did not comply with the Wage Subsidy Declaration rules and did not need some or all of the wage subsidy, it should write to the recipients and request them to repay the wage subsidy unless they can provide evidence to show that they are entitled to retain all or part of it  This would provide additional funds to deal with urgent social, environmental and climate change issues and could help reduce the billions of dollars of debt which taxpayers are going to have to repay.

The wage subsidy was paid out in a big rush at a time of great uncertainty and was based on a high trust model. Most businesses ended up being far less affected than had been anticipated. In 2019 most businesses were profitable after taking into account GST rated amounts and paying wages and salaries. As it turned out most businesses were far more profitable in 2020  and could have again paid wages and salaries without needing to retain the wage subsidy.

The reason for the big 14% jump in profitability was that during the lockdown businesses had their rent and other variable costs cut by 50% to 100%. They also had increased revenue because people could not travel overseas so after the lockdown they ended up spending over $10,000  million in New Zealand.

Many businesses who were not able to work during the 5 or 7 week lockdown were able to make up their lost revenue due to a surge in demand in the subsequent weeks. They should only have retained the wage subsidy for those weeks when workers were at home and unable to do any work.