In March 2020 as New Zealand entered its initial Covid-19 lockdown and uncertainty gripped the country, I suggested the banking sector had effectively become an extension of a socialist state.
My use of the "s" word was partly a wind-up for hardcore free marketers, but also reflected that an array of government and Reserve Bank measures, designed to keep the credit/debt conveyor belt flowing and the economy breathing, would undoubtedly benefit banks.
And boy has that proven to be the case.
As I reported on Tuesday, our big four Aussie owned banks posted combined annual net profit after tax of $5.493 billion this year. That's $365 million, or 7%, more than they made in their previous record year of 2018.
But it's not just the big banks making hay under the Covid clouds.
With annual profit of $126 million, Kiwibank got within $1 million of its record annual profit which dates from 2015. SBS Bank made record annual profit of $41.1 million, and The Co-operative Bank also delivered record annual profit of $15.6 million.
To cast your mind back to what seems a very long time ago now, when Covid-19 was taking its grip on the world in March 2020, there were big falls in global share markets and troubling gyrations in bond markets. With the realisation we were facing a global pandemic and the associated huge uncertainty, it almost felt like the world was ending.
Thus our government and central bank, like many of their overseas counterparts, rushed to take steps to support the economy. And given banks are at the epicentre of the economy, they've benefited.
The Official Cash Rate (OCR) was cut to a record low of just 0.25%. Loan-to-value ratio restrictions on low equity housing lending were removed. The Mortgage Deferral Scheme was introduced. And, for the first time, the Reserve Bank embarked on quantitative easing (QE).
This QE, or large scale asset purchase programme, saw the Reserve Bank buy about $55 billion worth of government and local government bonds from a range of banks including ANZ, BNZ, ASB's parent the Commonwealth Bank of Australia and Westpac.
QE is essentially a form of trickle down economics, supposed to cause a cascade of lower interest rates from the bond sellers down through the rest of the economy.
Banks have also been able to access billions of dollars of three-year money priced at the OCR through the Reserve Bank's Funding for Lending Programme.
The array of Covid-related government financial support measures has been headed by the Wage Subsidy Scheme benefiting businesses and their staff, the Covid-19 Resurgence Support Payment, income relief payments for people who lost their jobs due to Covid-19, the Business Finance Guarantee Scheme through which bank lending is 80% backed by the Government, and the Inland Revenue run Small Business Cashflow Loan Scheme which has provided nearly $2 billion to small businesses.
One can of course argue that some of these measures, notably the Wage Subsidy and Covid-19 Resurgence Support Payment, were required because government restrictions to fight the spread of Covid-19 meant many businesses had to close. However, the success of those short-term government restrictions last year meant New Zealand's then unvaccinated population enjoyed long periods of near complete freedom from both the virus and Covid-related restrictions that few other developed countries enjoyed, until Auckland's Delta outbreak hit in August.
What all of this has resulted in is a significantly stronger overall economy than expected. There've been record volumes of housing lending and record house prices. Unemployment has dropped to just 3.4% and inflation has reared its head, leading to the first OCR hike in seven years with more expected to follow.
Whilst some sectors of the economy have proven resilient and adaptable to the Covid-19 world, others have had a tougher time. Tourism and education have been hit by the closed border. Hospitality and smaller retailers have suffered, especially through the current lockdown in Auckland and parts of the Waikato. And accommodation providers and event organisers have also been hit.
Banks, meanwhile, are in clover.
The Reserve Bank did stop banks from paying dividends to their shareholders in April last year, easing this restriction somewhat in March this year so they can now pay up to 50% of earnings in dividends. It plans to keep the 50% rule in place until July next year. So far this year ANZ NZ has paid an $845 million dividend, and ASB a $650 million one. Details on BNZ and Westpac NZ's dividends are yet to come.
The reduction in dividend payments has meant the big four banks have been able to bolster their capital, and move closer to the increased Reserve Bank capital requirements they lobbied hard against in 2019. ANZ NZ, the country's biggest bank with total assets of $185 billion, estimates it now only needs about $1 billion by 2028 to meet those Reserve Bank requirements.
So against this backdrop would there be justification to impose a one-off Covid tax on the banking sector? The tax could be set at a percentage of an individual bank's profit and applied only to banks active in the housing market. Perhaps the money collected could be used to help out small businesses in the sectors of the economy hardest hit by the pandemic?
At 5% of the big four banks' combined profit $274.65 million would be raised, for example.
Using this money to help small businesses would be key. Arguably the Government's Small Business Cashflow Loan Scheme has addressed a market failure.
The big four are supposedly all-encompassing banks for New Zealand. However, they are increasingly housing lenders with a few other areas of lending tacked on. ANZ NZ now has 70% of its total lending in housing.
Of the businesses currently struggling, ANZ NZ CEO Antonia Watson recently noted; "The people that are really hurting - we haven’t lent money to.”
This point was reiterated by Westpac NZ chief financial officer Ian Hankins who told me while the hospitality, accommodation and tourism sectors may be hurting, "You won't see big exposures across our [lending] portfolio in that space. But still a lot of them are in pain and the focus is to do what we can to support them."
So off the back of a record breaking year against the bizarre backdrop of a global pandemic, contributing to a Covid tax could be a way for the banks to prove they're good corporate citizens and strengthen their social licences to operate. And maybe next we could look at the real estate sector...
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78 Comments
Is this "covid tax" a retrospective move? That sounds extremely communist takeover asset seizures style. While I concede the banks have benefitted, they are not the only ones such as supermkts. While other small businesses are very negatively effected by ongoing lockdowns and mismanaged vaccine rollout on an unwilling population.
I guess there is less admin to go after a few big players rather than hundreds of real estate agencies, dozens of insurance companies etc. IRD struggles to chase revenue as it is.
I've been expecting these sorts of "good ideas to get dosh fast" for years. The more wealth concentrates and the more broke govts get the more they will have to cast about for who has anything left and go after them. The US is well down this track looking at billionaire taxes, and they are eyeing unrealised capital gains. eg.
https://money.yahoo.com/democrats-unveil-billionaires-tax-on-unrealized…
And who would apply the tax? Government?
Mate, government is made of politicians, rich politicians. They probably own a lot of stock in these banks. No one cuts their own feet.
Everyone wants more from others but not give any from their kitty.
You pay GST if you own a business and then you have lots of options to get it back by showing expenses. Funny right?
So against this backdrop would there be justification to impose a one-off Covid tax on the banking sector? The tax could be set at a percentage of an individual bank's profit and applied only to banks active in the housing market.
There's already a recurring tax on the banking sector which is set at 28%. The government literally makes them pay it every year. The banks are the biggest private taxpayers in the country and fund all the spending programmes of the socialist state. When they make bigger profits they pay more tax. It's not as if they keep all the higher profits for themselves.
There's no need to make the tax system even more complex and single out certain industries, a simple, efficient and coherent tax system is something worth protecting.
Banks are licensed by the NZ Govt to create money to lend to people, which they use to create financial assets (loans) that they can buy and sell for a profit. They also get special access to Govt bonds that they can sell on the secondary market for a profit. Banks are therefore uniquely privileged in the economy - they are literally licensed to print money and make a profit from it. Banks are currently abusing that privilege and their excess profits should be taxed.
The idea that Banks fund the spending programmes of the state is beyond ridiculous.
Yes it amazes me that bank executives get paid millions of dollars a year to effectively run companies that can never fail because they will always be bailed out, that are so tightly regulated by the state that management don’t really have that much ability to improve a banks performance and therefore justify their hefty salary. They lend when they are told to and raise or lower interest rates to obtain as much profit as they can from NZ citizens while knowing that if they ^#}}^ everything up, they people they have got wealthy from, will then pay additional taxes in the future to cover their poor lending that result in a bank crisis. It’s a really daft model.
Unfortunately no matter how efficiently front-end functions can be operated the barriers to entry in banking are still enormous due to the heavy compliance burdens placed on the industry by regulators and government (e.g. they require them to have licenses to operate, they require them to hold certain types of capital). The best thing government could do would be to ease the regulatory burden and move towards a more fragmented industry rather than one dominated by the Big 4. Proposals like this one from Vaughan would effectively crush competition from NZ banks and enable the big Aussie banks with deeper pockets to seize more market share.
Instead of taxing the Banks' profit, the Government must compel these Aussie owned Banks to separately incorporate their NZ arms here and get a percentage of their ownership for the Government. In return for the QE, Easy money the RBNZ is giving them and also for the implied TBTF guarantee given to them by the NZ Government.
The RBNZ tells us here that QE is not free money for the banks. https://www.rbnz.govt.nz/research-and-publications/videos/money-creatio…
Perhaps a one off scaled Covid tax applied against all homeowners who have benefitted somewhat unequally as part of the team of five million . The banking profits pale in comparison to those who have seen their housing wealth surge in unprecedented scale , dividing the team , possibly irreversibly.
Trouble is that housing is notoriously illiquid. If they whacked a tax on unrealised gains in shares or something then at least people could try to sell some of the shares to pay the tax. There would be very loud squealing from those forced to sell a house to pay the tax, quite possibly their only house. Poor granny - she never did anything wrong!
But you did use the word "scaled", so I guess it could be targeted at multiple property owners, and they would have to liquidate some. Those who stopped squealing, caved in, and sold first before the market slumped would do better. Would be very dramatic to watch.
Oh all that is on the agenda.Hence the legislation at the end of 2020 empowering the IRD to “enquire” into “certain” wealth holders provides the platform, the mechanism. Hence that will facilitate the Green’s wealth tax, which will need to proceed in the interests of coalition necessity.
On my radar. They will start with the 'rich' because a significant number of kiwis breathe the tall poppy syndrome. The Government will use the following language..."but it only represents 1.2% of tax payers." This is the slippery slope. Once the legislation is in place the bar will come down...5%....10%...
One part of society got vastly wealthier in the last 18 months while the country collectively and other non-asset owning groups got poorer…not hard to see why in a democracy those getting richer at the expense of other voters are likely in the firing line. Call that tall poppy syndrome if you like, but it’s not a Nz only issues, that would be a global human condition.
"First they came for..." the landlords... but I was not a landlord, then they came for the wealthy...but I was not wealthy, then they came for the...
In the meantime, while NZ was sleeping all Govt's clipped the bracket creep ticket on unindexed marginal tax rates, now over $2B pa
Why single out banks ? Tax property investors instead, at an increasing rate for each supplementary house they own, and use this money to support the real economy and real businesses, in order to properly reward risk-taking and productive investment.
There is however a problem with any new tax: the problem is that this Government will waste any more money they can get on beneficiaries or on pen-pushers, rather than on the individuals who create actual wealth.
by Audaxes | 25th Oct 21, 9:17am
And separately, China is pushing ahead with a "5 year trial" of a new property tax on homeowners. Their goal is to "guide rational property buying".
That’s just what is needed in order to deter land becoming a speculative vehicle. I and others have urged a policy of land taxation in order to collect the land’s rising site value, so that it will not be pledged to banks for mortgage credit to further inflate china’s housing prices. - Link
We estimate that the value of the land now accounts for around 60 percent of New Zealand’s median house price, compared to around 40 percent five years ago. - RBNZ FSR Nov 21 pg15 (17of 52) PDF
The banking system’s earnings have increased over the past year. Coupled with dividend restrictions and lower risk-weighted asset growth, this has contributed to banks’ capital ratios increasing to their highest levels since the current risk-based approach to capital regulations was introduced. - RBNZ FSR Nov 21 pg4 (6 of 52) PDF
Yes if land price inflation was part of CPI then interest rates would like be around 10% and we wouldn’t have a property bubble of such significant magnitude.
One of the key reasons I think why we’ve seen such high growth in property prices has been coupled to the implementation of inflation targeting via a basket of goods that doesn’t include the cost of land. Sure not a ‘consumer item’ but it’s something that impacts every person of society whether they like it or not and its price is very sensitive to movements in OCR (inversely correlated)
The refrain of the socialist "tax is the obvious corrective mechanism". Also, "land is the real asset bubble". And how do you propose to sort that Jfoe? Magic some more up? Or punish those who happen to have rights over property just because they have it and others don't?
Spiralling inequalities. Where is the data for that? Or have you just made it up?
"Of the businesses currently struggling, ANZ NZ CEO Antonia Watson recently noted; "The people that are really hurting - we haven’t lent money to.”
This point was reiterated by Westpac NZ chief financial officer Ian Hankins who told me while the hospitality, accommodation and tourism sectors may be hurting, "You won't see big exposures across our [lending] portfolio in that space. But still a lot of them are in pain and the focus is to do what we can to support them."
Really?...somebody has.
Rich are getting richer because banks allow them more debt to speculate with - and we wonder why we have rising inequality and most probably social/financial disorder down track.
You can only repress one part of society and continue to give advantage to another, before the social contract is broken. At that point, who knows what happens. But the wealthy shouldn’t be surprised if they are the ones who the poor of society (with their ever increasing voter base) go after to remedy the situation.
What abject nonsense Independent. The rich cannot help but get richer, it's called the time value of money. But the poor are richer as well. And where do you get your "rising inequality" statistics from? Have you just made that up? And on the poor going after the wealthy, only if they are intellectually challenged, or Marxists. History tells us the poor get poorer when they go after the rich, as its the rich that generate ideas, businesses, jobs, tax etc. If you think the Government can do these things, I have a bridge I can sell you.
Housing/Banking is now an all consuming monster looming large over the NZ Economy - a very fragile edifice built on alot of FIRE hot air!
Licensed banks are in the unique position of being able to keystroke money/credit into existence and exchange that for a promissory note from a mortgage holder.
In collusion with complicit governments, of all colours, that has enabled a speculative housing frenzy to develop whereby the majority of New Zealanders believe that house prices will never fall.
Whilst the banks' windfall profits are obscene, the elephant in the room is the distortion of the free market by Central Banks and Governments over the last 30 years. The bail-outs, subsidies and interest rate manipulation have led us to this very mad and damaging place.
Yes, banks should be taxed more but I'm still waiting for the long-promised deposit guarantee scheme so don't hold out much hope.
Can’t quite escape on this sort of concept, my reading long ago of Henry V111’s seizure of the wealth of the monasteries. Still he required to found a new religious order in part, to do so. Could this be the dawning of the aRepublic of New Zealand? Just kidding of course.
Fox, Henry the 8th dissolved the Monasteries and acquired their wealth to remove Papist influence in England (there was the small matter of him needing a few bob to finance his lifestyle and wars!). All because the Pope wouldn't let him divorce one of his wives. So he set up the Church of England, and torched Catholicism. To be fair, it wasn't a new idea to Henry, he'd organised Henry Cromwell (who had dissolved Monasteries in the past) to survey each Monastery for the purpose of finding how much property each owned (via Valor Ecclesiasticus).
And Henry didn't find a new religious order in part, he did it in whole and became the Supreme Head of the CoE.
Yes exactly the incentives (tax, lending risk criteria/weighting, interest rate policy, immigration policies) are all set to create social division and financial instability…which is the complete opposite of what the RBNZ should be working towards/delivering.
Were acting like fools but expect good longer term, utilitarian outcomes…not going to happen without a significant paradigm and effective policy changes)
It’s the left that has created this situation - less market intervention and these problem would have resolved themselves. Instead we have communist like central banks that have effectively been price fixing assets and ignoring data that they don’t want to see (like transitory inflation narrative). Oh and here let the government pay your wages oh and here let the government give more and more accommodation supplements and welfare because the real economy can’t support the current cost of living.
The socialist mindset has created this, the free market will repair itself if allowed to do so…but people don’t like the reality of what that looks like. So we will continue to live in denial (for now…)
IO it looks a lot to me that the banking model is very like that in the US. So how can it be that the "left" created the problem? This is misapplied, and a lack of appropriate regulation, that had largely given the banks open slather in the market. I would rather suggest that this is a consequence of the free market model being applied by Governments. More right wing politics than left?
True that successive Governments have not changed much when they have had the opportunities. When times are good it is nigh on impossible to change a market to allow for the bad times that are surely coming, behest that you are accused of causing them.
I would take it more that this Government has exacerbated many of the problems through ideology and not being open to external inputs. There are too many examples over the last 4-5 years where the business landscape has been dramatically altered overnight with no input sought. Maybe it could be better said (using stereotypes) that the left want to forcefully shape the market and the right want to let it run unchecked, whereas the truth is likely somewhere in the middle. But you'll never get both to agree what the middle is!
You made me smile! I agree that this Government has shown a concerning bent towards traditional socialist political ideology that is highly concerning, as it is, in my view, about increasing dependency through driving down living standards. Superficially they can make it look good, but you've got to look for the hooks. A bigger concern though is that the other political parties do not seem to be much different as far as the man on the street goes. Preserving power and privilege seem to be all it is about for politicians.
The one big flaw in this article is that taxation does not finance the governments spending. The government spends taxes and borrows in NZ Dollar Currency which only it has the ability to create as The NZ Dollar is a sovereign currency.
Government spending adds reserves to the banking system while taxation deletes reserves from the banking system. Nor does borrowing finance the government it only changes the form of the governments liability from currency reserves and into treasury bonds while QE is only a reversal of this process.
Economist L. Randall Wray describes here how sovereign currencies operate. https://www.levyinstitute.org/pubs/Wray_Understanding_Modern.pdf
I vaguely remember in 1967, taking Anthropology 1 at Auckland Uni, a lecturer introducing the topic of primitive currencies, in particular the use of particular sea shells as a form of currency throughout a defined region of islands and atolls in the Pacific. This information had a special relevance in 1967 because that was the year NZ adopted decimal currency. So, having grown up believing that pounds,shillings, and pence were god-given constants, in one year I was suddenly exposed, in what amounted to an epiphany, that there is more to money than meets the eye.
I've been thinking that it might be worthwhile for the RBNZ to look at sea shells as a form of currency more relevant to our geographical location and to the fact that people of Polynesian ethnicity are multiplying at a rate so far in excess of any other NZ ethnic group that they will be the dominant ethnicity throughout NZ within this century. They, like other ethnicities will justifiably expect more of their traditional customs to be taken up as part of mainstream culture.
Sea shells would indeed be more acceptable to the people of NZ than would say a crypto currency such as bit-coin: sea shells can be held in the hand to be admired for their beauty as well as performing double duty as a means of trade; they make a soft melodic clatter as they are carried about in a bag, and can be held up to the ear to listen to the soothing sound of the sea. Bit-coin has none of these attractions.
Inflation would be restrained naturally by the very weight of a bag of sea shells; people just wouldn't be able to lug an increasingly heavy bag of sea shells off to P'n'save every few days because of the natural limits to human strength.
With visits to the beach becoming possible, and members of the RBNZ enjoying a long summer holiday, I'm thinking that they could surely find time to mull over the idea of a sea shell currency.
This was done by the ozzies a few years ago I think they called it a super profits tax the banks squeals were deafening but they paid it I think it was a one off in my view it would be fair to do the same here . The banks profits have been directly and advantageously delivered by government policy courteously delivered by the reserve bank. There is nothing socialist about it this policy in Australia was delivered by a conservative government.
This Govt hav its hands in the pockets of working-class kiwi's for giving rent subsidies, printing money in name of Covid & increasing state housing to cover up the mess.
After Labour came into power inflation, house price, child poverty, homelessness, covid cases, crime rate & economic disparity were at an all-time high. The complete failure of this govt only pushed the limits & has no intent to take any strong action, taxing banks is can't even thinkable & if it happens also it will be a minuscule percentage.
Either the current lot is corrupt or full of spineless/brain-dead people.
Banks are the biggest underlying cost base for most of NZ. A commercial or residential landlord has to pay interest so cannot provide rent relief in any meaningful way, small business have to use their home as collaterial in most cases increasing their mortgages for costs or investment in the business. The only relief the banks provided was defferring payments which means they capitalise both principal and interest payments over the loan term making more money. People talk about landlords providing relief but the biggest owner of property in nz is the banks making record profits every year for as long as I can remember. Its not just banks, corporations own the world, own the media and lobby govt relentlessly ruining everything to make money for a few shareholders. Corporate responsibility does not exist.
Absolutely agree with this comment, during lock down, two of our businesses with 60 odd employees were completely shutdown an unable to earn an income let alone make a profit, however the banks were able to keep charging us full interest, this is not equitable at all. As you suggest the bank have given us a holiday on our principle repayments, which is helpful, but ultimately they end up making more money from that same loan...
Everyone has a cost that needs to be met by someone as you go up the chain. But is it equitable that banks still made their margin on top of their wholesale interest costs? I don't think so. Maybe it would be better to require that banks only charge interest at the OCR rate when a customer is not making payments due to hardship?
You don’t even need to do a one off tax. Just make them retain 100% of profits as the increased capital buffer - the capital buffer the RBNZ has already signalled is required.
The RBNZ have said banks need to hold more capital for a 1 in 100 year event. Such an event occurs and they just defer the capital requirements. Pathetic and gutless, which is par for the course for them
International Banks can, and do, shift profits, losses and anything in between to any associated entity they like.
If the RBNZ 'asks' a foreign bank to retain its locally derived profits here, guess what? They wouldn't make a profit, so nothing to be retained.
Banks are fore-runners of the Google and Netflix etc income re-allocation model, (the Cayman Islands comes easily to mind) and were for several decades before either of those companies was even dreamed of.
(NB: Probably a better question is: "Why have the Aussie subsidiaries shipped so much money back home this year?" To bolster the Head-Office balance sheet against something they see coming; economic or regulatory?) To pay out inflated Dividends before the share price falls, or even provide the liquidity to buyback more of their shares to avoid that fall? I don't know, but someone in the banks just might)
Banks need to retain a share of profits locally, to grow capital hungry RWA security purchases.
From my past professional perspective it was the hedge funds that demanded trading desks like mine settle their trades in tax haven repositories.
I have no idea where the profits from those bank leveraged trades resided. But the extension of Prime bank loans to those hedge funds, to underwrite said trades, were certainly on our local London balance sheet and risk monitored close to a real time basis (circa 1995 onwards - VaR).
bw, your logic is astray. You talk about "Head Office Balance Sheet". Sure, there will be one of those, but when it comes to striking dividends, it is from the Group P&L and BS. And of course money moves about, the decisions are made at the parent, and fund are allocated for CAPEX, OPEX from the parent. It's no big deal, the profit is still made and taxed in NZ. There is a difference between cash, and profit. Also, your statement regarding RBNZ asking foreign banks to retain their profit here, and the banks in question then not making a profit (and shifting profits, losses to associated entities), there are rules around transfer pricing, which the IRD enforce. So let's not make stuff up that a bank would magically have its profit disappear.
"My use of the "s" word was partly a wind-up for hardcore free marketers". Somehow I doubt that Gareth, given your background. Your true colours are found in your tax suggestion. I have another suggestion for you. Since socialists love to spend other peoples money, why doesn't the government enforce on all that identify as socialists, a special annual "voluntary" payment to the IRD? That way, socialists can put their money where their mouth is, rather than be hopelessly hypocritical.
Should we not be surprised that when entering into a time of uncertainty and/or greater risk, then banks will take a more conservative approach? Then in an environment with a Government stimulated economy, accelerated the economy when all thoughts were that it would crash, leading to banks along with many other organisations doing particularly well over the last 18 months.
I'm not saying I'm happy with the amount banks are making, but what message does it send to banks next time a similar shock appears to be coming? Are we signalling to them to keep taking risks at the increased danger of failing, in which case which is worse? And what of other organisations. Earn too much (and we'll decide what that is after the fact) and we'll tax more? Another signal to international investors that your money may be better placed elsewhere.
If the Government wants to ensure more equitable outcomes maybe it should review the legislation that governs banks. In my opinion it would be better to require banking institutions to have more community services available to low income households during downturns, where that be budgeting advice, removal of fees, etc.
Well said. Government courted the banks when the pandemic showed up and engaged with them to keep lending. To levy them with a tax now they have done exactly what the government asked of them would be quite treacherous. It’s absurd to suggest additional taxes should be imposed on profitable industries when they are already paying more taxes as a result of the additional profits. It’s almost as if Vaughan doesn’t understand how percentages work. If he does it would be worth an explainer as to why a greater percentage should be taken in years when there are more profits. Maybe the percentage should be lower when they make less profit?
Reality is the Government has taken on a huge amount of debt to manage the COVID pandemic, but this is debt that can be paid off over a very long term. A pandemic is a 1-in-100 year crisis. Even today we are still paying for WWII. Back to the pandemic, the Govt took on this debt to protect New Zealand's long term interests, so there is no reason why the debt can't be phased over a generation or two to pay back.
Having said that, the size of the debt does mean one of two things: Govt has to increase income or cut costs.
But the old mantra that dominates New Zealand's business mindset "privatise the profits, socialise the losses", cannot apply any longer.
I expect extra taxes on businesses to pay back the debt the Government took on to keep them afloat through the wage subsidy or other means. Without the wage subsidy these businesses would have collapsed and the current labour market would be even more stretched as they look to re-hire the staff they fired!
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