Why business failures may be a good thing

Insolvency numbers continue to track up but business failures may prove to be a good thing for the overall health of the economy, one economist says.

Data from the Companies Office shows that after a spike, insolvencies fell but continued to increase month on month.

They are at more than twice the level of 2022.

Recent data from Centrix showed that some sectors were being hit particularly hard. Hospitality recorded 51 percent more liquidations than a year earlier, and retail liquidations were up 35 percent.

But spokesperson Monika Lacey said the fact that business defaults were down 13 percent year-on-year indicated that things were improving and that liquidation number should fall. She said it was a lagging indicator and reflected problems that had happened in the past rather than current issues.

Simplicity chief economist Shamubeel Eaqub said government financial data out on Thursday showed tax revenue for the year-to-date was nearly $1 billion above forecast, and 80 percent of hat was due to better-than-expected corporate income tax.

He said businesses closures were part of the recovery and allowed surviving businesses to increase their margins.

"Look at the tax numbers, the national accounts numbers, they're all pretty consistently saying that after really massive margin compression, we're seeing that start to recover towards more normal levels.

"You can't have jobs and investment if you don't have businesses making money. And so in my mind, despite all the uncertainty over the last three months, there's still some encouraging signs that if the kind of the truce in Iran holds, there's still some underlying factors that are still telling us that this recovery was underway and it was knitting together in a way that you'd expect for a normal economic cycle … And this business closure is a part of it, right? You need the weak businesses to close. That's what opens up that opportunity for surviving businesses to succeed."

He said it would still be many months before the liquidation numbers fell. "Usually it's up to 12 months before we start to see that turn."

Inland Revenue is still pursuing many businesses for overdue debt. "It's the return of the IRD rather than something new. If you look at the share of gazette notices, IRD's share has fallen during and post-Covid and that's now getting back to where it should have been rather than something new … in my view there is absolutely no justification to trade as a business if you cannot pay PAYE and GST, then you're an insolvent business."

Westpac chief economist Kelly Eckhold agreed that the Covid experience of IRD leniency could have let some businesses continue to trade when they really should have failed.

"Keeping firms alive that aren't viable is a bad thing. In financial crises you see policies to keep failing firms operating and they don't tend do much and can increase the cost that goes on the taxpayer."

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