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Government must spend more to support recovery

Secondly, governments need to avoid the looming “fiscal cliff”. They have cushioned the impacts of the crisis with more than $160 billion in support to businesses and households. But many programs are due to end together at the end of September. To avoid pushing the economy off that cliff, they should be wound back more gradually.

JobKeeper should be extended beyond September for businesses yet to substantially recover. The Coronavirus Supplement for JobSeeker should be wound back gradually in early 2021, after JobKeeper is removed. That would cushion the blow to workers’ incomes as they move off JobKeeper but avoid propping up zombie firms.

People queue outside Centrelink in Rockdale.

People queue outside Centrelink in Rockdale.Credit:Rhett Wyman

Third, governments should provide substantial fiscal stimulus to support the recovery. The Reserve Bank’s latest forecasts have unemployment falling slowly to 6.5 per cent by mid-2022. But we can do better. Unemployment leaves permanent scars on those affected and hurts the economy long term.

The government and the Reserve Bank should aim to bring unemployment down to between 4 and 5 per cent – the level expected to trigger faster growth in wages – within the next two years. Doing so will require sizeable fiscal stimulus: in the order of $70 billion to $90 billion, or about 3 to 4 per cent of gross domestic product. But it would mean an extra 430,000 to 510,000 Australians in work by mid-2022.

Extending JobKeeper and winding other emergency programs back more gradually will cost about $30 billion in 2020-21.

More generous childcare subsidies should also replace the pre-COVID regime, helping more second earners, mainly women, get back to work. And JobSeeker should be increased by at least $100 a week so it provides at least a minimum basic standard of living for those looking for work. These changes would cost at least $21 billion over the next two years. That means additional stimulus of about $20 billion to $40 billion will be needed before mid-2022.

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There are plenty of good options. One-off cash payments to households would boost spending. Government spending on mental health services or on helping disadvantaged students catch up on lost learning would create jobs, as would shovel-ready infrastructure projects with good returns to the community, including social housing, roads and school maintenance.

Naturally there are concerns younger generations would bear the burden of higher debt. But job-creating stimulus helps the young in particular, who are hit hardest by high unemployment. And there are few alternatives. Structural reforms to boost productivity typically do little to boost demand and create jobs in the short term.

So far, Australian governments’ COVID-19 responses have been among the best in class. But the next big test for our leaders is rebuilding the economy and creating jobs. And to do that they will need a plan.

Brendan Coates is household finances program director and Danielle Wood is budget policy program director at the Grattan Institute.

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