The Prime Minister has been forced by events to embrace the spending and borrowing he and his government once spurned, but he has brought the zeal of a convert to the task. The JobKeeper wage subsidy has rescued about 3.5 million workers. The boosted JobSeeker payment has helped another 1.6 million.
Morrison has found a way to outrun the avalanche. Yet the crisis still towers over him, his government and the country.
What next? The immediate phase – the emergency – is giving way to a recovery phase that requires actions that inject new life into the economy.
The fiscal update prepares the country for an unemployment rate that will climb to 9.25 per cent by December and could take seven years to return to normal, if previous recessions are any guide.
“That is too high for too long,” says Danielle Wood, chief executive of the Grattan Institute, a public policy think-tank. “It doesn’t need to be that high and the government can act to bring it down.”
Wood and her colleagues have suggested another $70 billion in government stimulus to create jobs. They nominate spending social housing, infrastructure, social services like mental health as well as direct payments to those in need (such as a higher JobSeeker rate) and tax cuts.
This would be on top of the latest $20 billion extension of JobKeeper and JobSeeker.
This does not mean Morrison and Treasurer Josh Frydenberg are failing. Most acknowledge the success of the stimulus so far, but the debate is only starting on the further measures needed in the October budget.
“I think it’s been very good in the emergency phase,” says Wood. “What I’m worried about is them not getting the response right in the recovery phase.”
Labor accuses Morrison of doing too little to help those in greatest need and leaving the country to wait for October when it should have done more this week.
“The Morrison government owes it to those Australians to come forward with a plan – not to just raise the white flag on unemployment, not to just throw their hands in the air and say things are really bad but we’re not going to do anything new about it,” Labor treasury spokesman Jim Chalmers said on Friday.
“That is the main hole in the budget update. They delayed it for months. They still only produced half of an update and there is not a plan in sight.”
Morrison emphasises that things move fast; that his old language about a “snap back” in the economy no longer applies; that he responds to events.
“The way that you deal with this is you don’t get frustrated about it, you don’t wallow in concern about it,” Morrison said on Friday. “You just take action. You’ve just got to deal with what’s in front of you. You can’t deal with things as you’d like them to be. You’ve got to deal with things as they are.”
The meeting of national cabinet on Friday made some headway on the next phase of economic action. Morrison reached agreement with state and territory leaders to proceed with 15 infrastructure projects.
While construction projects are a priority, the government is also considering whether to use the October budget to bring forward personal income tax cuts and offer an investment allowance for business to encourage spending on plant and equipment.
‘Strictly speaking, there is no reason the fiscal position needs to return to surplus over the medium-term.’
David Plank, head of Australian economics at ANZ
The true size of the fiscal stimulus is now confirmed. The government’s key policy measures add up to $164.1 billion – half of this from JobKeeper in its first and second phases. The other big components are the cash-flow boost for small and medium companies, and the temporary increase in JobSeeker and other income support.
The total economic support is larger at $289 billion, because it includes loans, but not all of this has been taken up. While there is a $40 billion loan offer to business, the money is lent by banks rather than the government and only $1.5 billion has been borrowed. Another $90 billion is meant to come from a loan facility the Reserve Bank announced for the banks in March, but only about 20 per cent of this has been taken up.
With this $164.1 billion now the base level of direct fiscal stimulus, the argument begins over how much more the economy will need.
The central question is timing. At first glance, the fiscal update suggests the economy shrank by 0.25 per cent in the year to June and will contract another 2.5 per cent in the current financial year. This hides the true shape of the slump and recovery.
The sharpest fall was in the quarter to the end of June – and it was so great that it reduces gross domestic product by 3.75 per cent for the full calendar year, despite a rebound in the September and December quarters as restrictions are eased.
If the economy reopens as the government assumes, the economy grows by 2.5 per cent in calendar 2021. The difference between the financial year and calendar year forecasts is crucial.
The uncertainty brings huge volatility to the recovery, at odds with early assumptions about a “V” shape with a strong upswing.
“It won’t be a V or a U and thankfully not an L, or even a W,” says Ernst & Young chief economist Jo Masters. “It’s likely to be a ‘sawtooth’ pattern. That bodes for a slow recovery where setbacks create bumps.”
The weakness in the Australian economy comes when old allies are suffering even greater declines this calendar year. The United States is forecast to contract by 8 per cent, the eurozone by 8.75 per cent and Japan by 6.25 per cent.
One country stands out for the way it is already recovering after suffering the first outbreak of COVID-19. China is forecast to grow by 1.75 per cent in 2020 and 8.25 per cent in 2021. The pandemic has increased the pace at which China catches up to the developed world, at a time when tension between China and the US brings greater instability.
This is the world Australia faces while being lumbered with $851.9 billion in gross debt as soon as next year, with the figure likely surpassing $1 trillion over time. While PWC chief economist Jeremy Thorpe says the budget may not return to balance for two decades and the debt could remain on the books until 2061, nobody can be sure of the timeframe.
David Plank, the head of Australian economics at ANZ, makes a key point about the debt debate: the policy response was needed, so the deficits should not be seen as a policy failure.
“It is critical that the government does not embark on a rapid return to fiscal balance as that will have severe negative economic consequences,” Plank says. In fact, he adds, the way the government scales back stimulus at the end of this year could be a “significant challenge” to the economy.
“Strictly speaking, there is no reason the fiscal position needs to return to surplus over the medium-term,” he says. “It will be enough for the size of the deficit to fall below the growth in nominal GDP. That will ensure the debt burden shrinks over time.”
This is just what a Labor government said during the global financial crisis and a Liberal government argues today. Only with stronger growth can Australia lighten the debt burden. Without that growth, the next generation will be left to carry an even heavier weight.
The avalanche is still there. This is no time to stop running.
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David Crowe is chief political correspondent for The Sydney Morning Herald and The Age.