Economic recovery contingent on budget stimulus

The willingness of the states and Federal Government to use fiscal policy to drive a sustained recovery from the COVID-19 recession has already saved many jobs from being permanently lost. It has also restored nearly half of the hours worked that were initially lost as a result of COVID-19 restrictions. However, the fate of many more jobs still depends on ensuring a successful transition of the millions of people still under JobKeeper or supported by JobSeeker as these programs are scaled back or ended.

This presents a significant challenge as the economy continues to operate under a range of COVID-19 safe restrictions. Continuing physical-distancing rules will limit the return to full capacity, especially in consumer-facing service industries. There is no indication of when international borders will fully reopen - a reduction in migration will see Australia’s population age faster with a range of adverse implications, and supply chains will remain disrupted. 

Given this backdrop, it’s not surprising that most forecasters expect the unemployment rate to only fall softly over the next few years with the RBA expecting it to still be around 7 per cent by the end of 2022. This poses a significant risk for the rising numbers of the long-term unemployed, especially young people attempting to transition from education to the workplace. This is just one of the potential shadows cast by this health and economic crisis. The task in today’s Federal Budget, therefore, is to lift the pace of recovery and several independent researchers have estimated an additional fiscal stimulus of around 2 per cent of GDP would be an appropriate goal.

Ideally, the bulk of the new stimulus should be frontloaded as much as possible. Mortgage and rent deferrals that temporarily reduced financial pressures on households are being reviewed and some of the existing government income support measures are already being wound back. JobKeeper is currently scheduled to end early 2021. This is despite employment - particularly in education, tourism, hospitality, the arts and recreation - will likely remain constrained by COVID-19 safe restrictions. 

If JobKeeper is to end early next year then a wage subsidy scheme, along the lines proposed by ex-Treasury and OECD official Peter Downes, that incentivises businesses to hire new workers could help displaced workers find new employment opportunities more quickly. This would also address some of the criticisms aimed at JobKeeper, including those by the Productivity Commission. 

However, to be particularly effective, businesses will need to be sufficiently confident there will be a take-up in demand for the increased products and services as labour demand expands. Bringing forward the second tranche of personal income tax cuts might only partially boost consumer spending given many consumers have preferred to save rather than spend the income injections. Direct government spending in areas that also have lasting effects on the supply side of the economy via lifting productivity and labour force participation could be more powerful.  

There is an expectation the Budget will include measures to accelerate approval and funding of infrastructure projects. Works that improve the resilience of properties and communities to natural hazards should be strongly considered – especially those initiatives that are well progressed in terms of planning. This is particularly relevant for regional communities, which can be more susceptible to economic shocks such as COVID-19, lack access to quality community amenities and latest advances in digital and other technologies and have high natural disaster risks. In addition to reducing the impact of future disasters, these communities will benefit now from the economic stimulus to employment and income. 

Not surprisingly, the scale of budget deficits to see the nation through the current crisis has raised concerns about the financial burden on future generations and the vulnerability to future shocks. However, to date, the rise in government deficits has effectively been a transfer of income from the public sector to households and businesses. Net national saving is largely unchanged, and the funding of Australia’s investment needs is comfortably within the capacity of domestic sources, as reflected in the continuing current account surplus. This is very different to previous periods of large budget deficits when the nation was running large current account deficits.

Importantly, the structural integrity of the Budget is supported by many of the fiscal measures being temporary, funding costs are at record low levels and governments, the health authorities, the RBA, the financial sector and regulatory agencies have worked together in ways that some nations can only dream of achieving.