The Prime Minister, the head of Treasury and the present or former Chief Medical Officer may each be experts within their fields, but none of their guesses about when Coronavirus will loosen its grip on the nation’s economic throat are any better than yours or mine, or the throwing of a dice.
This is not because such things cannot be modelled, or that their progress cannot be imagined, or because preventive measures do not work. It is, as the explosion of new cases in Victoria has demonstrated, because the shedding and spreading of the virus involves a lot of random factors, luck, and human folly.
Governments have to make best guesses about when the pandemic will run out of puff, and about how the economy, and, particularly, unemployment rates, will respond to the stimulation being given by spending measures. They are obviously aware that best guesses are somewhat less than reliable predictions, and that they will have to adjust the economic levers, or turn the economic steering wheel as events develop. Nonetheless, the figures, the estimates and the hints of where the players would like to end up are quite instructive, themselves able to have an impact on what happens.
And here’s the problem. A real crisis forced a conservative government to throw its economic doctrine and dogma out the window. Its old ideas and ideals about balanced budgets, surpluses, and winding down government debt have had to be abandoned as they have sought to sustain the population through lockdown, quarantine, and closure of borders, through the closure of some industries, the slowing of others, and mass unemployment. Spending and borrowing measures make multibillion-dollar deficits inevitable over the next few years, involving major increases in government debt. All of this to coddle an economy in virtual coma — made worse by the requirements imposed by regional outbreaks, closed borders and blockades — to reintroduce rules having the effect of slowing any recovery.
Last week’s economic statement announced that welfare benefits and payments for those thrown out of work would continue, if at reduced rates, beyond the date in September, set during the first decisions as the pandemic hit. It was obvious that the pandemic was not going to behave as some originally expected — with a short sharp hit, followed by a steady but deliberate revival of the economy, assisted, we all hoped, by the speedy development of a vaccine, or perhaps an effective treatment of the more serious symptoms. No criticism attaches to the misjudgements or wrong guesses, nor to those engaged in argument about when and whether controls should be lifted, and whether and to what extent risks had to be embraced.
One cannot expect that most of the ministers regret their original decisive action, whether in trying to deprive the virus of new hosts, or in attempting to help workers, families and businesses through the economic crisis. But it does seem clear that the measures are working hard on the political conscience, that ministers are determined that most of the assistance measures have definite use-by dates, and that the sooner the business of moving back to lower deficits, debt re-payments and reduced government outlays the better. To the measures recently announced will be added September Budget decisions, including ones bringing forward tax cuts, not least for those on the wealthier end of the spectrum.
But the revival of the economy — short of long term — does not depend on any bottom lines of government spending, government revenue, the public sector balance sheet, or the size of public debt. It depends first on a revival of spending and investment, in part assisted by the signals sent out by government’s pumping of money into the economy. It depends on this revival sucking up unemployment, both so that these have extra money to spend, but also so that they are adding to net supply and net demand. It depends on consumer and business confidence in a revival, in the worth of investing in new plant and equipment, and taking on new employees — starting with many of those let go when business conditions deteriorated.
That need not, of course, be only a result of new private-sector activity, because governments as consumers, at Commonwealth, state and local level, provide goods and services, directly or indirectly, and can take the opportunity to renew and refurbish existing as well as develop new infrastructure. Governments at all levels can also promote confidence as well as demand, by the measures they take to facilitate new adapted types of investment and growth suited for the post-Covid-19 economy.
All of these are part of what makes up that confidence that is necessary to get the engine of the economy humming again. The extra money funnelling into the economy is not being sucked out of the general economy, thereby running the risk of crowding the private sector out of the market for money to invest or spend. It is coming instead from debt, and that, as the Reserve Bank has been pointing out for years, in an environment of historically low-interest rates.
No one is suggesting that the new debt acquired can be of infinite proportions, nor that the size of the deficit can be as long as a piece of string. The greater the debt, the more that will ultimately have to be accounted for — perhaps repaid. Yet there has been no magical incantation which has decreed that a deficit of more than $100 billion in the past financial year and $200 billion in the present financial year is as much as the economy can take. No one, certainly not the Reserve Bank, is suggesting that putting this extra amount of money into the economy — or more than it — presents a clear and present danger of an overheated economy, a substantial increase in the inflation rate, or of a wages break-out.
To the contrary, the general fear in the community is that the stimulus so far planned and provided by government will not be enough. That is, it will be insufficient in the short and medium term to sop up unemployment, or to deal with the diminished capacity of more than a million Australians to buy goods and services, pay rents and plan their futures. It will not be enough to inspire entrepreneurs, new or already in the market to invest in their businesses and take on new employees.
It will not be enough that ordinary Australians will respond by spending tax cuts, instead of putting the money in the bank or retiring some credit card debt. A wealthier subset of the market may increase their spending on consumer items, such as cars, to make up for their incapacity to travel abroad for some time, but others will continue to be deeply insecure, with already diminished savings, and a good deal more insecurity, whether for themselves, their families or the economy at large.
That’s not a sentiment likely to be allayed by signals that the government is looking to wind back payments to individuals as soon as it can, perhaps so as to avoid allowing medium term unemployed to become “welfare dependent” and difficult to flog back into work. Nor is a revival of optimism, innovation and risk-taking likely to be promoted by signs of anxiety to reimpose controls, to rein in or brake any new types of expenditure. With or without all the stimulus money, the economy will be on life support, needing as much medicine as possible.
It would be far better if the government were showing a general willingness to continue stimulus payments, and fancy unemployment benefits as long as there was evidence that it was oiling the economy and creating the conditions in which unemployment (and labour market participation rates) could be brought back to normal.
It’s a matter of signals. A Treasurer cannily pulling the levers, and responding on the hop to developments, including unexpected outbreaks of Covid-19, or the consequences of resumption of old containment measures or specialised ones for particular cases, can very slowly put on the brakes as the economy begins moving again. There is the world of different between that — particularly as far as the psychology of the market is concerned — and meanly announcing, ahead of time that payments will be suspended, or halved, on particular arbitrary dates not really so far away.
It all comes back to a simple proposition, too long ignored by those who became obsessed by debt and deficit over recent years. We want balance, but in the economy generally. Governments should be spending or contracting according to the general health of the system, using the controls to slow down when excess spending is merely feeding into inflation, or to push things along when progress is stalling. It is the art of doing that effectively which labels a Treasurer, or a party, as a good economic manager.
Good economic managers do not engage in mindless and ideological cuts to spending when stimulus is called for, divert money away from activities which should be encouraged into the hands of those who neither spend nor invest, or set arbitrary cuts such as “efficiency dividends” to essential public services. The coalition government is not the author of the coronavirus. But on the records of the past two decades of government, or even the past year, the coalition claim to be a superior manager to the opposition has yet to be made out.