The Government’s long-awaited update of the fiscal and economic outlook contains no real surprises. But what we still need to know is what the Government intends to do next when the present economic support measures run out.
The headlines from the Government’s update of the fiscal and economic outlook are that:
· The Budget deficit for 2019-20 is estimated to be $85.8 bn – 4.3 per cent of GDP – and a huge $184.5 bn in 2020-21 – as much as 9.7 per cent of GDP, and an all-time record in peace time.
· As at the end of June, the deterioration in the Budget balance mainly reflects an increase of $58 bn in government expenditures since last December in response to the pandemic, while over the two years to 2020-21 the net impact of government policy decisions will increase expenditures by a total of $187.5 bn, or about 10 per cent of GDP.
· Gross public debt was 34.4 per cent of GDP as at 30 June 2020 but is presently expected to increase substantially to 45 per cent of GDP by 30 June 2021 – still very affordable and way below almost all other advanced economies. Indeed, because of the present low interest rates, the cost of servicing Australian government debt, as a proportion of GDP, is expected to be about half the cost incurred as a result of the last recession thirty years ago.
· Real GDP is forecast to have fallen sharply by 7 per cent in the recent June quarter and by 3¾ per cent this year (2020). Furthermore, while GDP is expected to increase by 2½ per cent in 2021, that will still represent a less than full recovery in economic activity by the end of next year.
· Unemployment is expected to peak at around 9¼ per cent in the December quarter this year and is still forecast to be as high as 8¾ per cent in the June quarter next year. Furthermore, Treasury estimate that the “effective” unemployment rate was as high as 15 per cent in April and close to 11 per cent in June – the difference between the measured and effective unemployment rates representing the many workers who quit the labour force or who were working zero hours on JobKeeper.
Although these headlines do not make for great reading, the general consensus is that the Government’s economic response has been very successful. Australia’s economy has suffered much less than most other nations and while that partly reflects the success of the Governments’ health response, it is also due to the economic support for businesses and households.
In brief, the government support includes the $85.7 bn JobKeeper Payment, expanded eligibility for income support payments, a time-limited Coronavirus Supplement to the income support for unemployed people, a variety of other support payments for households, including free childcare, temporary cash flow support for employers, and increasing and expanding access to the instant asset write-off.
Of all these various measures, JobKeeper has been the most important as well as the most expensive. More than 960,000 businesses and not-for-profits and more than 3.5 million individuals have been covered by the JobKeeper Payment. The Treasury review found that JobKeeper “has been well targeted, going to businesses that experienced an average decline in turnover in April 2020 of 37 per cent against the same month of the previous year (compared with a 4 per cent decline for other businesses). … The payment has kept jobs in place and maintained the links between employees and their employers.”
But the JobKeeper Payment was always intended to be temporary. There is no case for keeping zombie firms alive when the economy is recovering.
Therefore, both the JobKeeper Payment and the Coronavirus Supplement were originally scheduled to stop at the end of September. However, earlier this week the Government announced arrangements for some prolongation of both schemes. As widely expected, and agreed, the JobKeeper Payment will be more targeted and will gradually taper down over time.
Similarly, the Coronavirus Supplement will be reduced from $550 per fortnight to $250. The Government has also adjusted the means test for JobSeeker so that recipients can earn up to $300 per fortnight without loss of benefit, so in principle the reduction in the Coronavirus Supplement could be offset if the recipient can find that extra work – but this seems most unlikely for all but a very few. In addition, the requirement for JobSeeker recipients to apply for a minimum of 4 jobs per month will be restored, and this seems tough given the continuing poor outlook for the labour market.
In sum, the Government has this week provided a useful update of present policies and their impact on the economic and fiscal outlook. These policies have worked very well to mitigate the economic damage from the coronavirus, and the Government is to be congratulated, especially as it involved swallowing a lot of their past rhetoric.
What is missing from this update, however, is the probable further policy adjustments that will be needed over the course of this financial year and beyond. The Government says that this will have to wait until the Budget to be brought down on 6 October, but that is almost another three months away.
The Government will contend that this delay is because the future is especially uncertain at this time. But that is the reason why the Budget was not brought down in May as usual. In my view, the balance between the uncertainty of the economic outlook and providing better guidance to the rest of the economy on the Government’s intentions lies in making necessary decisions and providing more information now.
In particular, it is a shame that the Government did not announce this week a permanent increase in payments to all recipients of unemployment income support. There is almost universal agreement that a return to the past rate of $40 per day at the end of December as presently planned is unconscionable. Even the Government admits that the economy will not have recovered by then, and the Prime Minister has hinted that this decision will have to be reviewed.
But why not permanently lock in now the new rate of unemployment income support of $57 per day? Surely the nation can afford that much to mitigate the risk of poverty. That rate would still be significantly less than the income support for pensioners, whereas for years the two rates of assistance were the same, and no-one noticed any impact on the incentive to work back then.
But beyond the need to support unemployed people, it is pretty clear that the rate of economic recovery will be too slow, and that further government support will be needed, especially as the JobKeeper payment is wound down.
The reality is that the rate of economic growth was very disappointing for a few years before the pandemic. Productivity and real wage growth were negligible, and economic growth was dependent to an unusual degree on population growth, but because of travel restrictions, immigration and therefore population growth is certain to be much less in at least the next year or two.
More government support will be needed to lift aggregate demand over the next couple of years at least. Many argue that this support should take the form of increased infrastructure investment, as in principle that would add to the economy’s productive potential. However, the reality is that far too much of infrastructure investment is not warranted economically, and especially not when population pressures are unlikely to rise as fast as previously forecast, and more people may be working from home in future.
The other stimulus measure that seems to be getting support, especially within the Liberal Party, is to bring forward the Government’s promised tax cuts. However, as presently proposed, these tax cuts are very biased in favour of high-income earners, who are likely not to spend much of the extra disposable income. Given the need to support aggregate demand it would be better to review the structure of any tax cuts so that they were much more proportional across all income groups.
In addition, there are as always a variety of other worthy ways of stimulating the economy through additional spending. These include:
· seizing the opportunity to encourage new forms of renewable energy, and the industries that could be based on Australia’s comparative advantage in that production.
· providing more money for research and development, universities, social housing, and aged care; all of which are clearly underfunded at present.
All of these spending initiatives would not add up to as much as the $60 bn that the Government has saved relative to the original estimated cost of JobKeeper. Thus, the Government cannot claim that it cannot afford this largesse, while the economy is going to take quite a long time to recover fully.