MICHAEL KEATING. The Government’s Economic Response to the Coronavirus.

Mar 14, 2020

The Government’s economic stimulus package has generally been welcomed. But how good is it, and what are the implications for the longer-term economic outlook?

How much stimulus?

At a total estimated cost of $17.6 billion the package represents 0.9 per cent of annual GDP. Significantly, just over 60 per cent of the total cost will be incurred in the forthcoming June quarter, representing a bit over 2 per cent of that quarter’s GDP. So, the package does seem to be in the right ballpark in terms of its size and timing relative to the expected size of the downturn in the economy in the short-term.

Furthermore, there is considerable uncertainty about how much stimulus might be needed over a longer-term. First, there are uncertainties about the spread, severity and duration of the present health crisis. Second, there is further uncertainty about the impact of the health crisis on the economy because the impact on confidence, people’s ability to work and business cashflow are all uncertain as well.

In these unusual circumstances I note that the Government deliberately focussed on measures that are “timely and scalable, so that they can be adjusted appropriately as events unfold”. That seems to me to be very sensible, and the Government will have another opportunity in its Budget in two months to review what extra stimulus is necessary, if any, to further sustain the economy.

The structure of the stimulus package

Almost all the stimulus in the next few months will come from two measures:

1. Helping small and medium-sized businesses cover the costs of employee wages

2. A one-off payment to 6.5 million social security, veteran and other income support recipients.

In addition, eligible businesses can apply for a wage subsidy of an apprentice’s or a trainee’s wage paid during the 9 months from 1 January to 30 September this year, and that will cost just over $1 billion to be paid in 2020-21.

These measures are what is needed to maintain demand and employment. My only criticism is that I think more should have been done to help casual employees who can no longer find adequate hours of work. There are complicated arrangements so that casual workers can get income support if they are sick, but a healthy casual worker who can no longer obtain adequate hours of work gets no assistance.

I think it would be possible to devise a scheme to make up their earnings by giving them restricted access to Newstart. Alternatively, additional assistance could have been made available more generally to low-income households.

The other measures that complete this stimulus package are support for business investment and assistance for severely affected regions. In my opinion, these measures, while no doubt well-intended, are less worthy of support.

First, the investment incentives have two elements:

· Increasing the instant asset write-off for tax purposes

· Introducing a time-limited 15 month investment incentive by accelerating depreciation deductions for taxation purposes.

I think the weight of evidence is that increasing a firm’s after-tax income does not of itself lead to increased investment. Instead, providing there is an adequate return in the first place – and the high rates of profit already show that is the case – then increased investment depends first and foremost on increased aggregate demand, and principally consumer demand. Indeed, it is the weak consumer demand over the last year or two that has been responsible for the weak rates of business investment, despite a high profit share.

So, I don’t expect increasing the instant asset write-off to increase business investment much, if at all. Instead, past experience is that like a company tax cut these sorts of give-aways are used to finance bigger dividends and share buy-back schemes, but they don’t increase investment. However, the time-limited investment incentive might encourage some firms to bring forward their investment, so that they don’t miss out on that tax concession.

Second, the $1 billion to support regions most severely affected by the coronavirus outbreak begs more questions than have so far been answered. Furthermore, this Government has form when it comes to administering regional assistance.

So far, no detailed criteria have been provided as to how a region will be chosen for assistance, and what sorts of organisations and what activities that they undertake will qualify. I suspect that there is still substantial work to be done on developing the criteria for administering this scheme, and that will take time. Ideally these criteria should also be legislated by the Parliament.

Given the Government’s proposed timetable, however, it must be doubted whether this assistance will be well or even properly administered. Alternatively, if this scheme is properly administered so as to ensure due process and value for money, there may be delays such as have been experienced with the bushfire relief.

Overall, my verdict on the Government’s economic stimulus package is that it is about right in terms of the amount of assistance, and the principal elements should be supported. However, there are some elements that are of dubious value, and could easily be rorted.

The longer-term economic outlook

The Government has of course abandoned its commitment to return the Budget to surplus this financial year, but the longer-term commitment to return to surplus remains. According to the Government it “is acting decisively in the national interest … without a permanent or structural impact on the Budget balance”. The Government claims this is because the economy will bounce back, and the Budget will therefore bounce back as well.

The Government’s messaging is that by “bounce back” the economy will resume what they try to present as strong economic growth. I am, however, less confident about the longer-term outlook for the economy.

As I detailed in my previous post ,MICHAEL KEATING. Continuing economic stagnation the Australian economy has not performed well since this Government assumed office, and the last year – 2019 – was even worse. Thus over the last three years, labour productivity has not increased at all, private business investment has increased at much less than half the rate between 2001 and 2016, and real household consumption per capita fell over the last twelve months.

Essentially the Australian economy is being propped up by government spending – State and Commonwealth – but how compatible is that with returning the Budget to surplus?

The sort of temporary fix embodied in the Government’s stimulation package is never going to turn this situation around. What the Australian economy needs if it is to properly recover are structural reforms.

In particular, as the Governor of the Reserve Bank has stressed, we need to address the problem of low wage growth, and thus augment the rate of increase in aggregate demand. Over the longer term achieving faster wage growth will require more and better investment in education and training – including retraining – so that people can better adapt to the new technologies that are driving the changes in the labour market. But in addition, in the short-run changing wage setting practices to achieve higher wage growth should also be considered.

But with a government that is not prepared to acknowledge these sorts of fundamental structural problems, the Australian economy is most likely to continue to stagnate, notwithstanding this short-term stimulus package.

And if the economy continues to stagnate, then returning the Budget to a sustained surplus may also prove to be too difficult. Alternatively, the Government may well welsh on the Prime Minister’s “guarantee of funding for the essential services that Australians rely on”. But in that case the impact on demand and well-being would be even worse.

What Australia really needs is a government that has a real economic plan for the future, and not just a set of marketing slogans.

Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.

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