The Grattan Institute’s Fiscal Recovery Plan

Jul 1, 2020

The economy is presently receiving an unprecedented, but time-limited, level of fiscal support. The report just released by the Grattan Institute provides a very good analysis of what is now needed to sustain the economic recovery.

The Government has responded very well to the threat to the economy posed by the lockdown necessary to suppress the spread of the corona virus.

Most importantly, and to many people’s surprise, the Government has abandoned its rhetoric railing against budget deficits and debt. Instead, over the past three months the Federal Government has announced an unprecedented fiscal injection of $138 billion (about 7 per cent of GDP, or more than $5300 per Australian) to support businesses and households through the COVID-19 lockdown.

Nevertheless, this is the deepest recession that Australia – and the world – has faced since the Great Depression ninety years ago. If it hadn’t been for JobKeeper and all ‘stood down’ workers were counted as ‘unemployed’, the unemployment rate would have been 11.3 per cent in May. Furthermore, compared to previous recessions, this time the hours worked have fallen more, and more people are leaving the workforce; both of which are restraining the increase in recorded unemployment.

It is therefore quite fanciful to assume that any economy can “bounce” back from this sort of recession, without maintaining significant fiscal support. However, almost all the present fiscal stimulus is programmed to end at the end of September. Consequently, the economy is facing the prospect of a “fiscal cliff” as the additional $14 billion per month (almost 9 per cent of GDP) in emergency income support through JobKeeper and the higher rate of JobSeeker are almost simultaneously cut off.

The Government has acknowledged that a continuation of some fiscal assistance will be necessary. The Government, however, wants to fine-tune its assistance, which is appropriate, but businesses need to know soon what they can expect in order to make their own future plans.

Personally, I think that if we want to avoid a severe economic crunch, then the fiscal support package recommended in the Grattan Report, which has just been released, provides the best available base for considering what future fiscal support is needed.

First, the Grattan Report recommends that the most important and expensive form of emergency support – the JobKeeper program – that is scheduled to end in September, should be wound down more gradually. JobKeeper should also move to upfront payments and its coverage should be expanded to cover temporary migrants, casuals, and employees of universities, all of whom contribute to the economy and have so far been unfairly excluded. On the other hand, there would be some modest offsetting savings by adopting the Grattan recommendation to lower the rate of payment to part-timers.

In addition, the Grattan Report recommends a continuation of the emergency support through the JobSeeker supplement to December, phasing down to March 2021, and an intensive tuition program for disadvantaged students whose education was most damaged by the lockdown. In sum, the Grattan Report estimates that the total cost of continuing this amount of emergency support would amount to another $30 billion in 2020-21.

Second, the Grattan Report recommends permanent fixes to improve the social safety net by:

· Increasing income support for unemployed people from April 2021, so that instead of dropping back to an income of $40 per day at the end of September, unemployed people would receive at least an additional $14 per day.

· Lifting rent assistance by 40 per cent from October 2020, in recognition that people on income support who don’t own their own home are presently much worse off.

· Reforming the subsidies for childcare from October 2020, when the present temporary arrangements for free childcare are programmed to cease, in the expectation that this will assist workforce participation by low-income mothers.

It is estimated that these initiatives would cost at least $21 billion over the next two years.

Third, the Grattan Report concludes that if governments want to get a return to something like full-employment by mid-2022, “then they will need to be prepared to add to the temporary stimulus by spending another $20-40 billion on services, infrastructure, and building social housing, depending on how the economic recovery plays out”.

In relation to infrastructure investment it should be noted that the Grattan Report is properly suspicious of the large projects favoured by governments: too often these are not properly evaluated, they take more time to start, and the present uncertainty about future population growth and peoples’ future travel and working arrangements make these projects even more risky at present. This is why the Grattan Report favours increased spending on social housing and road maintenance, both of which can be started immediately and for which there is a pressing need.

In total, the Grattan Report estimates that its preferred package, as outlined above, will cost in the order of $70-to-$90 billion in additional stimulus over the next two years, equivalent to around 3-4 per cent of GDP. In addition, the counterpart of the recession has been that government revenue has also fallen substantially compared to the Budget estimates of a year ago.

On the other hand, after September the Government will be saving the equivalent of $14 billion a month after the termination of the present arrangements for JobKeeper and JobSeeker. Over the nine months from October to June, that would amount to a spending reduction totalling $126 billion; a lot more than the extra $60 billion or so to cover the cost of the Grattan recommendations over the same period. And of course, the Government has “saved” as much as $60 billion compared with the original estimated cost of JobKeeper, which the Government was prepared to spend when it thought that was what was needed to “save” the economy.

So, while I note that the Prime Minister is already talking about how “the government had to be mindful of available resources”, I fail to see the relevance of this observation in present circumstances. Instead, the present reality is that the “available resources” would be idle, unutilized and therefore useless, without the present government support for business and household demand. Thankfully, this fiscal support is helping to sustain the capacity that will allow the economy to reduce the “debt burden” as the economy recovers.

There are related concerns about how future generations will be left to pay off this debt. But as the Grattan Report points out, the stimulus has been of most help to young people who are the hardest hit by high unemployment. Without the support of JobKeeper in particular, many young people would be much worse off now, and less able to contribute to the future growth of the economy.

Finally, the Grattan Report estimates that “Even assuming no boost to GDP from the spending, public debt by 2029-30 would be only 3-to-4 per cent of GDP higher than otherwise.” Furthermore, with interest rates expected to remain low, the cost of servicing this debt will be fiscally insignificant.

Accordingly, I strongly endorse the Grattan Report’s conclusion that: “Assuming interest rates remain low, governments should be in no rush to consolidate their budgets while economies remain weak in Australia and across the globe.”

In addition, it is important to implement this agenda for renewed fiscal support urgently. Certainly, it should be no later than the economic statement by the Treasurer planned for 23 July.

And as the Grattan Report puts it: “Given the size of this agenda, and its urgency – either because programs are expiring, or because it is important to respond quickly and decisively in a recession – governments are unlikely to have political or bureaucratic resources to successfully pursue long-term reforms that are outside these parameters, no matter how valuable they might be.”

Certainly, we could do without the distraction of attempting wholesale IR reform. As the Grattan Report notes, this would be controversial, take significant time and political capital to implement, and there is scant evidence that it would deliver substantial economic benefits.

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