With the Australian government finally giving up on its abstract goal of making taxes greater than spending in a financial year — the great and mythical surplus — it is finally focused on what it should have been doing all along. Making sure the economy works for all Australians.
Prime Minister Scott Morrison has today announced a big stimulus package worth around 1% of GDP, or $17.6 billion. All it took was for world markets to crumble to dust and the global body count to rise considerably.
What’s the best way to respond to the end of hypocrisy? When, after a long period of being perverse, someone finally starts doing the right thing, what do you do? It’s not easy to lavish them with praise. But it is the right thing to do.
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So kudos to Mr Morrison. Congratulations to Mr Frydenberg. We are all Keynesians now.
Kevin Rudd and Ken Henry may be feeling vindicated today that when the chips are down, their old plan is still the best plan. Go hard, go early, go households.
That was the mantra in the 2008 GFC and it is once again the path the government will (mostly) go down to respond to the ravages of the coronavirus.
The mainstays of the stimulus package being announced today are payments to households. An extra $750 for pensioners and other welfare recipients is a fundamentally good idea. When you put money in the hands of people who have the least, they spend it.
Whereas if you give such a sum to people with deep savings they just add it to the pile and it makes no difference. Targeting the stimulus at the needy is a convergence of policy that is sound both morally and economically.
Of course, the government cannot be seen to have stolen Ken Henry’s policy recipe entirely. They’ve added their own flavour, and that comes in the form of support for small business.
The extension of the instant asset tax write off is a favourite for the coalition because it generates headlines with large numbers in them. The $150,000 instant asset write off (up from $30,000), but the budget cost is much less than $150,000, because it’s only a change in depreciation schedules, not a grant of $150,000.
Will that policy make any difference? It is unclear. What small business is going to make a big purchase right now just because the tax treatment is more generous? And it’s right now that we need the spending.
In better policy ideas, the government has pledged to pay half the wages of 120,000 apprentices. Money to support the continuation of employment is hard to argue against. As are grants of up to $25,000 to small businesses. And the government has said it might do more at budget time. That’s good.
Keeping people in jobs and keeping businesses out of the hands of liquidators is the best way to make sure the Australian economy is poised to rebound if and when the virus ceases to be a problem, in what the prime minister has hinted might be six or nine months time.
The global financial crisis provides our current best model for how to respond to an economic crisis. That was a severe and dislocating event. But it was fundamentally financial in nature — about unrepayable loans and of problems of liquidity.
Finance is about confidence, and putting cash in someone’s pocket directly helps restore confidence.
This time the crisis is in the natural world first. Tiny strands of RNA are invading human cells and hijacking their replication machinery. That’s what a virus is.
People’s hearts are stopping. The economic stimulus package cannot change that.
In fact, economic inactivity may be most effective at containing the spread of the virus. In a speech delivered on Wednesday, the RBA deputy governor Guy Debelle shared two graphs that show the extent of the economic slowdown in China.
The graphs are startling – showing a tremendous stasis in the billion-person nation:
What is important to think about is what this represents. Is this how failure looks? Or is this the price of success?
Because China can fairly claim victory against COVID-19. Viral transmission in China has dramatically weakened. Their official numbers of additional daily cases has trickled down to low double digits. And World Health Organisation experts say they believe China’s numbers.
Perhaps this is the quarantine we have to have, and the economic shrinkage that comes with it is the price we pay?
Of course, these days it is possible to consume without any actual icky human contact.
The best outcome for both economy and virus might be if the spending surge provoked by the stimulus targets online services. Spend your $500 check on a bigger data allowance, on getting food delivered to your house.
Don’t spend it on getting out in a crowd.