philip-lowe
Reserve Bank of Australia governor Philip Lowe (Image: AAP/Joel Carrett)

Although the government will significantly reduce income support via JobKeeper and JobSeeker in the December 2020 and March 2021 quarters — down to about $20 billion from October to March compared with about $10 billion a month now — that’s not the limit of its stimulus.

It’s not even the biggest part.

Tomorrow it will reveal historic budget deficits — $80 to $90 billion for last financial year and, according to estimates, between $170 and $240 billion for the current year, with the risks, as they say, on the upside.

Much of that — especially next year — will be from a collapse in tax revenue as company profits fall, firms go under, and people swap well-paying, tax-yielding jobs for JobSeeker benefits.

A $200 billion deficit next year will be over 10% of GDP, injected by the government into the economy via its borrowings.

Whether that’s enough to get the economy growing substantially again isn’t clear.

Australia was stagnant and growth was slowing before the pandemic; the full restoration of the economy pre-COVID, which is no longer possible, would simply restore an economy with persistent unemployment above 5%, stagnant wages and growth at 2% a year — and certainly not the near 4% Prime Minister Scott Morrison says he is aiming for.

It’s likely further stimulus, on top of the $300 billion in deficits last year and this — let alone the likely large deficit for 2021-22 due to low tax revenue — will be needed to make a serious dent in unemployment next year.

But all that stimulus is both necessary and affordable — even if it’s many multiples of the spending that Labor engaged in and which we were told by the Coalition back then was unaffordable. (Remember Barnaby Joyce claiming Australia would default during his brief, disastrous stint as shadow finance minister?)

Australia has ample capacity to fund all this spending and much more. We’re on track for debt of about 30% of GDP — high by recent Australian standards but far below countries such as Canada, Germany, the US, the UK and Japan.

Reserve Bank governor Philip Lowe confirmed that yesterday in the annual Annika Foundation address, which governors make annually and use to discuss the state of the economy.

‘The path ahead will be bumpy’

While broadly upbeat that Australia had “turned the corner”, he cautioned that “notwithstanding this turnaround, the path ahead is expected to be bumpy and there are some major cross-currents in the labour market”.

One of those is the sort-of positive that unemployment would continue to rise as an improving labour market lured more people into looking for work.

So Lowe believes fiscal support will continue to be needed for some time while the labour market reabsorbs those people and begins creating more jobs. Until then, Lowe believes fiscal policy is important, especially in boosting the confidence of households, and thus their willingness to spend.

While dismissing arguments for money-printing, “monetary financing” and the suddenly fashionable modern monetary theory (MMT), Lowe noted:

This proposal is only relevant to the situation where high government debt constrains the ability of the government to provide necessary fiscal stimulus financed through the normal channels.

Clearly it is not relevant to the situation we face in Australia … Monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be. The Australian government is able to finance itself in the bond market, and it can do so on very favourable terms … These are the lowest borrowing costs since federation.

Even if we don’t embrace MMT or believe in helicopter money, debt should not be a restraint on fiscal policy at this point. We can afford the red ink that will adorn tomorrow’s economic statement, and the spending it signifies is crucial in getting Australians back into jobs.

As Lowe said, exactly how long this spending will be required isn’t clear: “We need to recognise that the task is complicated by the fact there is still considerable uncertainty about how long this period of weak income will last. The longer it lasts and the more uncertain things are, the harder it is to smooth out.”

Inevitably: “At some point in the future, attention will rightly return to addressing the ratio of public debt to GDP …”

But we’re not at that point yet. For now, the challenge is for fiscal policy to support jobs, confidence and incomes.

Peter Fray

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