You might not think it, but yesterday’s economic statement from Treasurer Josh Frydenberg brims with optimism. Its forecasts assume we have the pandemic under control. The bad news in the statement is a result of what has already happened.
As we knew, the economy is in recession. Unemployment is forecast to rise around 9.25% in the December quarter. However employment then begins to recover following easing of restrictions. The assumption is we won’t need restrictions for the latter part of this year and into the next.
Reflecting this confidence, travel bans will be lifted. From January 1 migrants and visitors will be allowed, with a two-week quarantine. Numbers will be lower than in past years, but the statement forecasts some 31,000 arrivals.
Mining investment is also forecast to grow. This is optimism of a different kind: assuming China, our biggest trading partner, is not sufficiently annoyed with us to harm the minerals trade.
At present, that’s a reasonable assumption. However, if US-China relations continue to deteriorate and Australia sides with the US, we can expect heavy economic retaliation, which might extend to minerals.
Sure, that would hurt Chinese firms as well — but China is a one party, centrally controlled state so might want to take action against Australia anyway.
Despite the current state of the jobs market, wages are assumed to grow this year and next (albeit at a lower rate than in past years). When people are desperate for any kind of employment, whatever the pay, that’s an optimistic forecast.
The other major sign of optimism is the description of COVID-19 as a “once in a century shock”. We can but hope. There is an alternative: this pandemic is only the start of many more. The statement does not contemplate that possibility.
There’s nothing wrong with optimism. The health of our economy relies on business and consumer confidence. A pessimistic statement would become a self-fulfilling prophecy of economic gloom. We expect optimism in a statement like this.
But there are dark clouds, and the statement does not ignore them.
It is admirably open about the global risks if control measures in the rest of the world fail. We are still part of a global economy, which faces considerable uncertainty if other countries fail to contain the pandemic.
It also discusses what would happen under a second wave scenario. The reimposition of widespread restrictions across Australia would cost the economy $2 billion a week.
The statement assumes, however, that Victoria will contain its current outbreak.
If Victoria fails, or if the outbreak crosses the border and spreads widely in NSW, then this economic statement becomes chip wrapper. It would need to be rethought from the basic assumptions up.
There is no argument to be made that, if there is a resurgence of COVID-19 across other states, the policies of suppression should be abandoned. Loss of life and ongoing health problems need to be countered.
Nevertheless, movement restrictions and social isolation do enormous economic damage. This means government has to step in to repair it.
The good news is we can afford to do so.
Australia has a relatively low level of debt to GDP compared with other countries. If the pandemic situation worsens we can and should spend even more to stay afloat.
With interest rates at their lowest levels in living memory, funding the spending is not a problem.
It will still be through traditional debt funding. In an implicit rejection of modern monetary theory the Reserve Bank governor gave a speech on Tuesday declaring “there is no free lunch. The tab always has to be paid and it is paid out of taxes and government revenues in one form or another”.
Thus, we will have a historically high deficit and increased debt. That’s not what matters economically. What does matter is that the government has sensible measures in place, especially to help people retain employment.