Australia might have initially dodged a bullet when its early and successful handling of the pandemic saw lockdown restrictions, and economic impediments, removed earlier than expected. Policymakers breathed a sigh of relief that while things were bad, they were nowhere near as bad as expected. Instead of GDP falling by an early estimate of 10% in the June quarter, the forecasts are now back around half that rate.
That’s all history after yesterday. Victoria’s economic shutdown will deliver a body blow to Australia’s economy, with the impact site in Melbourne but the effects felt right across the country. This is bad. And it will get worse. For those of us who lived through the 1990s recession, it’s a sickening prospect.
And all thanks to the Victorian government.
Large sections of Victorian retail will shut down, though much of it will continue to function, after a fashion — restaurants and cafes doing takeaway and delivery, click-and-collect continuing to operate, online commerce proceeding as normal.
Even so, the employment consequences will be dire. So much of the retail sector is small business; many, having survived this far, won’t make it to September.
The severe curtailment of construction — with large projects forced to offload 75% of their workers, down to “pilot light” status — will bring the lockdown deep into the heart of one of the nation’s biggest industries, which until now has only suffered indirect, though substantial, damage from falling demand. The consequences will flow through building supply chains across the country. Again, many firms that have struggled into the second half of the year will go under, never to return.
The logic of the construction lockdown isn’t clear. The sector hasn’t been a vector for infection in the way animal slaughtering (which will have less restrictions) and hospitality has been. Building workers don’t just go to construction sites, of course — they travel there, they buy goods and services along the way and while at work — and Daniel Andrews is correct that the line has to be drawn somewhere, and there will always be arguments at the margins. But the sector is paying the price for failings elsewhere in the economy.
So will the rest of Australia. Even if successful in rapidly bringing down the level of infection in Victoria, the economic damage will persist, probably for years to come, in the form of higher unemployment, lower pay and lost opportunities — especially for young people.
The Andrews government is responsible for this. The #IstandwithDan crowd can type all the hashtags they like and it won’t change that fact. A reckoning is due on that front, but that can wait.
It is the federal government that should be borrowing the funds needed to support the economy. Unlike Victoria, it is in no danger of seeing its credit rating downgraded — in fact the Commonwealth’s credit rating is better than that of the United States, despite the unreformed and sclerotic economy we’re constantly told we have by business and the commentariat.
The government is currently tapping the market for debt at record low rates; it should continue to do so and take on the full burden of funding the measures needed to support the economy. Adjustments can be made in the future, in areas like GST distribution, so that Victoria can repay some of that. But the efficiency with which the federal government can raise debt, and the national nature of the crisis emanating from Melbourne, requires a national fiscal and debt response.
The Reserve Bank, despite speculation about an interest rate cut to 0.1%, has no further capacity to assist: any further reduction would see effective negative interest rates, which governor Philip Lowe has made clear the bank is not prepared to countenance.
Today’s meeting, nonetheless — and Friday’s Statement of Monetary Policy — will have to address the crisis in Victoria and the damage done to the bank’s forecasts as a quarter of the economy goes into lockdown.
That may include another signal that the bank is committed to supporting the economy for a long time to come: it is already targeting the three year bond rate at 0.25% and has repeated several times that the current cash rate of 0.25% will prevail for years to come; possibly that language will be strengthened further.
So the Morrison government has to make some sort of new fiscal statement. Through no fault of its own, the July update may as well now be prehistoric, and the October budget is too far away. We can’t drift in uncertainty while sweating on the numbers out of Victoria every day through this month and then September, but nor can the budget be brought forward significantly. Yesterday’s pandemic leave payment announcement is a start but nothing more.
Some statement, along the lines of an extension of JobKeeper and JobSeeker at current rates until the end of the year, and another, much bigger construction industry support package (aimed at social housing, like literally everyone in the construction sector is crying out for) as well as more funding for a much more tightly regulated aged care sector (can we finally have mandated staff ratios?), is thus necessary in coming days.
Daniel Andrews is right. This is a disaster. And not just for Victoria. The federal government, and the rest of us, will be trying to rebuild from it for years to come.
How much blame does Daniel Andrews deserve for the looming economic crisis? And what steps should the federal government take? Let us know your thoughts by writing to [email protected]. Please include your full name to be considered for publication in Crikey’s Your Say section.