Treasurer Josh Frydenberg (Image: AAP/Lukas Coch)

There are worrying signs that an ideologically blinkered government isn’t going to pursue the kind of demand-focused policies that are needed to get Australia out of what could be an extended recession.

While yesterday’s 7% contraction for the June quarter was a little worse than forecasters expected, it lacked the kind of psychological impact negative quarters usually have. We’re all painfully aware of what’s been going on since March, and we also know the Morrison government has worked hard, and successfully, to offset the worst impacts of lockdown.

But a negative September quarter, signalling the longest recession since the Fraser-Howard double dip/four quarter epic of 1982-83, would be something else.

That’s a distinct possibility thanks to the Victorian outbreak, the impact of which has been reinforced by the nagging incidence of COVID-19 cases in Sydney for the past couple of months. Forecasters now see a flat to slightly weaker GDP for the current quarter.

The NAB’s economics team expects “a flatter outcome in the September quarter and a gradual recovery from there — but do not expect the economy to recover its pre-virus level until early/mid-2023”.

NAB also sees unemployment continuing to rise to close to 10% early next year, with no return to the pre-COVID level in the foreseeable future.”From a policy perspective this outlook warrants ongoing support to ensure the recovery can happen as quickly as possible.”

We already know where policy needs to be focused. Reserve Bank governor Philip Lowe has made clear that the issue is demand, not the kind of supply-side reforms urged by business, the media and Josh Frydenberg. Targeting demand, however, has to be effective — something that seems problematic if the government goes ahead with bringing forward scheduled tax cuts in the budget next month.

To support demand as much as possible, the government has to do everything it can to ensure it maximises the chances of people spending its stimulus payments.

We know that when it comes to stimulus, people spend less of what they get from tax cuts than what they spend of one-off cash payments. Low-income people such as JobSeeker recipients are more likely to spend payments, according to Lowe; evidence from the US also shows people who live “paycheque to paycheque” are over two and a half times more likely to spend payments than people who save much of their income.

We also know that stimulus payments work best when consumers are confident about their economic prospects and the government’s handling of the crisis that has engendered them. The Rudd-Swan stimulus payments during the financial crisis worked because consumers had faith in that government and their economic prospects; Scott Morrison’s tax refunds last year sank without trace because consumer confidence had slumped amid economic stagnation.

Tax cuts to high income earners will thus be the least effective form of stimulus, while payments to low-income earners, such as JobSeeker recipients, will be the most effective. Tax cuts will simply go into household savings, which hit an all-time record of nearly 20% in the June quarter. But it is tax cuts to high income earners the government is considering bringing forward, while it plans to slash JobSeeker payments from the end of the year.

And what is it doing to lift consumer confidence? As Lowe has said, part of restoring consumer confidence lies in containing the virus. But other actions will also play a role. If the government, as seems likely, pursues the much-vaunted industrial relations “flexibility” demanded by business, it will further undermine consumer confidence as workers face the prospects of not merely continued wage stagnation but cuts to wages and conditions.

It’s been repeatedly demonstrated that industrial relations reform does little to increase productivity; ironically in the June quarter labour productivity in the private sector surged 5.9%; before that, the 0.9% rise in the March quarter had been the strongest rise in nearly four years.

We already know from the Wage Price Index data that private sector wages rose only 0.1% in the quarter, with wages falling in six industries including major sectors like construction and professional services, again showing that “lack of flexibility” is a business myth.

Keeping unemployment lower and supporting the unemployed as much as possible will give households more confidence and get them spending and reducing their record level of savings. It’s chicken-and-egg stuff, to a degree, but stimulus will build confidence so that consumers spend more, including further stimulus, because they’re confident the government is backing them.

The evidence is all there about what kinds of stimulus work best, about how industrial relations “reform” yields no benefits, about the importance of consumer sentiment in economic recovery. Yet the majority of media economic commentators, and pretty much all political journalists, seem oblivious to it, even after their spectacular failure last year when predictions of a stimulus bonanza from Morrison’s tax rebates never materialised.

And if the fiscal hawks on the government backbench are still worried about how all this will be paid for, company profits soared 15% in the June quarter off the back of JobKeeper payments and other forms of business support. How about a special profits tax that reduces to zero depending on how many additional staff the company employs over the next two years?

Better that money goes to employees, or back to taxpayers, rather than to investors via increased dividends. That’s an idea you won’t find in the Financial Review’s shopping list of “microeconomic reforms”.

Crikey would love to hear from readers with tips on how to survive the recession. These could be ideas for fellow readers, or for policymakers. Send your ideas to [email protected] with “Recession Busters” in the subject line.