How much stimulus is enough for an economy in deep recession?
The government has already pumped more than 4% of GDP into the economy in deficit spending in the six months to June. Its July fiscal update forecast nearly 10% of GDP in deficit spending for this financial year already, with a deficit of around $185 billion.
From the torrent of budget leaks, and the occasional actual budget scoop, the deficit to be unveiled tomorrow is likely to be comfortably above $200 billion, or well over 10% of a shrunken GDP.
That’s the first criterion for the budget: just how much more is the government prepared to pump into the economy, beyond the measures it already has in place — to accommodate the impact of the Victorian lockdown, to accommodate a shallower but longer recession than that envisaged in the halcyon days of “snap back”, to accommodate further damage to the global economy if second and third waves take hold in Europe, the Americas and India — though not, thankfully, our own region.
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The dangers of not providing sufficient extra stimulus are clear from the US. Friday’s US jobs report — the last before the November 3 poll — showed a noticeable slowing in jobs growth.
Massive stimulus spending and other aid packages in late spring and through summer had previously driven a strong recovery in the US with a rapid rise in new jobs being filled, solid growth in retail sales, housing and output.
But growth faltered in September: 661,000 jobs new jobs were created, the smallest gain since the jobs recovery started in May and less than half the August number. US payrolls are still 10.7 million below their pre-pandemic level — or around half the jobs lost since March; 345,000 Americans also lost their jobs permanently in the month.
As those income, salary support and stimulus packages from early in the year come to an end, large US companies are announcing lay offs of tens of thousands of workers — 28,000 at Disney theme parks, 32,000 at American Airlines and United Airlines, 7000 at a major oil refiner.
The same fate awaits Australia if the government’s rapid tapering of income support via JobKeeper and JobSeeker goes ahead in the absence of other stimulus. The recovery here, like in the US, is nowhere close to self-sustaining, particularly while the the threat of infection will continue to curb consumer and business behaviour.
The Grattan Institute suggests additional stimulus of between $70 and $90 billion over 2020-21 and 2021-22, or an extra 3-4% of GDP beyond what is already planned.
Not all spending is equal, however. Some spending is more stimulatory than other spending. And some spending will leave a better economic legacy, or be fairer. Most of the budget debate is about this, rather than the quantum of stimulus.
Spending that will be both stimulatory and leave a strong economic legacy should top the list of extra spending. There are some obvious candidates.
Pretty much everyone outside the Morrison government thinks investment in social housing is a no-brainer; those inside, however, appear to prefer encouraging spending in new private housing and renovations.
Greater investment in aged care ticks all; three boxes — stimulus, fairness and economic effectiveness, given the persistent problems in that sector and the challenge of addressing its workforce needs in coming years.
Investment in high quality infrastructure projects, rather than politically chosen rubbish like the inland rail and other National Party boondoggles, will also deliver maximum stimulus and economic outcomes.
Funding for small-scale, local infrastructure projects by local government will also deliver a more rapid form of stimulus, targeting projects of community value, and avoiding the persistent problem of the Morrison government, that it makes big announcements and then never spends the money, merely re-announces the same spending six months or a year later.
A permanent increase in the “JobSeeker” payment will also deliver strong, rapid stimulus, and greater support for low income earners; an enhanced investment allowance will also get businesses, particularly small businesses, spending more rapidly than they otherwise would — certainly more so than company tax cuts.
Stimulus can also be used to address ongoing structural policy failures. The Coalition has presided over a remarkable collapse in apprenticeship numbers even before the pandemic, and is now belatedly rushing to do what it could have tried to do in the last five budgets and turn around a long-term problem with wage subsidies.
There are also obvious candidates for spending that is less stimulatory and less effective or fair. Income tax cuts for high income earners top that list; income tax cuts for middle income earners will also deliver less stimulus than, for example, a JobSeeker increase or tax cuts for low income earners.
At least a proportion of those tax cuts will make their way into the economy. In contrast, handouts to fossil fuel companies, which has been a Morrison government speciality, are actually economically damaging, further distorting the energy market, deterring investment and locking Australia into obsolete, carbon-intensive energy production.
When Labor responded to the financial crisis, it produced, in the words of Joseph Stiglitz, “one of the best-designed Keynesian stimulus packages of any country”: highly stimulatory, rapid in impact, fair and leaving behind a strong legacy of social housing and educational investment.
The challenge of tomorrow’s budget is not so much in how much is spent, but whether the Morrison government can deliver stimulus of that quality.