(Image: Private Media/Tom Red)

What was initially a political problem for the government over the level of support it provided for New South Wales is threatening to turn into a real economic problem as it tries to scale up assistance to reflect the likelihood the nation’s biggest economic centre will be locked down for weeks.

The worst-case scenario is Australia blundering into another recession off the back of the Morrison government’s vaccine and quarantine failures and Gladys Berejiklian’s failure to respond with sufficient seriousness to the Delta variant outbreak in Sydney.

Despite the constant demands for the restoration of JobKeeper, Scott Morrison and Josh Frydenberg have sensibly held fire so far, trying to gauge the scale of the economic hit Sydney people are going to suffer, and what it would do the wider economy. Every day makes it clearer that the hit will be substantial on both counts. But reflexively restoring JobKeeper in the early stages of a lockdown would be poor, and expensive, policy. JobKeeper, despite maintaining the link between workers and employers, is a blunt instrument. We’re still learning about the undeserving corporations, private schools and and other rorters who pocketed millions last time.

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Morrison’s priority so far has been to avoid the toxic impression he initially gave over assistance that he was prime minister for NSW, and Sydney would get special treatment — especially compared with Melbourne. And restoring JobKeeper, even though it was a national program, would have reinforced the sense that what happened in Sydney mattered more than down south.

The latest Morgan poll last week, showing Labor 56-44 ahead in Victoria, would have concentrated minds within the government: it’s been generally assumed that Labor had its best shot at picking up a number of seats in Victoria in 2019 and the next election would be won or lost elsewhere. Maybe another $500 million in dodgy car parks will be needed.

The bigger challenge now is to confine the economic impact of the Sydney lockdown to the current quarter. Until a month ago, the government’s fiscal and broader economic policies were on track, with a recovery even stronger than previously forecast, and discussion of whether the Reserve Bank would be forced to move more quickly to a normalisation of monetary policy on the back of rapidly falling unemployment. Now the problem is once again about just how bad it’s going to get.

One scenario is NSW lets the construction sector resume, gets on top of the virus, and emerges from lockdown in mid to late August, with current support settings intact. Another is that lockdown — of one kind or another — persists into September, with Sydney cut off from the rest of the country for much of the remainder of 2021, while confidence takes a hit and the fall in the unemployment rate stalls, requiring much stronger support. Without that, there’s no bounce-back of the kind we enjoyed last year, but at best narrow avoidance of a technical recession and a muted recovery plagued by uncertainty, continuing problems in Sydney and no end in sight until half the population gets vaccinated.

Morrison and Frydenberg, in consultation with Berijiklian, have to work out how to respond fiscally as we see which scenario, or the more likely one somewhere in between, emerges. It’s a trickier policy problem than knowing there’s a national emergency and firing everything you’ve got at the crisis. And the consequences are different — get it wrong and Morrison and Berejiklian will wear the blame for sending us into a second recession in two years (get it right, of course, and they’ll still be beaten up for causing the extended lockdown in the first place). Meantime business, unions and everyone in between is shouting at them to bring back JobKeeper.

The good news is that the government has plenty of fiscal ammunition, having spent less so far than it anticipated last year. And Simon Birmingham is proving to be no Mathias Cormann when it comes to fiscal discipline.

The Berijiklian government’s formal decision to extend lockdown further in Sydney this week might provide the occasion for the federal government to scale up assistance still further. But don’t count on JobKeeper returning for a second go.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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