Weaning the economy off the extraordinary taxpayer support deployed in response to the coronavirus-induced economic crisis will be a monumental test for the Morrison government in the months and years ahead.
The government’s top economic adviser, Treasury Secretary Steven Kennedy, this week revealed parts of the recovery plan to steer the economy out of the deepest recession since the Great Depression of the 1930s.
Kennedy has among the most important jobs in Australia rebuilding the shattered economy, so his prescription for the long climb out is valuable to understand.
His list is: focus on getting Australians back into jobs, shore up confidence among households and business, support the economy probably for years as monetary policy is out of ammunition and don’t overly worry about the rising budget debt in the short term.
The total number of employed people fell by a record 594,000 last month, pushing up the official unemployment rate by a full percentage point to 6.2 per cent.
But a more accurate underlying unemployment rate is more like 9.6 per cent, taking into account the half a million people who gave up looking for work but were not defined as unemployed.
As the economy gradually reopens, some stood-down workers and unemployed people will get back to work at cafes, restaurants and retailers. Tourism will remain weak due to indefinite international border closures. Employment won’t recover to pre-COVID-19 levels, at least for several years.
The lifting of restrictions alone won’t bring the economy back. Social distancing behaviour will remain entrenched to some extent, suppressing the confidence of consumers to go out and spend, people to build and buy homes, and nervous businesses to invest.
Hence, Kennedy used the words “confidence” or “confident” 11 times in his one-hour testimony to the COVID-19 Senate committee on Thursday.
Schools are vital
“Really, the question is how you get it all operating and get people confident in engaging in the market again,” Kennedy says.
“We’ll be more confident about recovery when we see business investment and housing investment because, at that point, we’ll know people are more confident about the future.”‘
Reopening of schools, a vital part of local communities, is an important first step for morale.
Hours worked plunged a record 9.2 per cent in April, including 750,000 employed people who worked zero hours, probably because many of them were on JobKeeper. The Reserve Bank of Australia forecasts total hours worked to fall 20 per cent in the June quarter, though governor Philip Lowe said on Thursday it could end up being not quite as large a drop.
Government policy will need to consider whether the priority is getting unemployed people back into work or underemployed people working more hours. Reading between the lines, avoiding long term unemployment seems a bigger priority, or “re-employment” as Kennedy terms it.
“Often in recovery you see people increase the hours of employees before they increase the new employees, so whether you have measures that focus on getting more people back as opposed to just general stimulus for demand, which will flow predominantly into hours, will be a question that we’ll be thinking carefully about.”
That suggests there will likely be targeted labour market measures to reduce unemployment, not just broader economic stimulus that tends to flow through to hours for employees, who want more work.
Nevertheless, as the government withdraws $214 billion in coronavirus emergency spending, Kennedy also suggests other ongoing government spending support and structural reform will be needed for the economy.
The RBA’s current near-zero interest rates won’t move into negative territory, according to governor Lowe, so a greater burden than usual will fall on fiscal policy.
“The role of fiscal policy in the months and years ahead will be perhaps more important than ever given where monetary policy now sits, being accommodative but not able to provide the usual impact that it would,” Kennedy says.
“So that means we are in an unprecedented period.”
More infrastructure spending announcements on labour-intensive “shovel-ready” projects that can be quickly deployed are in the pipeline for the recovery phase.
What does all this mean for government debt, which is on track to soar towards $1 trillion or about 50 per cent of GDP?
Kennedy is relatively relaxed. International investors are falling over themselves to lend money to the Australian government at a super-low cost of less than 1 per cent for 10 years.
So long as Australia can demonstrate a credible medium-to-long term budget framework and the nominal economy grows faster than the borrowing rate, debt as a share of the economy will naturally fall over time.
“So I think our debt will still be very reasonable in a global sense, and I think a sound long-term structural budget position with a strong focus on getting people back to jobs and full employment will mean all those things will solve themselves, frankly,” Kennedy says.
He cautions about getting too “excited” over embarking on immediate economic reforms – such as to the tax and industrial relations systems – while the immediate crisis is still at hand.
But Kennedy says the structure of the tax system and “composition” of tax cuts, spending efficiently on government services and how efficiently markets allocate capital “matter enormously”.
In other words, when the crisis passes, productivity-enhancing reforms combined with well-targeted ongoing spending support from Canberra should be the focus.
That is how Kennedy can get more people back into jobs and the economy growing strongly.
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