Michelle Grattan, University of CanberraJosh Frydenberg says he will bring down a “pandemic budget” on Tuesday, warning that despite Australia’s strong recovery, there is “still a great deal of uncertainty out there”.
The Treasurer points to new strains of the coronavirus, the COVID crisis raging in India, and local lockdowns. “We can’t take for granted the strong economic recovery we’ve seen. We’ve got to lock in those gains,” he said on Friday, speaking to The Conversation.
Touted as big spending, the budget will contain, besides a large reform package for aged care, significant outlays on mental health.
In measures on housing, it will increase from $30,000 to $50,000 the maximum amount of voluntary contributions aspiring home buyers can take from the First Home Super Saver Scheme.
This scheme allows people to make voluntary contributions to superannuation to save for their first home.
At present these contributions are capped at $15,000 a year and $30,000 in total.
With the rise in house prices, the current cap on the amount that can be released is a diminishing proportion of the deposit needed.
There will also be another 10,000 places added to the First Home Loan Deposit Scheme, which can only be used for new housing. This means-tested measure allows first home buyers to build a new home or buy a newly-built one with a deposit of as little as 5%.
The budget will have an “improved bottom line, particularly in 2021”, compared with the earlier forecasts, Frydenberg confirmed.
This will be thanks in large part to a stronger-than-expected labour market as well as high iron ore prices.
The aim of pushing unemployment down below 5% will be a central feature of the budget.
“There’s a historic opportunity to drive the unemployment rate back to where it was pre pandemic and even lower,” Frydenberg said.
“And that’s why in this budget, you’ll see significant investments in energy, infrastructure, skills, the digital economy and lower taxes. Strengthening our economy will lead to a stronger budget position.”
Frydenberg said the dire predictions about what would happen with the end of JobKeeper in late March had not been fulfilled. In fact fewer people had been on income support after JobKeeper ended.
“And what you’ll see is that the budget improves as a result of the labour market strength, even more so than it does as a result of the higher iron ore price, because you get lower welfare payments and you get more tax revenue coming in from people at work.”
The budget will push out the assumptions about when Australia will reopen its international border. Last October’s budget assumed the border closure easing by the latter part of this year.
But the theatre that has built up around the presentation of that bill — the budget speech — has given it the space to deal with so much more.
Legally, the budget needn’t deal with much
Last year’s speech mentioned values, twice. It spoke of our “cherished way of life”, of the courage, commitment, and compassion of healthcare workers and volunteer firefighters, of our “invisible strength”.
And it extended the low and middle income tax offset for another year.
Legally, the budget bill can’t include tax measures. That’s outlawed by the Constitution.
Tax measures have to be introduced in separate legislation, measure by measure — or not be introduced at all. Our government can continue to collect tax at the existing rates for as long as it likes, unlike in Britain where tax collections form the core of the budget bill and need to be re-authorised every year.
In Australia, government spending does need to be re-authorised every year but only spending which is for the “ordinary annual services” of government.
Everything else — the vast bulk of government spending, everything from Medicare to pensions to grants to the states to family support to support for private schools and private health insurance — is ongoing, approved on a never-ending basis under so-called “standing appropriations” or “special appropriations”.
At the last count there were 240 such special appropriations, covering everything from the funding of universities to paid parental leave.
The Department of Finance says 167 of them are unlimited, meaning there is “no defined ceiling on total expenditure”.
What’s left, what actually needs to be re-approved in the budget each year, is little more than the payment of rent and public service wages, suggesting that if the Senate had rejected “supply” (the budget appropriation bill) during the 1975 constitutional crisis as it had threatened to do, the Whitlam government could have taxed and spent much as before, although it would have had to get private banks to advance public servants’ wages, something it was investigating doing.
Practically, it deals with most things
It might be because it needs to do so little that the budget has come to do so much.
Now the “forward estimates” for spending and revenue and the state of the economy go out for four years, and some of them for ten.
The budget has become a statement of the government’s values in part because it puts numbers on those values — how much it is prepared to spend on health compared to defence, how much it plans to spend on superannuation tax concessions for high earners compared to pensions for low earners.
Which makes it a statement of values
As with the US President’s State of the Union speech, it’s the only night of the year in which the government sets out clearly what stands for and what it plans to do.
An accident of history means it’s the treasurer rather than the prime minister who delivers the statement of values, although the treasurer speaks for the prime minister, as Joe Hockey spoke for Tony Abbott in 2014 when he infamously declared his budget to be for “lifters, not leaners”.
Josh Frydenberg’s values will be apparent in how he responds to a surging iron ore price (last year’s budget assumed US$55 a tonne and on a slightly different measure it’s currently north of US$180) and much stronger than expected recoveries in jobs and the share market.
It would be tempting to wind back spending and push up taxes in order to close the budget deficit without seeing how far the recovery can run.
That Frydenberg says he won’t, not until he gets the unemployment rate below 5% and hundreds of thousands more Australians are in jobs, is a statement of values.
That he is reportedly planning to spend an extra $10 billion (over the four-year “forward estimates”, not per year) on responding to the findings of the aged-care royal commission when the commission identified much greater needs might also be a statement of values.
As might the forecasts he makes for immigration, for the spending on mental health promised in response to the Productivity Commission inquiry, for the rollout of vaccines for Australians and vaccines for countries that need them more than Australia.
They’ll all be part of a program that makes clear what the government stands for and against which it can be judged. What happens Tuesday night will matter.
Michelle Grattan, University of CanberraThe government will aim at driving unemployment below pre-pandemic levels in its May 11 budget and avoid any future sharp pivots towards “austerity”, Treasurer Josh Frydenberg will say on Thursday.
Delivering his pre-budget address on the budget’s economic and fiscal strategy, Frydenberg does not give a specific unemployment target but points clearly to wanting to see it below 5%.
Unemployment was 5.1% in February last year, on the cusp of the pandemic. The Reserve Bank has put forward a case for pushing the rate down into the “low 4s”.
In his speech, released ahead of delivery, Frydenberg says a new paper by Treasury on the Non-Accelerating Inflation Rate of Unemployment – the rate of unemployment below which inflation is expected to accelerate – puts the NAIRU between 4.5% and 5%, lower than its previous 5% estimate. (The paper will be released on Thursday, as will one on labour market participation.)
“This lower estimate of the NAIRU means a lower unemployment rate will now be required to see inflation and wages accelerate,” Frydenberg says.
“In effect, both the RBA and Treasury’s best estimate is that the unemployment rate will now need to have a four in front of it to deliver this outcome.”
Unemployment was 5.6% in March, although the April figure may be higher, after the end of JobKeeper in late March.
Frydenberg said despite doomsday predictions about the consequences of JobKeeper finishing, early signs were the labour market had remained resilient. In the fortnight to April 16, the number of people on income support fell by about 46,000.
The Treasurer said that in sharp contrast to previous recessions, following this one “we are on track for the unemployment rate to recover in around two years”.
The government’s ambitions on unemployment have shifted substantially since last year, when Frydenberg first said it would not move to fiscal consolidation until the rate was “comfortably below 6%”.
In Thursday’s speech he reaffirms that “despite the strength in our domestic economic recovery, the unemployment rate is not yet ‘comfortably below 6%’.”
He says “these are unusual and uncertain times”, so “we remain firmly in the first phase of our economic and fiscal strategy.
“We need to continue working hard to drive the unemployment rate lower.
Treasurer Josh Frydenberg mocked the idea of a “well-being budget” as “laughable” back in February. He’s got less reason to laugh now.
According to an Essential Research poll last week, 78% of Australians agree the pandemic has exposed flaws in the economy and there is an opportunity to explore new ways to run things. A well-being budget might be just the ticket.
In February, Frydenberg dismissed a well-being budget as “just another word for Labor’s higher taxes and more debt”, after the shadow treasurer, Jim Chalmers, committed the heresy of saying gross domestic product was, on its own, a deficient economic measure, and countenanced “a version of New Zealand’s well-being budget, which redefines what success means in terms of economic outcomes”.
Frydenberg joked about Chalmers being “fresh from his ashram deep in the Himalayas, barefoot, robes flowing, incense burning, beads in one hand, well-being budget in the other”.
But now, with the federal government changing its tune on many things, such as debt, it might be a good time for Frydenberg to change his mind on this.
Well-being measures, for one thing, could greatly assist the Australian government in budgeting to improve mental health and prevent suicides – things Frydenberg said in his budget speech are national priorities.
It’s impossible to address the nation’s mental crisis just through the blunt tools of economic growth and money for band-aid services. If a bigger income was the main means to mental well-being, after all, James Packer would be happier.
Mental health is a complex problem, with complicated causes, requiring a sophisticated response. To do that, developing measurements of well-being can only help.
There is no universal definition of well-being economics, but essentially it is an economic perspective that acknowledges gross domestic product – the monetary value of all goods and services produced by a country in a given period – as an all-too narrow metric for building a prosperous, sustainable, human-centred economy.
GDP is useful, as Chalmers acknowledged in his February speech:
It does still provide a powerful insight into the current state of the economy, and is useful for historical comparisons. […]
More broadly, growth matters to the jobs and opportunities created in our society. A healthy, growing economy can make people more comfortable with farsighted social and economic policy changes as well.
But GDP does not, as Chalmers said, paint the whole picture. He quoted Robert Kennedy, who said GDP measured everything “except that which makes life worthwhile”; and Nobel-winning economist Joseph Stiglitz: “If we measure the wrong thing, we will do the wrong thing.” So his point was hardly fringe.
Indeed even the architect of GDP as an economic measure, economist Simon Kuznets, warned against putting too much emphasis on it, and of the dangers of it subverting the normally “valuable capacity of the human mind to simplify a complex situation in a compact characterisation”.
The main difference of The Wellbeing Budget to previous budgets was how it allocated resources to five priority areas: mental health; child well-being; Māori and Pasifika well-being; productivity; and environmental sustainability.
The traditional budget process tends to consider priorities on a yearly basis. This guides governments to put more money into short-term goals and less into initiatives with long-term returns. To overcome this bias, New Zealand’s Treasury created an assessment framework that considers the merits of projects according to 60 different measurements (covering economic, social and environmental impacts).
The intention is to ensure the budget doesn’t neglect to invest in long-term initiatives that can prevent problems, rather than being caught in a cycle of pumping money into alleviating the symptoms short-term.
In mental health this means more emphasis on policies that keep people well, rather than on providing help only once they are very unwell – the type of “defensive spending” dominating the Australian government’s priorities in mental health in last week’s budget.
The Australian Capital Territory’s Labor government has already replicated New Zealand’s model in its own Wellbeing Framework.
In February Chalmers indicated a desire for federal Labor to take a well-being budget to the next election.
ALP leader Anthony Albanese’s response to the federal budget on Thursday night gave few signals the Labor Party will do so. Though he criticised the government’s short-term GDP growth focus, the word “well-being” did not pass his lips.
But popular opinion suggests both parties should be putting well-being measures on the agenda. Already more than 30 countries measure “life satisfaction”. Support for well-being economics should transcend party lines, as it does in countries such as Britain.
If the Australian government is to “build back better”, it’s hard to see how a well-being budget could possibly hurt.
Accelerated tax cuts, cash splashes for pensioners, massive incentives for business to invest and a subsidy to hire unemployed people are the centrepieces of the Morrison government’s COVID-19 budget.
More than 11 million taxpayers will get a tax cut backdated to July 1, giving lower and middle-income earners tax relief this financial year of up to $2,745 and dual income families relief of up to $5,490, compared to their tax in 2017-18.
Australians on pensions and other eligible recipients will also receive a cash handout of $250 from December and another $250 from March next year.
Treasurer Josh Frydenberg said the Australia economy was “fighting back”, with more than half of those who had lost their jobs now back at work. But “there remains a monumental task ahead,” he said, assuring Australians “we have your back”.
“The road to recovery will be hard — but there is hope,” he said
A budget focused on creating jobs delivers multiple measures to boost business activity, and a new plan to subsidise hiring young people who are unemployed for up to a year.
Frydenberg said the Australian economy had been hit hard, but “we have a plan to rebuild our economy and to create jobs”.
The budget has a massive $213.7 billion deficit for this year. It will stay in the red throughout the budget period, with deficits totalling $480.5 billion over the next four years.
Net debt will reach $703 billion this financial year – more than 36% of GDP, rising to $966 billion (44% of GDP) by June 2024.
Frydenberg told parliament, “this is a heavy burden, but a necessary one to responsibly deal with the greatest challenge of our time”.
The economy is forecast to contract by 3.75% this calendar year, with unemployment peaking at 8% in the December quarter. In the 2021 calendar year, economic growth is forecast to be 4.25%, with unemployment falling to 6.5% by the June quarter 2022.
In his speech to parliament, Frydenberg reiterated the government’s two-phase strategy.
The first phase is to focus on “boosting consumer and business confidence, growing the economy and creating jobs”.
Once unemployment is “comfortably below 6%” the government will move to phase two, “where there is a deliberate shift from providing temporary and targeted support to stabilising gross and net debt as a share of the economy.”
“We will then rebuild our fiscal buffers, so that we can be prepared for the next economic shock,” Frydenberg said.
The income tax cuts, at nearly $7 billion, are the biggest cost this financial year, rising to nearly $18 billion in total over the forward estimates.
Tax cuts brought forward
The government is bringing forward stage two of its already legislated tax plan, lifting the 19% threshold from $37,000 to $45,000 and the 32.5% threshold from $90,000 to $120,000.
It is also retaining the Low and Middle Income Tax Offset for an extra year.
Frydenberg said, as a proportion of tax payable, compared to 2017-18, the greatest benefit would flow to people on lower incomes, with those earning $40,000 paying 21% less tax, and people on $80,000 paying about 11% less tax this year.
“Under our changes, more than seven million Australians receive tax relief of $2,000 or more this year,” Frydenberg said.
JobMaker hiring credit and huge tax breaks
A new JobMaker hiring credit will be available for employers who take on people on JobSeeker aged 16 to 35. The subsidy will be $200 a week for those under 30 and $100 a week for older people. These new hires must work at least 20 hours a week. All businesses except big banks will be able to use the scheme and the government says it will support about 450,000 jobs for young people.
The hiring credit will cost $850 million in the current financial year, rising to $2.9 billion in 2021-22, and $4 billion in total over the forward estimates.
The government says the initiative will support about 450,000 young people into jobs.
Tax breaks for business are huge over the budget period.
From budget night, more than 99% of businesses will be able to write off the full value of any eligible asset they purchase. The concession will be available for businesses with a turnover of up to $5 billion until mid-2022, with the program costing $26.7 billion over the forward estimates.
Frydenberg described the concession as “a game changer” which “will unlock investment”.
“It will dramatically expand the productive capacity of the nation and create tens of thousands of jobs.”
In another business initiative, companies will be able to use their losses earlier.
Frydenberg said the combination of these two measures would create an extra 50,000 jobs.
Infrastructure and water spending
The government is also looking to infrastructure to stimulate activity, with Frydenberg saying “the budget will see $14 billion in new and accelerated infrastructure projects.”
As part of supporting the regions, Frydenberg announced $2 billion in new funding to build water infrastructure.
With women’s jobs particularly badly hit during the recession, the budget has a women’s economic security statement including $240 million in measures.
Thousands of new home care packages
On aged care, Frydenberg announced an increase of 23,000 home care packages, costing $1.6 billion. He said the government would provide “a comprehensive response” after the royal commission’s final report on aged care, which comes early next year.
The government is also implementing reforms to superannuation arrangements.
New superannuation accounts will no longer be automatically created when a worker moves jobs. “Under our reforms, your super will follow you,” Frydenberg said.
The government had previously flagged that it would implement the change, recommended by the Productivity Commission.
Labour described the budget as a “grab bag of headline seeking announcements” which would “rack up a trillion dollars of debt, but still doesn’t do enough to create jobs, fails to build for the future and leaves too many Australia’s behind”.
Business welcomed the budget, with the Business Council of Australia saying it was “about getting Australians back to work, and getting businesses back on track”.
The Australian Chamber of Commerce and Industry said “Australian entrepreneurs will be energised by the unparalleled investment incentives”.
ACTU secretary Sally McManus tweeted:
The Community Housing Industry Association said the budget’s extension of the government guarantee for the National Housing Finance and Investment Corporation by $1 billion was welcome but criticised the lack of direct investment in social housing.
It’s easy get the impression the massive government spending and deficits and debt required by the pandemic are new.
It would be understandable, because much of what happened before the 1980s has been forgotten.
Yet for almost all of the years since Federation – almost every one – the Commonwealth budget has been in deficit, right through til the late 1980s.
And it has hurt us not at all.
Seventy five years ago, the world faced daunting challenges: the reconstruction of Europe and Japan; the long-overdue end of an empire; the threat of communism; urgent demands for public services, social welfare and housing; and the orientation of economic activity away from the demands of war towards improvements in the quality of life.
In Australia, the Commonwealth published a white paper, Full Employment in Australia, in which it accepted responsibility for ensuring that there would always be enough demand for labour so that everyone who wanted to a job would be able to get one.
In pursuit of this goal, both sides of politics understood that they would usually need to run budget deficits.
For 40 years under prime ministers Chifley, Menzies, Holt, Gorton, McMahon, Whitlam and Fraser that is exactly what happened, as it had for most of the 40 previous years without the guiding light of the white paper.
Governments would spend as much as was needed (some of it in the form of gigantic nation-building projects such as the Snowy Mountains Scheme) and tax as little as was needed in order to keep the unemployment rate at close to zero as practical without putting too much pressure on prices.
If there were deficits, low interest rates and the economic growth that flowed from those deficits would shrink the resulting debt as a proportion of GDP.
Banks were regulated to ensure interest rates stayed low and credit was directed to businesses and households.
Menzies was a Keynesian
These were the golden years of so-called Keynesian economics with a consensus across the political spectrum that it was right to use government spending and tax measures to sustain the economy, disputed only by Marxists on the Left and a small band of neoliberals on the Right.
Up until the mid-1970s, when war in the Middle East, fautrising energy prices in a world dependent on oil and rising union militancy in Australia combined to create double-digit inflation and an unemployment rate far higher than the one or two per cent Australia had enjoyed since the war.
In Australia and elsewhere it allowed a takeover by a new band of neoliberal politicians and economists who believed in small government (sometimes austerity), balanced budgets and outsourcing economic management to central banks who were given the autonomy to adjust interest rates and the supply of money in a deregulated market.
It happened slowly, under the governments of Margaret Thatcher in the United Kingdom, Ronald Reagan in the United States and (Labor prime minister) Bob Hawke in Australia.
Hawke was an exception
By the 1990s, the old consensus had not only disappeared, its successes had been erased from memories. A new academic and institutional consensus emerged, shared by prime ministers Hawke, Keating and Howard and treasurers Keating and Costello.
Although it does not require balanced budgets, the Charter of Budget Honesty introduced by Treasurer Peter Costello requires governments to publish the fiscal strategy they intend to use in drawing up budgets.
The first, in 1997 required the government to achieve “underlying budget balance, on average, over the course of the economic cycle”.
Over time it was hardened to “achieve budget surpluses, on average, over the course of the economic cycle”.
It has been honoured in the breach since 2008, because surpluses usually aren’t consistent with good economic management, regardless of charters.
If the private sector is a net saver, as it usually is, the public sector usually needs to be a net spender in order to keep resources fully employed.
In last year’s election Prime Minister Scott Morrison and his opponent Bill Shorten disagreed about many things, but the need for surpluses wasn’t one of them
Surpluses no longer
No longer. In the leadup to tomorrow’s budget Treasurer Josh Frydenberg has promised a new fiscal strategy, one that for the first time is likely to promise neither a surplus or a balanced budget.
“It would now be damaging to the economy and unrealistic to target surpluses over the forward estimates, he said in September. “This would risk undermining the economic recovery we need to bring hundreds of thousands more Australians back to work and to underpin a stronger medium-term fiscal position”.
Proponents of the neoliberal consensus would argue that the decade of surpluses between the late 1990s and the global financial crisis was a golden time. It was certainly helped by the mining boom.
Inflation has been below the Reserve Bank’s target and unemployment above it for a decade. The budget is about all that’s left to support the economy. It certainly shouldn’t be getting out of the way to allow the private sector to create wealth, as those proponents used to suggest.
We are on the cusp or a second Keynesian revolution, one expression of which is Modern Monetary Theory, which suggests deficits need to be embraced where they are necessary to bring about full employment.
A government such as Australia’s which issues its own currency is able to fund deficits for as long as it needs to, and would be wise to do so up until the point where it creates too much inflation.
With the package comes the idea of a job guarantee, first put forward by the American economist Hyman Minsky in the 1960s, and promoted now by University of Newcastle labour market specialist Bill Mitchell and the founder of the Cape York Institute Noel Pearson.
It is the unconditional offer of a job at a minimum wage to anyone willing and able to work, normally funded by budget deficits and bigger when the economy is weak and smaller when it is strong.
Will it happen? As Stephanie Kelton, the world’s most prominent Modern Monetary Theorist and author of the New York Times bestseller The Deficit Myth said recently, “I won’t say no. But it’s going to be a hell of a fight.
The one that it has been using doesn’t mention unemployment at all and instead talks about offsetting new spending “by reductions in spending elsewhere” and commits it to “achieve budget surpluses, on average, over the course of the economic cycle” – something that’s not going to happen for a long time.
A realistic fiscal strategy is a good idea. A lot of behaviour is driven by expectations. If consumers and businesses think the government is going to slash and burn its way to a surplus, any stimulus in the meantime will be less effective.
People are more likely to save, and businesses less likely to hire, if they think tax hikes and spending cuts are around the corner.
Former US Federal Reserve Chairman William McChesney Martin Jr. once famously said that the central bank’s role is “to take away the punch bowl just as the party gets going”.
Tightening budget policy – raising taxes or cutting spending – when unemployment crosses the 6% mark would be packing away the booze when many of the guests haven’t even arrived.
In the 15 years before COVID-19 struck, Australia’s unemployment rate had been above 6% only briefly, between mid 2014 and early 2016.
Unemployment rate, 2015 – 2019
The unemployment rate was well below 6% before the pandemic struck, yet the labour market was clearly running below its potential.
Before the pandemic, the Reserve Bank revised down its estimate of the unemployment speed limit – the unemployment rate at which inflation and wages would accelerate – from 5% to around 4.5%.
The Treasurer should wait until we’re closer to that speed limit before reaching for the brakes. The difference between 6% and 4.5% unemployment might not sound like much, but it amounts to an extra 200,000 people or so in work.
And it affects the rest of us too. Most Australians won’t get anything more than modest pay rises until the labour market tightens.
The danger is declaring victory too soon
The government handled the acute phase of this crisis well, although not perfectly. It deserves credit for moving very quickly to support the economy. But the danger now is that it turns too soon to budget tightening, stunting a nascent recovery.
This is the mistake many governments and central banks made after the global financial crisis – acting commendably to shore up activity in the crisis phase, but then pulling away support before enough of the damage had been repaired.
With interest rates so low, the government has a lot of capacity to run deficits without the debt-to-GDP ratio getting out of control.
As Frydenberg noted, “with historically low interest rates, it is not necessary to run budget surpluses to stabilise and reduce debt as a share of GDP — provided the economy is growing steadily”.
More than half of the 1.3 million people who lost their jobs or were stood down on zero hours at the start of the pandemic had started some form of work by July, according to figures released by Treasurer Josh Frydenberg.
Treasury figures show the national effective unemployment rate at 9.9% in July, compared with a peak of 14.9% in April, with 689,000 gaining effective employment. The official July unemployment rate was 7.5%.
Excluding Victoria – which is in full lockdown combatting a second COVID wave – the national effective unemployment rate would be 9.5%.
The effective unemployment rate includes the jobless looking for work, those who are employed but on zero hours, and those who have left the labour force since March.
Frydenberg said Victoria was a setback however “the jobs recovery across the rest of the country gives cause for optimism”.
But he warned, “high frequency data is showing signs that the jobs recovery may be slowing as state border closures have been tightened.”
The effective unemployment rate is expected to increase above 13% with a rise of about 450,000 effectively unemployed over August and September compared to July. Most will be in Victoria.
The effective unemployment rate is lowest in the ACT (5.2%), Tasmania (7.9%) and NSW (8.5%) and highest in the NT (12.1%), Queensland (11.4%) and Victoria (10.5%). South Australia and Western Australia are both at 9.8%.
NSW has had the strongest recovery with 315,000 people gaining effective employment since April. This is 46% of total effective employment, and compares with NSW’s 32% of the country’s population.
NSW has supported the federal government’s argument for open borders, although its border with Victoria has been shut in light of Victoria’s second wave.
In July, nearly half of those who were employed but working zero hours for economic reasons were from Victoria. This contrasts with April, when only 30% of zero hour workers were in Victoria and about 35% in NSW.
Outside Victoria, the number of people on unemployment benefits is about 3% below the May peak. In Victoria it is 3.8% above its previous peak in May, after a 6.3% rise since the end of June.
By mid August, the number on unemployment benefits had fallen by 22,800 from the May peak, despite an increase of 14,900 in Victoria.
The fortnight parliamentary session beginning Monday will have as the main legislation before it the extension of the JobKeeper scheme and the Coronavirus supplement beyond the end of September. Each would be scaled down.
Gone are the days when economic policy was adjusted once each year by the government in the budget and fine-tuned once each month at meetings of the Reserve Bank board.
The coroanvirus means we haven’t had a budget in more than a year. What the Reserve Bank has done to interest rates means its monthly board meetings matter less.
Governor Philip Lowe reaffirmed this week that monetary policy was on hold for the foreseeable future. The bank’s cash rate is as low as it can go (actually well below its 0.25% target) and the bank will only intervene in the bond market if it has to in order to keep bond rates low (which it doesn’t — the demand for even the rush of new bond issues is much bigger than the supply).
It has lobbed the ball to Frydenberg’s side of the court.
The only situation in which it might be brought back into play is if the government ran into funding problems, of which there is no sign whatsoever.
Holding the racket
The treasurer’s problem is sequencing, and we will are likely to get hints on how he’ll play it in the economic statement to be released today.
The first challenge was to limit the damage to the economy from the initial shock near the start of the year — to stop a vicious cycle of weaker spending, plummeting investment and soaring unemployment.
These self-reinforcing crises required a circuit breaker.
The emergency stimulus provided through Jobkeeper and Jobseeker has been a great success at putting a floor under incomes and demand.
The government ensured a basic income for people whose jobs were axed or at risk, kept hundreds of thousands attached to their jobs and bolstered household incomes despite a massive loss of activity. It gets a tick.
But these emergency measures will not get the economy going again once the crisis has eased.
Some argue they will stand in the way of a recovery if they keep people ensconced on benefits or attached to firms without futures.
A tricky transition
Phase two will require genuine fiscal stimulus: not a security blanket of the kind we have had, but a direct injection of money that will spark a new wave of investment and employment.
The trick is to sequence it properly.
The announced tapering of JobKeeper and JobSeeker will cut incomes and cut jobs as firms pay people less and realign staff levels in line with lower subsidies.
The government believes it has got it right, but it is forecasting an 80% drop in JobKeeper payments between September and the end of the year. It might not be a cliff but it is still a very steep slope that will need to be matched by a sharp recovery in economic activity.
It needs to be ready to revise the timetable as needed. Its current projections look like a best case scenario.
An unknowable stage two
The second stage will involve a good deal of spending on infrastructure. But, especially without certainty about immigration, it is hard to tell what will be needed.
The pandemic will have changed the way we work and play. It is not yet clear whether people take advantage of remote working and move out of congested cities. it is not yet clear what it will mean for digital health, digital education and digital shopping.
An even-harder stage three
The final stage will involve structural reforms; alterations to tax settings, regulations and industrial relations. Which is where it gets really hard. It will require not only sequencing but getting agreement across the political divide.
No civil society can base its economic and social structures on the mere desire for efficiency. Fairness and social justice matter just as much, and they can best be guaranteed if the measures are pulled together as a package with trade-offs that protect the values that matter to Australians.
That’ll be Frydenberg’s biggest challenge. The future doesn’t need to be rushed out this week, or in the October Budget, but in the months to come it’ll have to take shape.
Treasurer Josh Frydenberg will warn against the danger of a protectionist push in Australia as a result of the virus crisis, in a Tuesday speech that also stresses it is vital to get the country moving as soon as possible.
“There is a risk that protectionist sentiment re-emerges on the other side of the crisis, and for that we must be vigilant,” Frydenberg will tell the National Press Club. An extract of his address was released ahead of delivery.
The crisis has prompted a debate about Australia being too dependent on China in terms of both exports and imports, with calls for greater self-sufficiency.
Without mentioning China in the extract, Frydenberg says, “While we must always safeguard our national interest, we must also recognise the great benefits that have accrued to Australia as a trading nation”.
“Unleashing the power of dynamic, innovative, and open markets must be central to the recovery, with the private sector leading job creation, not government.”
As the national cabinet this week considers lifting some restrictions, Frydenberg says for every extra week they remain, “Treasury estimates that we will see close to a $4 billion reduction in economic activity from a combination of reduced workforce participation, productivity and consumption.
“This is equivalent to what around four million Australians on the median wage would earn in a week.”
“We must get people back into jobs and back into work.”
He points out the longer people are unemployed, the harder it is to rejoin the workforce – in the early 1990s, unemployment increased by 5% over three years, then took seven years to get back to its former level.
“As has been remarked, unemployment went up in the elevator, and went down by the stairs. In the current coronavirus, it is expected the unemployment rate will go up by around 5% in three months, let alone three years. It underlines the importance of getting people back to work as soon as possible to avoid the long-term economic and social impacts from a high unemployment rate.”
The national cabinet meets on Tuesday and Friday, with announcements on Friday about unwinding some restrictions.
JACINDA ARDERN JOINS TUESDAY’S NATIONAL CABINET
New Zealand Prime Minister Jacinda Ardern has been invited to join Tuesday’s national cabinet meeting. She said on Monday the meeting would discuss “the creation of a trans-Tasman travel bubble”.
But Ardern added the caveat: “Don’t expect this to happen in a couple of weeks time”. The health gains made in New Zealand had to be locked in, she said.
When Ardern spoke to the media on Monday, New Zealand had had no new cases in the previous 24 hours. Its strategy is one of trying to eliminate the virus, while Australia’s strategy has been one of suppression.
Ardern said Tuesday’s meeting “is without precedent”; it highlighted “the mutual importance of our two countries, and economies, to each other.
“Both our countries’ strong record on fighting the virus has placed us in the enviable position of being able to plan the next stage in our economic rebuild, and to include tran-Tasman travel and engagement in our strategy.”
There will be discussion at the meeting of the progress of Australia’s COVIDSafe app. More than 4.5 million people have downloaded it so far.
National cabinet will also receive a presentation on COVID safe workplaces, which has been a project of the National COVID-19 Coordination Commission.
In his speech Frydenberg says when widespread restrictions were imposed in March Treasury estimated a 10-12% fall in GDP in the June quarter, the equivalent of about $50 billion.
If these restrictions had been akin to the eight-week lockdown in Europe, the impact on GDP could have been 24%, or $120 billion, in the June quarter, he says.
“This would have seen enormous stress on our financial system as a result of increased balance sheet impairments, widespread firm closures, higher unemployment and household debt. This was the cliff we were standing on.”
But notwithstanding Australia’s success in suppressing the virus and its unprecedented economic response, “our economic indicators are going to get considerably worse in the period ahead before they get better.
“Some of the hardest hit sectors like retail and hospitality are among the biggest employers, accounting for more than two million employees between them.”
Credit card data from the banks showed spending on arts and recreational services, accommodation and food services down about 60% and 70% respectively in late April compared to the year before.
“Despite the toilet paper boom and the record increase in retail trade in March due to panic buying, overall consumption, according to NAB data, has fallen 19.5% since the start of the year, with declines across all jurisdictions.”
Treasury forecasts unemployment doubling to 10% in the June quarter, but it could have been 15% without the JobKeeper package, Frydenberg says.
“The economic shock the world is confronting dwarfs the GFC,” he says.
He says Australia has the advantage of having made real progress in suppressing the virus’s spread without a full lockdown. Agriculture, mining and construction have continued – 85% of mining businesses were still operating this month.
“We are by no means out of this crisis,” Frydenberg says. “Nevertheless as we build to the recovery phase, we must also turn our minds to the changes that will be needed to further drive economic growth and employment.”