Although the government will significantly reduce income support via JobKeeper and JobSeeker in the December 2020 and March 2021 quarters — down to about $20 billion from October to March compared with about $10 billion a month now — that’s not the limit of its stimulus.
It’s not even the biggest part.
Tomorrow it will reveal historic budget deficits — $80 to $90 billion for last financial year and, according to estimates, between $170 and $240 billion for the current year, with the risks, as they say, on the upside.
Much of that — especially next year — will be from a collapse in tax revenue as company profits fall, firms go under, and people swap well-paying, tax-yielding jobs for JobSeeker benefits.
A $200 billion deficit next year will be over 10% of GDP, injected by the government into the economy via its borrowings.
Whether that’s enough to get the economy growing substantially again isn’t clear.
Australia was stagnant and growth was slowing before the pandemic; the full restoration of the economy pre-COVID, which is no longer possible, would simply restore an economy with persistent unemployment above 5%, stagnant wages and growth at 2% a year — and certainly not the near 4% Prime Minister Scott Morrison says he is aiming for.
It’s likely further stimulus, on top of the $300 billion in deficits last year and this — let alone the likely large deficit for 2021-22 due to low tax revenue — will be needed to make a serious dent in unemployment next year.
But all that stimulus is both necessary and affordable — even if it’s many multiples of the spending that Labor engaged in and which we were told by the Coalition back then was unaffordable. (Remember Barnaby Joyce claiming Australia would default during his brief, disastrous stint as shadow finance minister?)
Australia has ample capacity to fund all this spending and much more. We’re on track for debt of about 30% of GDP — high by recent Australian standards but far below countries such as Canada, Germany, the US, the UK and Japan.
Reserve Bank governor Philip Lowe confirmed that yesterday in the annual Annika Foundation address, which governors make annually and use to discuss the state of the economy.
‘The path ahead will be bumpy’
While broadly upbeat that Australia had “turned the corner”, he cautioned that “notwithstanding this turnaround, the path ahead is expected to be bumpy and there are some major cross-currents in the labour market”.
One of those is the sort-of positive that unemployment would continue to rise as an improving labour market lured more people into looking for work.
So Lowe believes fiscal support will continue to be needed for some time while the labour market reabsorbs those people and begins creating more jobs. Until then, Lowe believes fiscal policy is important, especially in boosting the confidence of households, and thus their willingness to spend.
While dismissing arguments for money-printing, “monetary financing” and the suddenly fashionable modern monetary theory (MMT), Lowe noted:
This proposal is only relevant to the situation where high government debt constrains the ability of the government to provide necessary fiscal stimulus financed through the normal channels.
Clearly it is not relevant to the situation we face in Australia … Monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be. The Australian government is able to finance itself in the bond market, and it can do so on very favourable terms … These are the lowest borrowing costs since federation.
Even if we don’t embrace MMT or believe in helicopter money, debt should not be a restraint on fiscal policy at this point. We can afford the red ink that will adorn tomorrow’s economic statement, and the spending it signifies is crucial in getting Australians back into jobs.
As Lowe said, exactly how long this spending will be required isn’t clear: “We need to recognise that the task is complicated by the fact there is still considerable uncertainty about how long this period of weak income will last. The longer it lasts and the more uncertain things are, the harder it is to smooth out.”
Inevitably: “At some point in the future, attention will rightly return to addressing the ratio of public debt to GDP …”
But we’re not at that point yet. For now, the challenge is for fiscal policy to support jobs, confidence and incomes.
I can’t see that the usual complaint about printing money – that it will raise inflation – is really a problem in a situation in which people are inevitably not spending. Print away, I say.
Lowe’s dismissal of MTM is tepid at best. At the core of MTM is the notion that a job should be available for anyone who wants one and that the governments job is to finance infrastructure and such like schemes to meet this aim and if that country is a sovereign issuer of currency then the monetary limits to this are only reached when the demand for jobs has been filled. At that time monetary, tax , spending and other policies would be initiated to fight any resulting inflation.
To a large extent Lowe has been trapped in a fight inflation time warp. It is the last war not this one. In this respect the RBA under Lowe kept interest rates too high for too long trapped by the governments policies aiming to boost asset prices and although always hinted that the government should have a better balanced fiscal policy mix but were far too reticent in calling it out. The fact is that they were left to fight with one hand tied behind their backs. Their natural rate of unemployment and CPI targets were too high and provided cover for government policies resulting ineffective use monetary policy to try to fight asset price inflation at the expense of stagnant wages and under employment.
The commentary of Lowe’s about central bank balance sheet debits and credits is a very poor substitute for what is called for and that is to actually join the MTM debate and with strong and detailed arguments rather than throw away lines in a luncheon talk.
That would be MMT Red Dwarf, but probably a spell check software changed it to MTM, for those of my vintage that would be the Mary Tyler Moore show.
Tepid is too nice a word though. I fear that Lowe is still fighting the last war too. It’s a nonsense, probably an example of groupthink within Treasury and The Reserve. Also suggests a lack of flexibility in thinking, not so surprising for someone highly educated (orthodoxy is the box you have to think outside of).
It also sadly suggests the lack of critical thinking skills at the most senior levels of our corporate and public sectors, invariably peopled by old white males (like me).
Critical thinking skills might see them put forward some sound arguments as to why ‘printing money’ is a bad thing – of course not much needs to be printed these days, just a few bits and bytes moved around. So far they have come up with nothing and continue to espouse this fake debt problem. What do they think the Reserve does with all the bonds they buy back on the secondary market? Send a bill to Parliament to pay it back? It’s a bunch of book entries, nothing more, and in the meantime they are meddling with the rates that the bond market sets, and I’m not sure that is in favour of savers.
But how is it that they don’t know that Japan has been doing this successfully for about 30 years without consequence, or that the US effectively did the same but erroneously gave it to the banks instead of for building worthwhile infrastructure.
There were a couple of other eyebrow raising comments from Lowe’s speech.
Number 1.
“Over recent decades, the conventional wisdom has been that the government’s balance sheet has a limited role in managing economic fluctuations, with the main focus instead being on structural and intergenerational issues. The global financial crisis, and now the pandemic, have caused some rethinking here.”
What an absurd thing to say. Where does this one come from! Australia’s performance during the GFC was good precisely because the governments balance sheet was used and onTreasury’s advice. This is mainstream economics. What he is really trying to say is that neoliberal doctrine says that governments should NOT spend money on unemployment or government services. It is certainly not wisdom.
Number 2.
“Using the public balance sheet in this way inevitably requires government borrowing againstfuture income. It is through this borrowing that we are able to smooth out the hit to our currentincome. For a country that has got used to low budget deficits and low levels of public debt, this is quite a change.”
Ummm not really. The sections in Alan Austin’s piece linked below on Net Debt, Gross Debt and Government Spending from Michael West.com are worth a read.
https://www.michaelwest.com.au/mathias-cormann-leaves-a-legacy-of-losses-as-finance-minister/
To quote
“By April 2017, the Coalition doubled all Labor’s gross debt, and by March 2019 it had doubled all debt accumulated by all governments since 1854.”
“Between 2012 and 2019, 19 countries reduced their debt, four of them by an impressive 15% or more. Fourteen increased debt over that period by less than 15%. Just three – Chile, Greece and Australia – increased borrowings by more than 15%. Of these, Australia’s was the worst, at 17.6% of GDP.”
Ho hum.
Why is it a radical, unacceptable concept to neoliberals that it must be more economically and socially effective to directly pay people to do productive stuff for the society – social housing, renewable energy projects, community projects etc etc. This displaces no opportunity for business that neoliberal capitalism will support. Business must be led by government not the obverse, what we have now.
We have the worst, visionless gov’t for this time. There’s little talk about job creation, the only thing you hear are the good old chestnuts about paying back debt for generations, training for (non existing) jobs, disincentivise all those dole bludgers and tax cuts. Another catastrophe is slow rolling it’s way towards us and with basically the carte blanche that the gov’t has to create jobs, stimulate the economy and simultaneously reduce the impacts of climate change, this gov’t is intent on accelerating this AND inequality. It’s going to cost us for decades to come and I’m not talking about “paying back debt”, it’ll be far, far worse.
A billion ton of iron ore to China and our end is a pittance.. this is replicated all over the “Resource Sector”.. We need to smarten up and do some extracting of our own.. It’s not a complicated industry .. our lucrative iron ore mines are basic quarries..