There are worrying signs that an ideologically blinkered government isn’t going to pursue the kind of demand-focused policies that are needed to get Australia out of what could be an extended recession.
While yesterday’s 7% contraction for the June quarter was a little worse than forecasters expected, it lacked the kind of psychological impact negative quarters usually have. We’re all painfully aware of what’s been going on since March, and we also know the Morrison government has worked hard, and successfully, to offset the worst impacts of lockdown.
But a negative September quarter, signalling the longest recession since the Fraser-Howard double dip/four quarter epic of 1982-83, would be something else.
That’s a distinct possibility thanks to the Victorian outbreak, the impact of which has been reinforced by the nagging incidence of COVID-19 cases in Sydney for the past couple of months. Forecasters now see a flat to slightly weaker GDP for the current quarter.
The NAB’s economics team expects “a flatter outcome in the September quarter and a gradual recovery from there — but do not expect the economy to recover its pre-virus level until early/mid-2023”.
NAB also sees unemployment continuing to rise to close to 10% early next year, with no return to the pre-COVID level in the foreseeable future.”From a policy perspective this outlook warrants ongoing support to ensure the recovery can happen as quickly as possible.”
We already know where policy needs to be focused. Reserve Bank governor Philip Lowe has made clear that the issue is demand, not the kind of supply-side reforms urged by business, the media and Josh Frydenberg. Targeting demand, however, has to be effective — something that seems problematic if the government goes ahead with bringing forward scheduled tax cuts in the budget next month.
To support demand as much as possible, the government has to do everything it can to ensure it maximises the chances of people spending its stimulus payments.
We know that when it comes to stimulus, people spend less of what they get from tax cuts than what they spend of one-off cash payments. Low-income people such as JobSeeker recipients are more likely to spend payments, according to Lowe; evidence from the US also shows people who live “paycheque to paycheque” are over two and a half times more likely to spend payments than people who save much of their income.
We also know that stimulus payments work best when consumers are confident about their economic prospects and the government’s handling of the crisis that has engendered them. The Rudd-Swan stimulus payments during the financial crisis worked because consumers had faith in that government and their economic prospects; Scott Morrison’s tax refunds last year sank without trace because consumer confidence had slumped amid economic stagnation.
Tax cuts to high income earners will thus be the least effective form of stimulus, while payments to low-income earners, such as JobSeeker recipients, will be the most effective. Tax cuts will simply go into household savings, which hit an all-time record of nearly 20% in the June quarter. But it is tax cuts to high income earners the government is considering bringing forward, while it plans to slash JobSeeker payments from the end of the year.
And what is it doing to lift consumer confidence? As Lowe has said, part of restoring consumer confidence lies in containing the virus. But other actions will also play a role. If the government, as seems likely, pursues the much-vaunted industrial relations “flexibility” demanded by business, it will further undermine consumer confidence as workers face the prospects of not merely continued wage stagnation but cuts to wages and conditions.
It’s been repeatedly demonstrated that industrial relations reform does little to increase productivity; ironically in the June quarter labour productivity in the private sector surged 5.9%; before that, the 0.9% rise in the March quarter had been the strongest rise in nearly four years.
We already know from the Wage Price Index data that private sector wages rose only 0.1% in the quarter, with wages falling in six industries including major sectors like construction and professional services, again showing that “lack of flexibility” is a business myth.
Keeping unemployment lower and supporting the unemployed as much as possible will give households more confidence and get them spending and reducing their record level of savings. It’s chicken-and-egg stuff, to a degree, but stimulus will build confidence so that consumers spend more, including further stimulus, because they’re confident the government is backing them.
The evidence is all there about what kinds of stimulus work best, about how industrial relations “reform” yields no benefits, about the importance of consumer sentiment in economic recovery. Yet the majority of media economic commentators, and pretty much all political journalists, seem oblivious to it, even after their spectacular failure last year when predictions of a stimulus bonanza from Morrison’s tax rebates never materialised.
And if the fiscal hawks on the government backbench are still worried about how all this will be paid for, company profits soared 15% in the June quarter off the back of JobKeeper payments and other forms of business support. How about a special profits tax that reduces to zero depending on how many additional staff the company employs over the next two years?
Better that money goes to employees, or back to taxpayers, rather than to investors via increased dividends. That’s an idea you won’t find in the Financial Review’s shopping list of “microeconomic reforms”.
Crikey would love to hear from readers with tips on how to survive the recession. These could be ideas for fellow readers, or for policymakers. Send your ideas to letters@crikey.com.au with “Recession Busters” in the subject line.
It’s pointless trying to reason with the Liberal government. It is driven by greed and ideology and understands nothing else. Economically, it cares only for its wealthy base.
“Tax cuts to high income earners will thus be the least effective form of stimulus“, with only tax cuts to business as having an equally minuscule effect.
There, fixed.
And more IR flexibility. This is what we get from our Treasurer, ideology and glib phrases. What flexibility exactly, Josh? How much blood can you wring from that stone? Talk about high hanging fruit.
But these people believe this, as did that fool Costello. No curiosity, no interest in evidence or analysis, just ideology taught to them at their private schools and handed down as rubbish lore from their fathers, who got it from their grandfathers, all the way back. Not an analytical bone in their bodies, just ideology.
Talking points, that lead to less talking. Great leadership Josh and ScoMo.
Once you realize that taxes don’t fund spending, as MMT demonstrates ,and in fact it’s the other way round. (and it’s clear that the Gazillions of dollars pumped into economies around the world could NOT have come from taxes) it allows you to think more freely about how to manage the economy. Imagine, instead of giving tax cuts to the wealthy, we give them to the poor and middleclass instead? Might that not spur demand, and of a level far greater than for the wealthy who can already purchase/use what they want?
By raising the tax free threshold to, say $30,000. you are giving the lower paid an immediate pay rise, without imposing further costs on small business. If you then flatten the tax rates to, again, let’s say 20/25% on incomes up to, say $180,000, you give a huge boost to middle income earners.
Good progressive policy Richard that helps put cash in hand efficiently. The next problem is the greater on, what do individuals do with that Treasury induced income bonus, we have just seen uncertainty boost savings rates to record ? high percentages. Uncertainty also impacts willingness to take on additional debt, au contraire there is an incentive to pay debt down which is in effect another form of saving. If past performance is any guide this Governments focus will be on moving wealth upwards which when the factors outlined previously are included suggests we are in for a long dark deflationary night.
The poor spending their money to survive is a future point in time and a project in hand being worked on by the flock in Canberra.
The Old Testament says something about suffering (mightily?) first.
Policy making process
1. Identify an issue
2. Formulate a policy
3. Adopt the policy
4. Implement the policy
5. Evaluate the impact
6. Improve the policy
Wondering if @joshfrydenberg, or any neolib, has ever evaluated the impact of trickle down tax cuts before. Guessing no as they don’t work – why do it yet again
I don’t think they know what policy is let alone how to formulate it. If your raisin d’être is to outsource everything to The private sector then you don’t need to be making policies. It is clear that Frydenberg hasn’t a clue. Tax cuts, red tape cuts and cutting workers conditions are the only ideas he has ever expressed.
All the measures that are destined to drive our economy through the plughole at the bottom of the cesspool.
I wouldn’t let any of these people run my recipe book collection.
Not bad, Franky, but it needs a “tidy-up” Point (2) is actually the most important stage.
2a Test the identification of the issue (for veracity)
2b consider corrections that will be durable allowing that some proposals may be conntradictiroy
2c select a policy based upon, robustness, effectiveness and budget
2d Formulate the policy.
It’s all shaping up to be the recession the liberals deserve to have. Hopefully their pathetic handling of the recession will finally break the myth that they are somehow superior economic managers.