It was obvious this time last week, but even more so a week later: Scott Morrison and Treasurer Josh Frydenberg are taking both the continuing threat from the coronavirus and the need to restore the economy far too cheaply. Figuratively and literally.
One thing another week of struggle by Victoria and NSW to contain the virus’s second wave has shown more clearly – plus the realisation of how vulnerable the neglect and misregulation of our aged care sector have left us – is the unreality of the government’s expectations about the effects of the pandemic.
Last week’s economic and budget update assumed Victoria would be back on track in six weeks and NSW’s struggles were too minor to matter. And also that we’ll start opening to international travel in January.
A more realistic assumption would be that the larger, virus-prone half of the economy (NSW and Victoria) will need to stay sealed off from the healthier, smaller half (the other states and the Northern Territory) indefinitely. Half a healthy economy is far from ideal, but it beats none.
Surely we should have realised by now that the pandemic will be a long-haul flight. Speaking of which, our barriers against the rest of the world are likely to stay up long after the 12th day of Christmas.
Economically, we must make the best of it we can – which won’t be anything like as good as we’d like. Forcing the pace on lifting the lockdown and removing the interstate barriers could easily end up setting us back rather than moving us forward.
What economists seem yet to understand is that, psychologically, what we have to do to keep the virus controlled is the opposite to what you’d do to hasten an economic recovery. To ensure people keep mask-wearing, hand-washing, sanitising, social-distancing and filling out a form every time they walk into a cafe for month after month, you keep them in a state of fear, afraid the virus may bite them at any moment.
How will this give them the confidence to get on with spending and investing? It won’t. Quite the opposite. But it’s the first indication Morrison and Frydenberg will need to spend more for longer.
The second thing that’s more obvious now than it was a week ago is that the setback in Victoria and NSW has put a question mark over the signs of an initial bounce-back in the economy as the lockdown has been lifted. The new payroll-based figures for the week to July 11 show jobs falling in all states, not just Victoria and NSW.
All this casts further doubt on the wisdom of the changes to the JobKeeper and JobSeeker programs announced last week. The initial reaction of relief that the government had not gone through with its original plan to end them abruptly in September has given way to the realisation that this threat of dropping the economy off a “fiscal cliff” has been delayed rather than averted.
The new boss of independent think tank the Grattan Institute, Danielle Wood, has estimated that the changes to the two job schemes will reduce the government’s support for the economy by close to $10 billion in the December quarter and thus “leave a substantial hole in the economy”.
In an earlier major report, Grattan argued that the government needed to spend a further $70 billion to $90 billion to secure a recovery. The measures announced last week amount to only about an additional $22 billion.
According to calculations by the ANZ bank’s economics team, the withdrawal of budgetary support amounts to the equivalent of about 10 per cent of quarterly gross domestic product during the December quarter.
In consequence, although the bank agrees with Treasury that real GDP will grow in the present September quarter, it sees the economy returning to contraction in the December quarter. What would that do for business and consumer confidence?
In its earlier report, Grattan said the government should aim to get the unemployment rate back down to 5 per cent or below by mid-2022. Why the hurry? To “reduce the long-term economic pain and avoid scarring people’s lives”.
Particularly young people’s lives – as this week’s report from the Productivity Commission has reminded us.
But the economic update last week forecast the unemployment rate would peak at 9.25 per cent in the December quarter and still be sitting at 8.75 per cent in the middle of next year.
That’s simply not good enough. It puts the interests of the budget deficit ahead of the interests of tens of thousands of Australians thrown out of work through “no fault of their own”, to quote a Mr S. Morrison.
Grattan’s Wood stresses that she has no problem with making the JobKeeper wage subsidy scheme better targeted. But that’s not all the government did. It cut back the size of payments and extended the scheme only for another six months.
After the cutback in income support for the jobless and potentially jobless was announced two days before the presentation of the budget update, she hoped the update would include announcements about the new spending programs that would fill the “substantial hole” the cutback left.
It didn’t. Not a sausage.
“The missing piece of the puzzle,” she now says, “remains a plan to stimulate the economy and jobs growth as the income supports are phased out and social distancing restrictions are eased in many parts of the country.”
So what should the government be spending on? She suggests measures that would both create jobs and meet social needs. “Social housing, mental health services, and tutoring to help disadvantaged students catch up on learning lost during the pandemic would deliver on this double dividend.
“Boosting the childcare subsidy to support family incomes and workforce participation should also be in the mix,” she says.
To that you could add fixing aged care, spending more on research and development and universities, not to mention renewable energy.
There’s no shortage of good things worth spending on.
