Time to dig deep for those who haven't had a good crisis

Do the initials EOFY mean anything to you? It’s a relatively new abbreviation, but it’s become so widely used by marketers anxious to squeeze in one last bargain sale before their books close that you probably don’t need me to tell you it stands for end of the financial year.

It’s also become a standby for our tax-deductible charities which, at this time of year, are busy mailing their supporters to subtly remind them that a generous donation or two in the next few weeks would do much to fatten the refund cheque that’s the reward awaiting us when we’ve submitted our tax return.

As an accountant who’s highly conscious of what’s tax deductible and what’s not – and who, in earlier times, did his share of knocking on doors, selling buttons on button day and rattling a collection box at the entrance to the show, but drew the line at helping his father sell the War Cry newspaper in pubs – EOFY looms large on my to-do list in the next few weeks.

It’s years since I’ve helped with the Salvos’ Red Shield appeal but, in any case, no house-to-house collection day was possible this year, for obvious reasons. Which is a pity since it means the Salvos will have a lot less ability to help those it always finds needing assistance, let alone the surge in families caught short by a recession likely to be still blighting many people’s lives long after Scott Morrison and Josh Frydenberg have triumphantly declared recovery and withdrawn their extra financial support.

Thinking about it, tax deductibility is a way that we mere mortals can oblige our political masters to divert more taxpayer support to those causes to which we attach more importance than the pollies seem to. And, if that’s your motivation, the knowledge that much of what you give will be coming back to you should prompt you to give a lot more than you first thought of.

Of course, the Salvos are far from the only charity caught short by their reliance on volunteer funding drives. A report published last week by Social Ventures Australia and the Centre for Social Impact at the University of NSW is a reminder that, apart from social distancing’s disruption of volunteering and fundraising events, donations always suffer when economic times are tough.

There are more than 57,000 charities registered with the Australian Charities and Not-for-profits Commission. Before the recession they employed about 1.3 million people – one worker in 10 – and had 3.7 million volunteers.

Charities provide a huge range of services to the community: education, health care, sport and recreation, legal services, arts and culture, animal protection, environmental protection and much else.

Governments rely on charities to deliver services on their behalf: aged care, disability services, employment services (replacing the old Commonwealth Employment Service) and childcare and early learning.

Governments also rely on charities to fill in the gaps in their systems. When the dole was only $40 a day – to which Morrison says he’ll soon revert – they could be sure no one would starve because the Salvos, Vinnies and Mission Australia would be there to give them a feed or a food parcel.

All those homeless people on the street? The Salvos, Vinnies and Mission Australia will do what they can. Maybe those people enjoy sleeping in parks and under railway bridges – especially in summer.

People who get themselves deep in debt with multiple credit cards and pay-day lenders? Not to worry. I hear the Salvos have an excellent financial counselling service.

Most charities have few reserves to fall back on when donations fall short. The report by Social Ventures Australia took a sample of 16,000 charities with 1.2 million employees and found that, should their revenue fall by 20 per cent, 88 per cent of them would immediately be making an operating loss, with 17 per cent at high risk of closing their doors within six months. More than 200,000 jobs could be lost as a result of cost-cutting and closures.

To be fair, the Morrison government has modified its JobKeeper wage subsidy scheme so as to include charities and their employees, though the scheme is set to expire in September.

Mitchell Evans, leader of the Salvos’ Sydney Streetlevel mission, says they are expecting “an avalanche of need in the months to come, as the government’s JobKeeper and additional funds under JobSeeker [unemployment benefits] conclude”.

His mission in Surry Hills has already seen a 60 per cent increase in demand for its meal services, and now provides 80 takeaway lunches every day.

At Major Brendan Nottle’s Project 614 in Bourke Street, Melbourne (where my cousin Barry is working), demand for emergency relief has now tripled to 90 people a day. “We’ve particularly seen more men coming to us for help, often with a mate, as they’re embarrassed and don’t really know how to ask for help,” Nottle says.

As Morrison cuts back to be sure of affording the huge tax cuts he’s promised high income-earners like me in 2024, kicking the tin’s the least I can do.

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Economy to blame for part of the expected budget blowout

When you ask people who work in the House with the Flag on Top why the budget deficit has gone up or gone down, most will tell you it’s gone up because the government decided to spend more money, or it’s gone down because the government decided to spend less money.

When you live in Canberra, the budget looms large and the economy is something far distant in Melbourne or Sydney or somewhere. The budget is the steering wheel by which those in the national capital control the economy of you and me, they think.

When you consider how close they live to all the economists in Treasury and all the distinguished economists at the Australian National University, it's surprising how little so many Canberrans understand about the economy.

The truth is, the nation’s economy – almost all of which exists outside the ACT – is far bigger and more powerful than the budget of the federal government (even after you throw in the budgets of the eight states and territories).

So, though it’s true that changes in the federal budget can have a big influence on what happens in the economy, it’s just as true that what happens in the economy can have a big influence on what happens to the budget.

To be clear, there’s a two-way relationship between the big thing that is the economy and the much smaller thing that is the budget. What’s done to the budget affects the economy, but what you and I - and the businesses we mainly work for - do to the economy has a big effect on the budget.

On how much tax we end up having to pay, and on the benefits – in kind as well as cash – the government has to pay us. How many kids we have and send to school. Whether they decide to go on to university or TAFE. How old we get and need the age pension and go to doctors and hospitals more often. Whether we lose our jobs and need to be supported by the dole. And all the rest.

With the virus and the consequent recession changing everything, this week we were supposed to get an emergency update on the state of the economy and the budget from Treasurer Josh Frydenberg. But he’s put it off until late next month.

Not to worry. On Friday the independent Parliamentary Budget Office stepped into the breach and produced “medium-term fiscal projections” of the effect of the coronavirus and the policy response to it.

Starting with the forecasts in the mid-year update published in December as its base, it used the Reserve Bank’s recently published forecasts for the economy (in lieu of Treasury’s) to estimate the expected change in the federal budget’s receipts, payments and underlying cash balance brought about by the crisis.

Its headline finding was that the crisis may cause the federal government’s net public debt to be between $500 billion and $620 billion higher than it would otherwise have been by 2029-30. That would be equivalent to between 11 and 18 per cent of gross domestic product.

But no one knows what the future holds, and projections 10 years into the future are so speculative as to be useless. They’re actually a bad thing because they give the uninitiated (including the politicians) a false sense of certainty.

The report’s way of putting this is to say its results are “indicative only” – which is an econocrats’ way of saying that, at best, they give you a rough idea of what might happen. So let’s just focus on the guesstimates for this (almost over) financial year and the next two, ending with 2021-22.

They show the budget deficit for this financial year is now expected to be $67 billion worse than formerly expected. The budget balance for the coming financial year may be $191 billion worse and for 2021-22 may be $56 billion worse. That’s a total deterioration of $314 billion.

Now, the explicit policy decisions of the government in response to the virus are expected to account for only $187 billion of that total. This accounts for almost all the expected increase in government payments, leaving the expected fall of $126 billion in tax collections and other receipts making up the remainder.

Get it? About 40 per cent of the overall deterioration came from the recession, caused by the fall in tax collections – individuals earning less income and paying less income tax; companies earning lower profits and paying less company tax; consumers buying less and paying less goods and services tax – leaving the government’s own actions accounting only for the remaining 60 per cent.

As economists put it, about 60 per cent of the expected deterioration in the budget balance over three years is “structural”, whereas 40 per cent is “cyclical” – meaning it will fix itself as the economy recovers.

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Virus lockdown pushes already weak economy into recession

If you needed the news that the economy contracted in the March quarter or Treasurer Josh Frydenberg’s official admission that, because Treasury expects the present quarter to be much worse, we are now in recession, go to the bottom of the class. Sorry, but you just don’t get it.

To anyone who can tell which side is up, what characterises a recession is not what happens to gross domestic product in two successive quarters or even half a dozen, it’s what happens to employment.

The role of the economy is to provide 13 million Australians with their livelihoods. When it falters in that role, that’s what we really care about. We call it a recession, and it’s why just hearing that word should frighten the pants off you. It means hundreds of thousands – maybe millions – of families will be in hardship, anxiety and fear about the future, which could go on for months and months.

So you should have been in no doubt that the economy was in recession from the day, weeks ago, you turned on the telly to see footage of hundreds of people queueing round the block to get into Centrelink and register for unemployment benefits – the JobSeeker payment as it’s now called.

The statistical confirmation of recession came not this week, but more than three weeks ago when the Australian Bureau of Statistics issued labour force figures showing that, in just the four weeks to mid-April, the number of Australians with jobs fell by an unprecedented 600,000.

What more proof did you need? There was more. The total number of hours worked during the month fell by more than 9 per cent. Also unprecedented. In consequence, the rate of under-employment (mainly part-timers wishing to work more hours than they are) leapt by almost 5 percentage points to 13.7 per cent. “Gee, do you think a recession might be coming?”

Of course, what happens to jobs is closely related to what happens to GDP – the volume of goods and services being produced during a period. When firms or government agencies decide to reduce the goods or services they’re producing, it’s a safe bet they’ll also reduce the number of workers they need to help with the producing.

No, my point is just, don’t get the monkey confused with the organ-grinder. We don’t need GDP to tell us whether we’re in recession, we need it to help us understand why we’re in recession and which aspects and industries are most affected.

So let’s start again. The “national accounts” issued by the bureau this week showed real GDP fell by 0.3 per cent in the March quarter so that the economy grew by only 1.4 per cent over the year to March.

To put that 0.3 per cent fall into context, had the economy continued growing at its previous rate it would have increased by about 0.5 per cent. So it’s a fall of 0.8 per cent from what might have occurred. A bit of that fall is explained by the bushfires, but most of it by the early stages of the economic response to the coronavirus – particularly the travel bans and first two weeks of the lockdown.

The largest factor explaining the actual fall is consumer spending, which fell by 1.1 per cent and so contributed minus 0.6 percentage points to the overall fall of 0.3 per cent. Some of this fall was involuntary (as the early days of the lockdown closed many businesses and prevented housebound families from getting out to shop), but much would have been deliberate, as households tightened their belts in anticipation of tough times to come.

Investment spending on new homes and alterations continued to fall – by 1.7 per cent – and business investment spending fell by 0.8 per cent. So, all told, the private sector’s subtraction from growth increased to 0.8 percentage points.

In contrast, government consumption spending (which included spending related to the bushfires and the virus) grew by 1.8 per cent. Add modest growth in infrastructure spending and the public sector made a positive contribution of 0.3 percentage points to the overall fall in GDP during the quarter.

Apart from a fall in inventories that subtracted 0.3 points from the overall change, that leaves “net exports” (exports minus imports) making a positive contribution of 0.5 percentage points. But that’s not as good as it sounds. The volume of our exports actually fell by 3.5 per cent, so we got a positive contribution only because the volume of imports fell by more.

The main factor influencing trade was the travel bans, which hit inbound tourism and incoming overseas students (both exports) and hit outbound tourism (an import) harder. We’re a net importer of tourism.

You see happening in this recession what happens in every recession: it’s the private sector that contracts, whereas the public sector (via federal and state budgets) expands to fill the vacuum. The extent to which governments apply “fiscal stimulus” and allow their budget deficits to rise has a big influence on how severe the recession is, how high unemployment goes and how long it takes to get everyone back to work.

Frydenberg claimed on Wednesday that the economy entered the crisis “from a position of strength”. This is simply untrue. People will stop believing what the Treasurer says if he continues playing so lightly with the truth.

The truth comes from economist David Bassanese of BetaShares: “Let’s not forget the economy was already struggling before the virus crisis due to a downturn in housing construction, weak business investment and tapped out consumer spending. Those fundamental challenges have not gone away, and the shock of COVID-19 has only exacerbated them.”

The truth Frydenberg is so unwilling to face up to is that, with the private sector already so weak, we were relying on the federal and state budgets to prop up the economy for many quarters before the virus arrived. Pretending otherwise won’t create a single job.

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Many illusions performed in the name of creating jobs

How on earth can someone get to be Treasurer of our oldest state and yet say something as uncomprehending as that he has to freeze NSW public servants’ wages so he can use the money to create jobs? Fortunately, Victoria’s Treasurer is better educated.

So, for the benefit of Dominic Perrottet, Economics 101, lesson 1: every dollar that’s spent by governments, businesses, consumers or the most despised welfare recipient helps to create jobs. And don’t tell me that, as well as creating jobs directly, your pet project will also create jobs indirectly. That’s also true of every dollar spent.

In high school economics it’s called “the circular flow of income”. They ought to write a song about it: the money goes round and round. That’s because what’s a cost to an employer is income to their employee. And when that employee spends part of their wage in another employer’s business, that cost to the employee becomes income to the other business. (I know it’s complicated, but stick with it.)

You have to be a duly elected politician to believe that only dollars that are spent by governments, bearing the label “job creation”, do the trick – preferably with a ribbon to cut while the cameras roll.

Perrottet claims that “everything for me is jobs, jobs, jobs”. He’s certainly right to believe that the political survival of every government – state or federal – will depend on their success in getting people back to work after this terrible, government-ordered recession. And it won’t be easy.

But if he cared as much about jobs as he claims to, he’d raise state public sector wages by 2.5 per cent as normal and spend big on his specific, look-at-moy, look-at-moy job creation projects.

If it’s all so important, why must one form of job creation be sacrificed to pay for another? Why must Peter be robbed to pay Paul? Perrottet says “this is not about the budget. This is not about savings”.

Really? Then what is it about? Well, one possibility is that it’s about party prejudices. Perrottet hails from the Liberal tribe, whose members tend to regard people who work for the government as overpaid and underworked. If private sector workers are likely to miss out on a pay rise this year, those tribe members might be pretty unhappy about seeing nurses and teachers and pen-pushers escape unscathed.

But I suspect the real reason is Perrottet’s unreal fear of debt and, more particularly, of having the state’s triple-A credit rating downgraded. In the old days, governments worried a downgrading would mean having to pay higher interest rates on their bonds. But these days rates are already so close to zero you couldn’t see the difference with a magnifying glass.

So why are our politicians – state and federal – willing to cede their sovereignty to a bunch of American rating agencies, whose creditability was smashed in the global financial crisis? Not only did they fail to see it coming, they contributed to it by selling triple-A ratings to business borrowers whose debt was later found to be “toxic”.

So why? Because the pollies live in fear of the drubbing they’d take from the other political tribe. Unfortunately, Labor is as much into playing cheap tit-for-tat politics as are the Libs. Being downgraded by a bunch of Yanks on the make is, we’re always assured, the ultimate proof of economic incompetence. Yeah, sure.

Turning to the private sector, its long-established practice is for annual pay rises to be forgone during recessions. Despite the Victorian government’s support for a 3 per cent increase in national minimum and award wages, the Fair Work Commission is likely to follow precedent and give it a miss. The Morrison government wouldn’t have the gumption to propose otherwise.

Individual big businesses will press their unions to skip a beat, and workers afraid they could be next on the dole queue won’t be inclined to argue. Economic orthodoxy says it’s never smart to raise the price of something – labour, in this case – when you’re not selling enough of it. (It’s just a pity there’s so little empirical evidence to support this over-simplified model of how the job market works.)

One of the troubles with recessions is they encourage counter-productive behaviour. Fearful of losing my job, I cut my spending and save as much as I can. But when everyone does the same, we all suffer.

It’s the same with wages. When business is weak and profits are down, it makes sense to keep your wage bill low. But when every business does it, the result is no growth in the wages your customers use to buy your product and get you back to health and strength. Allow you to employ a few more people even.

What gets me is that their “debt and deficit” phobia stops even the Liberals from seeing that, at times like this, the role of the public sector is to do whatever it takes to rescue their mates in the private sector (which includes you and me). Even the business lobby groups don’t seem to get it.

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Reserve Bank has just one thing to say to Scott Morrison

It’s possible Reserve Bank governor Dr Philip Lowe has been reading a book about speechmaking – the one that says: keep the message simple and keep saying it until it sinks in. See if you can detect his one big message last week in his evidence to the Senate inquiry into the response to the coronavirus.

Lowe said that when the JobKeeper wage subsidy scheme was due to end in late September was "a critical point for the economy". This was also when the banks’ six-month deferral of mortgage and other payments would come to an end.

"It will be important to review the parameters of that [JobKeeper] scheme. It may be that, in four months’ time, we bounce back well, and the economy does reasonably well, and these schemes, which were temporary in nature, can be withdrawn without problems," he said.

"But if the economy has not recovered reasonably well by then, as part of [Treasury’s] review we should perhaps be looking at an extension of the scheme, or a modification in some way. . . More generally, right through the next year or so, I think the economy is going to need support from both monetary policy [interest rates] and fiscal policy [the budget].

"There are certain risks if we withdraw that support too early. I know, from the Reserve Bank’s perspective, we’re going to keep the monetary support going for a long period of time, and I’m hopeful that the fiscal support will be there for a long period of time.

"If the economy picks up more quickly, that can be withdrawn safely. But if the recovery is very drawn out, then it’s going to be very important that we keep the fiscal support going," he said.

The Reserve’s contribution was to keep interest rates low and make sure credit was available. It had the official interest rate down at 0.25 per cent, which was effectively as low as it could go. But, as the head of the US Federal Reserve kept saying, "Central banks work through lending, not through spending".

"So it’s an indirect channel and there’s a limit to what we can do. . . Going forward, fiscal policy will have to play a more significant role in managing the economic cycle than it has in the past. . . In the next little while there’s not going to be very much scope at all to use monetary policy in [the way it’s been used in the past 20 years].

"So I think fiscal policy will have to be used, and that’s going to require a change in mindset," he said.

Lowe said he thought it was going to be "a long drawn-out process" to get back to full employment which, before the crisis, he’d thought was an unemployment rate of 4.5 per cent, "which means that we’re going to keep interest rates where they are perhaps for years".

It was too early to say what the economy was going to be like in four months’ time, but "if we have not come out of the current trough in economic activity, there will be, and there should be, a debate about how the JobKeeper program transitions into something else, whether it’s extended for specific industries or somehow tapered".

"It’s very important that we don’t withdraw the fiscal stimulus too early," he said, adding a minute later that "my main concern is that we don’t withdraw the fiscal stimulus too early".

Several minutes later, in answer to another question, he said that "if we’re still in the situation where there hasn’t been a decent bounce-back in four or five months’ time, then ending that fiscal support prematurely could be damaging".

Later: "My main point here is: we’ve got to keep the fiscal stimulus going until recovery is assured. I’ve seen, particularly over the past decade, the fiscal stimulus withdrawn too quickly and the economy suffered".

He’s referring, I think, to the US, Britain and the euro-zone countries which, not long after their recoveries from the global financial crisis in 2009, took fright at their rising levels of public debt and switched abruptly to policies of "austerity" – cutting government spending and raising taxes – causing their economies to languish for the past decade.

"The level of public debt in Australia, while it’s rising, is still low. The government can borrow for three years at 0.25 per cent, and it can borrow for 10 years at 0.9 per cent. The [Treasury] held a bond auction two weeks ago and it was able to borrow $19 billion at 1 per cent for 10 years.

"The Australian government has the capability to borrow more, and I think it would be a mistake to withdraw the fiscal stimulus too quickly," he said.

I think I’m getting the message, but is it getting through to Scott Morrison and Treasurer Josh Frydenberg?

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Treasury: no depression, but no big bounce-back either

Although the virus has delayed the budget until October, Treasurer Josh Frydenberg will deliver an update on the budget and – more importantly – the economy, within the next fortnight. But last week the secretary to the Treasury dropped some big hints on what to expect.

In evidence to the Senate committee inquiring into the response to the virus, Dr Steven Kennedy started with the outlook for the labour market. The latest figures from the Australian Bureau of Statistics are for the four weeks up to mid-April.

In round figures, they show that 900,000 people lost their jobs during the period (although 300,000 gained jobs), 1 million people worked fewer hours and three-quarters of a million kept their jobs but worked no hours (most of them protected by the JobKeeper wage subsidy scheme).

So that’s a total of 2.7 million workers – about one worker in five - adversely affected by the snap recession. Total employment fell by 4.6 per cent, but total hours worked fell by twice that – 9.2 per cent, telling us much of the pain was borne by part-time workers. The rate of under-employment (mainly part-timers working fewer hours than they want to) leapt by almost 5 percentage points to 13.7 per cent.

The “good” news is, Kennedy thinks that’s most of the collapse in employment we’re likely to see. We may get a bit more in the figures for May, and maybe even a fraction more in June. But that should be it.

The trick, however, is that though the underlying position won’t be getting much worse, we’ll see the rate of unemployment shooting up. It had risen by “only” 1 percentage point to 6.2 per cent by mid-April, but Kennedy expects it to be closer to 10 per cent by mid-June. (And it would have gone a lot higher but for the JobKeeper scheme.)

Such a strange outcome – it’s not actually getting much worse, but the unemployment rate is rocketing – is explained by the strange nature of this coronacession: a recession caused by the government, acting under doctors’ orders.

In an ordinary recession, almost all the people who lost their jobs in April would have immediately started looking for a new one, and so met the bureau’s tight definition of being unemployed. This time, most people didn’t start looking because many potential employers had been ordered to cease trading and, in any case, you and I had been ordered to stay in our homes and rarely come out.

As the lockdown is eased, however, people will start actively looking for work, and the bureau will change their status from “not in the labour force” to unemployed, making the figures look a lot worse.

On Wednesday, the bureau will publish the “national accounts”, showing what happened to real gross domestic product – the change in the economy’s production of goods and services – during the March quarter.

Kennedy is expecting real GDP to have fallen a bit, mainly because of the bushfires and the ban on entry to Australia by foreign tourists and overseas students. He’s expecting the big fall to come in the June quarter, and for the combined fall since December to be as much as 10 per cent.

If it’s anything like that big it will be humongous. The total contraction in the last recession, in the early 1990s, was just 1.5 per cent. But, as with the job figures, Kennedy is expecting the contraction in GDP to end with the June quarter.

The big question is, what happens after that? With most of the economy reopened – but, of course, our borders still closed to international travel – will most of us be back at work and producing and spending almost as normal? That is, will the period of the economy dropping like a stone be followed by it bouncing back like a rubber ball, producing a graph that looks like a big V?

No. Kennedy told the Senate committee “I’m not predicting a V-shaped recovery in any sense, but the way we entered this [downturn], and the nature of this shock, give me some hope that if governments respond well, particularly through their fiscal levers [that is, their budgets], we needn’t have what’s called the L-shaped recovery”.

That is, economic activity drops a long way, but stays there without growing. Kennedy says the L-shape is probably what people would think of as more like a depression.

Kennedy noted that, according to separate figures from the bureau, the number of jobs in the accommodation and food sector fell by more than 25 per cent in just the three weeks to April 4, while jobs in the arts and recreation services sector fell by almost 19 per cent.

He drew some hope from the fact that the sectors worst affected by the lockdown are “quite dynamic”. “They’re sectors that have high turnover in businesses coming and going, quite high turnover in employees and a lot of casuals,” he said.

So, in the right conditions, they had the potential to re-establish quickly. In contrast, it was hard to re-establish a manufacturing plant quickly. In this strange recession, manufacturing, construction and mining had been allowed to continue without much disruption.

If you rule out V-shaped and L-shaped recoveries, what’s left is a U-shape. You go down fast, but bounce along the bottom before going back up. But our success in suppressing the virus means we’ve been able to start dismantling the lockdown earlier than the six months initially expected.

“So in some ways we’re actually a little more optimistic [than we were] – maybe we just squeeze the U together a bit,” he said.

That’s looking at our domestic economy. Looking at the prospects for the global economy, it’s possibly worse than he first thought. But even here Kennedy finds some source of hope. It so happens that our major trading partners – China, South Korea and Japan – are among the countries that have done better at beating the virus and getting back to work.

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Right now, we need all the government spending we can get

Lying awake in bed last night thinking about our predicament, a frightening insight came to me: the only way out of a recession is to spend your way out. It sounds wrong-headed, but it’s not. It’s just, as economists say, “counter-intuitive”.

Who must do all this spending? In the first instance, the government. And let me tell you, if Scott Morrison lacks the courage to spend as much as is needed – as it seems he may – he’s likely to be kicked out at the next election because we’ll still be languishing in a recession that’s deeper and longer than it needed to be.

The reason spending your way out of trouble strikes us as foolhardy is that we’re used to thinking as individuals. If I and my family tried that solution, we’d soon get ourselves into even deeper trouble. True. But what’s true for the individual isn’t necessarily true for all of us acting together via the government – which we elected to do things on our behalf and to our benefit.

It shouldn’t really surprise us that governments can get away with doing things you and I can’t. That’s partly because the federal government represents 25 million individuals. It’s also because national governments have powers you and I don’t possess: the power to cover the money they spend by imposing taxes on us, and even the power simply to print the money they spend.

This, of course, is what worries Morrison and his ministers about spending big. When governments spend too much they go into deficit and debt, and then they have to raises taxes to cover the deficit and eventually pay off the debt.

But that’s the wrong way to think about it. The right way is the way Morrison has already said we’ll cope with the debt: we’ll grow our way out of it. The trick, however, is that you don’t get the economy back to growing unless you spend enough to get it growing.

Let’s get back to basics. Economic activity is about getting and spending – producing and consuming. We earn incomes by producing goods or services (or, more likely, by helping our employer produce goods or services), then spend most of that income on the goods and services we need to live our lives.

Recessions occur when, for some reason, we stop spending enough to buy all the goods and services being produced. (In the present case, the reason is that, in order to stop the virus spreading, the government ordered non-essential businesses to close their doors, and you and me to stay in our homes and not go out buying things.)

When people stop spending enough to buy all that businesses are producing, those businesses cut back their production. This often involves sacking workers or putting them on short hours. Obviously, people who lose their jobs cut their spending.

Even people who’ve kept their jobs tighten their belts for fear they’ll be next. Optimism evaporates as everyone gets fearful about the future. Rather than spending, people save as much as they can.

The private sector – businesses and households – contracts. To be crude, it starts disappearing up its own fundament. Until someone breaks this vicious circle, the private sector keeps getting smaller and unemployment keeps rising.

Obviously, what’s needed to reverse the cycle is a huge burst of spending. But there’s only one source that spending can come from: the government. The smaller public sector has to rescue the much bigger private sector and get it going again.

This creates a dilemma for people who’ve convinced themselves that government spending is, at best, a necessary evil to be kept to an absolute minimum because, just as dancing leads to sex, government spending leads to me paying higher taxes.

Turns out that government spending does much good and we shouldn’t be so stingy and resentful about the taxes we pay. (If some government spending is wasteful then eliminating waste is what we should be focusing on.)

In any case, provided you spend enough to get the economy growing again, that growth means rising incomes from which to pay tax. As well, once the economy is growing faster than the debt is, it declines relative to the size of the economy; the problem shrinks. We ended World War II with debt hugely higher than today. How did we get it down? That’s how.

You and I are in a hurry to pay down our debt partly because we’re mortal. We need to get it paid before we retire, let alone before we die. Governments, however, need be in no such hurry because they go on forever.

The other reason you and I are in a hurry to repay, of course, is the interest we must keep paying until we do. The higher the rate of interest, the more hurry we should be in. In evidence to a Senate committee last week, Treasury secretary Dr Steven Kennedy advised that the interest rate the government is paying on the 10-year bonds it’s issuing is 1 per cent – less than inflation. Still worried?

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Treasury: the budget won't ruin us, but will help save us

Something we should be thankful for is that Scott Morrison saw fit to return the leadership of Treasury to another highly respected macro-economist in the months before the arrival of a virus obliged Morrison to hit the economy for six.

The key to our success in suppressing the virus was his willingness to follow his medicrats’ Treasury-like advice to “go early, go hard”. Unfortunately, going hard meant governments closing our borders and ordering a large slab of private enterprise to cease supplying goods and services to their customers.

We’re left with a sudden, unexpected, government-ordered, supply-side “disease-led” shock to the economy that’s without precedent. By mid-April, this had caused 2.7 million Australians to have either lost their jobs or had their hours reduced.

It would have been several million souls worse than that, but for the quick thinking that saw we needed a new measure – the JobKeeper wage subsidy – to preserve the attachment between businesses and their workers, even though there was much less work to be done.

Treasury and the Australian Tax Office had to design and implement this completely unfamiliar program within a few weeks. It thus shouldn’t be too surprising that their initial estimate of its size and cost proved badly astray. Especially when you remember how far their staffing levels have been run down in the name of smaller (and thus less capable) government.

The JobKeeper program is now expected to involve 3.5 million rather than 6.5 million workers, and cost $70 billion over six months rather than $130 million. According to Treasurer Josh Frydenberg, this $60 billion reduction is “good news for the Australian taxpayer” - which suggests he’s yet to learn that the economy matters more than the budget.

Make a note, Josh: the budget serves the economy (and society), the economy doesn’t serve the budget. Taxpayers gain their livelihoods from the economy, which brings them many benefits (starting with three meals a day) along with taxes to pay. In my experience, someone who loses their job gets little comfort from the knowledge that they’ll be paying less tax.

In truth, the $60 billion stuff-up is good news for the economy and the people whose livelihoods it supports. It suggests that fewer businesses than expected have had their revenues cut by 30 per cent (or 50 per cent for big businesses), so that fewer workers than expected have had their livelihoods threatened.

In any case, Treasury secretary Dr Steven Kennedy’s remarks to the Senate committee examining our response to the virus, made the day before the stuff-up was announced, suggest there’ll be plenty of other important uses to which the $60 billion could be put.

Kennedy stressed the central role that the budget (“fiscal policy”) would have to play in getting the economy back to full employment “in the months and years ahead”, especially because the other instrument for managing demand, “monetary policy”, is “not able to provide the usual impact that it would”.

That is, interest rates are already as low as they can go, whereas in the global financial crisis they were cut by 4.25 percentage points to help stimulate demand.

As we move away from the supply shock and cautiously reopen industry, “it will become more about managing demand and more about confidence. The focus will be very much on fiscal policy – how it’s contributing to growth and how the composition of those policies contributes to growth and how they encourage re-employment”.

It was obviously a matter for the government but, in the run-up to the budget in October, Treasury would be advising the government on “macro-policy and the composition of existing fiscal stimulus and whether any more is required”.

“I realise people are very excited about lots of reform, but I would encourage us not to get too far ahead of ourselves; we need to keep the economy afloat as it is now and to also get it open,” Kennedy said.

When they think of the huge budget deficits coming up, readers ask me where all the money will be coming from. Short answer: it will be borrowed. And Kennedy advised the committee there was no shortage of institutions keen to buy the government’s bonds (including, no doubt, your super fund, but also foreign institutions).

Countries such as Australia and New Zealand had been “incredibly well placed” to borrow more because “we did start with relatively low levels of debt”. This meant our deficit spending in response to the economic shock could be managed without much debate, he said.

And with the cost of borrowing so low (10-year government bonds cost the government an interest rate of 1 per cent), once the economy was back to growing strongly and the budget balance improving – which wouldn’t be for some time – “debt will bring itself down over time”.

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Women, part-timers and the young hardest hit by jobs crisis

At a time like this, measuring the rise in joblessness is very important. But it’s a trickier job than many realise. You have to draw boundaries somewhere, and where they should go can always be debated.

But some who don’t like comparing shades of grey think the problem can be reduced to good guys and bad guys. Why do the figures look strange? Because some prime minister a few years back changed the definition of unemployment to make it look smaller. Would you believe that someone who’s worked as little as one hour in a week is counted as employed?

Sorry, this fiddling is an urban myth. The truth isn’t nearly so exciting. But before I deflate the balloon, let me show you the circumstantial evidence.

The most recent figures, for April, show America’s rate of unemployment leaping more than 10 percentage points to 14.7 per cent – in just a month. Canada’s unemployment jumped 5 points to 13 per cent.

What happened to our rate? It crept up from 5.2 per cent to 6.2 per cent. Really? Are you kidding? What’s that if it’s not a fiddle?

Or, consider this. Our figures show that about 900,000 people lost their jobs in the four weeks to mid-April. But they also show that unemployment increased during the period by only about 100,000. How’s that possible? What’s that if it’s not a fiddle?

Actually, it’s support for one of my favourite sayings: the world is a complicated place. There are puzzles everywhere. If you want everything to be black or white – all good or all bad - you should never have left the security of primary school.

So, it may look like a conspiracy, but it ain’t. A sign that we’re dealing with a myth is that the identity of the PM who did the dirty deed changes with the political sympathies of the person who tells you they remember him doing it.

The figures we get each month for how many people are employed, unemployed or neither (“not in the labour force”) come from a huge monthly survey of households conducted by the Australian Bureau of Statistics, which brooks no interference from politicians.

The bureau follows international conventions set by the United Nations' International Labour Organisation, in Geneva. Its definitions haven’t changed in many decades. (I once ran into a union-movement economist who was an Australian representative on the ILO committee reviewing the definitions. To my surprise, he staunchly defended the decision to leave them unchanged, including the bit about one hour’s work meaning you were employed.)

As the bureau explains in its release, the main reason the North Americans’ unemployment rates are so much higher than ours has to do with workers who’ve been “stood down” for some weeks because the boss has no work for them, but hopes to bring them back when things improve.

We class such people a still employed, whereas the North Americans class them as unemployed. The bureau estimates that, if we did it the American way, our unemployment rate would be not 6.2 per cent, but 11.7 per cent.

Although about 900,000 Australians ceased to be employed during the four weeks to mid-April, it may amaze you that, in the same period, about 300,000 people went from not having a job to having one. This surprises people because they don’t realise how much coming and going there is in the labour force, even during recessions.

The bureau estimates that, even in a month where total employment seems hardly to have changed, on average about 300,000 people leave employment and about the same number move into employment.

It’s the net fall in employment of about 600,000 that matters. Why then did unemployment rise by only about 100,000? Because part of the definition of being unemployed is that you must be actively looking for job. Since we were in lockdown, 500,000 of these people didn’t start looking for another job, and so were classed as “not in the labour force”. As soon as they do start looking, they’ll be unemployed.

People make too much of the rule that an hour’s work means you’re not unemployed. Only 2.5 per cent of all those employed in March worked for only one to five hours a week. It’s true, however, that the international definition of unemployment is too narrow, especially in a world where one-third of our jobs are part-time.

This is why the bureau always calculates the rate of under-employment – people who have (mainly) part-time jobs, but would prefer to be working more hours than they’re able to, maybe even full-time hours.

The coronacession has meant many workers are having their hours cut. The number of underemployed people jumped by 100,000 to 800,000, taking the underemployed proportion of the labour force from 8.8 per cent to 13.7 per cent.

Delving into the figures, about 55 per cent of the 600,000 jobs lost in April were held by women, even though women accounted for only 47 per cent of the workforce. Almost two-thirds of the jobs lost were part-time.

Employment of people aged 15 to 24 fell by about 11 per cent, compared with a fall of 3 per cent for prime-aged workers (aged 25 to 54). Unemployment is a much bigger problem for the young, as is underemployment.

While your head’s still spinning, one last puzzle. Being counted as unemployed by the bureau is not the same thing as being eligible to receive unemployment benefits - the “JobSeeker” payment - from Centrelink.

Some people counted as unemployed aren’t eligible for the dole (often because their spouse’s income is too high), whereas some people eligible for the dole aren’t counted as unemployed (because they’re allowed to work a few hours a week before the dole cuts out).

Right now, however (and partly thanks to a temporary increase in how much your spouse may earn), there are 800,000 people counted as unemployed, but twice as many – 1.6 million – getting the JobSeeker payment.

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Joblessness hasn't been worse in our lifetimes - nor as hidden

Voters have highly stereotyped views about which side of politics is better at handling which of our problems. So it’s no surprise that the party of the bosses is seen as better at managing the economy, the budget and interest rates, whereas the party of the workers is regarded as better at industrial relations and anything that involves the government spending money.

These stereotypes aren’t necessarily right, but they’re deeply engrained in our thinking. What keeps politics interesting, however, is that voters’ list of our most pressing problems keeps changing with our circumstances. Sometimes Liberal strongpoints are at the top; sometimes Labor strongpoints.

The new problem for Scott Morrison is that though the Libs are seen as best at managing the economy and the budget, when the economy falls into to recession, voters’ focus shifts to the massive unemployment.

That’s a problem his opponents are regarded as better at – perhaps because we know fixing it involves spending shed-loads of money. The Libs are feeling terribly guilty about the $200 billion they’ve committed to spending so far, and are telling themselves they’ll be turning off the tap in September, come what may.

I’m sure you remember the shocking TV footage we saw some weeks back of long queues outside Centrelink offices. You’ve seen the movie; now read the stats. They arrived last Thursday. They showed what had happened in the jobs market just between mid-March and mid-April.

They were the most appalling news on jobs we've had since the Great Depression of the 1930s. Actually, they’re worse than then, in the sense that they happened in just a month (with some more bad months to come), whereas in the Depression it all took several years.

But the unique nature of this coronacession – where, acting under doctors’ orders, the government simply instructed non-essential businesses to close their doors – makes it much harder than usual to see what’s happening in what the media call “the jobs market” and the Australian Bureau of Statistics calls “the labour force”.

At present, a lot of the job loss remains hidden. Tracing what’s happening is like peeling an onion. Except that onions get smaller as you peel, whereas this problem gets bigger as you delve into the fine print. Much bigger.

How do we know how bad it was in the Depression? We know the rate of unemployment got to 20 per cent. By that measure, our problem is small. In April the number of people classed as unemployed by the bureau rose by about 100,000 to more than 800,000. Expressed as a proportion of the labour force (that is, everyone with a job or actively seeking one), the rate of unemployment rose just from 5.2 per cent to 6.2 per cent.

But don’t trust this. As most people know, the bureau’s definition of what it means to be unemployed is very narrow. You have to be actually looking for work and ready to take up any job you’re offered.

You get a better idea from the news that, of the 13 million Australians employed in March, 900,000 lost their jobs in April. However – and I know you’ll find this hard to believe – 300,000 people without jobs gained one during the month, so the net loss of jobs was almost 600,000.

But why, then, did unemployment rise by only 100,000 rather than 600,000? Because 500,000 people didn’t look for another job – understandable since so many employers were in lockdown – and so were classed as “not in the labour force”.

So that’s the first source of hidden joblessness. Most of those people will start looking for jobs as soon as it makes sense to, and then will be counted as unemployed.

The next source of hiddenness comes from the new and worthy JobKeeper wage subsidy scheme, intended to preserve the attachment between employers and their workers even though, during the lockdown, those employers don’t have much work needing to be done.

There are now more than 6 million workers on the JobKeeper allowance – that is, about half the entire workforce. Because they’re receiving a wage, they’re all counted as employed. Some are working pretty much as normal and some are working reduced hours, but many do no work at all.

It turns out that the best guide to what’s happening comes from the change in the total number of hours worked during the month. It’s fallen by an unprecedented 9.2 per cent, double the 4.6 per cent fall in the number of people employed.

The fall in hours is explained by people losing their jobs, people keeping their jobs but being given fewer hours to work, and people on JobKeeper working fewer hours – or none. This explains why, despite the limited rise in unemployment, the rate of underemployed workers (those working fewer hours than they want to) leapt from 8.8 per cent to 13.7 per cent.

All told, that means about 2.7 million people – almost one worker in five – either lost their job or lost hours during just a month. Gosh.

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