Give the economy time before waking it from hibernation

Give the economy time before waking it from hibernation

In a show of fiscal virtue, Mr Morrison on Thursday said he wanted a “snap back” in spending at some point. His choice of words is open to interpretation but a gradual winding down of emergency measures is the best approach.

Economic support should be reduced steadily as the economy recovers, but only once the surge in unemployment starts to subside. Rather than slashing all emergency benefits, the government should make them incrementally less generous and harder to get.

The speed with which Australia can return to fiscal normality will depend partly on our success in containing the virus.

After the meeting of the national cabinet on Friday, Mr Morrison noted new infections are back to the same level as two weeks ago. The “trajectory is promising,” he said. He then hinted that over the next six months Australia could start relaxing some of the extreme social distancing measures.

That is good news but economic recovery will take a long time. It could be a year or more before all of the restrictions are rescinded. At that point the global economy will still be deeply challenged. Some industries such as international tourism and education might take years to recover properly.

In all likelihood the budget will remain in deficit for years, causing heartburn to free market purists inside the Coalition who worry the government’s embrace of Keynesianism has gone too far.

Yet just as the warnings that the stimulus package during the global financial crisis would cause “a debt and deficit disaster” were exaggerated, it is important to put Australia’s situation in context and realise that Australia has financial room to move even now.

Thanks to the tight budgeting of the past five years by the Coalition, debt was low compared to most countries before the crisis. For example, current Australia’s government net debt as a share of the economy is only about a quarter the size of government debt in the US.

Thanks to this buffer, Australia is not in immediate danger of losing its AAA rating and our credit is still seen as one of the safest bets on global financial markets.

Gradually winding back the temporary stimulus should be enough to reassure markets but Australia will have to take some fundamental decisions about whether to make any part of the enormous expansion in the welfare state over the past four weeks permanent.

On the one hand, conservatives are right that excessive welfare can undermine economic flexibility and reduce the incentives to find work. But on the other hand, it will be politically difficult for Mr Morrison to cut back on things such as free childcare that are popular with aspirational voters.

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He could also struggle to reverse the rise in the Newstart allowance, which even some business groups have said was too low.

Mr Morrison may also have to go against all his political instincts by raising taxes to help fill the gap in the budget. Even fund manager Geoff Wilson, who led a campaign at the last election fighting the Opposition’s plan to slash franking credits, now says that should be on the table. Mr Morrison may even have to reconsider the big tax cuts for high-income earners due to take effect from 2023.

The federal government has barely had time to catch its breath in the past month and until the immediate pandemic crisis has eased, these debates are largely academic. Perhaps, however, by the time Treasurer Josh Frydenberg hands down his delayed budget in October he will be in a position to sketch out the broad brushstrokes of a plan for the years ahead.

Herald editor Lisa Davies writes a weekly newsletter exclusively for subscribers. To have it delivered to your inbox, please sign up here.

Since the Herald was first published in 1831, the editorial team has believed it important to express a considered view on the issues of the day for readers, always putting the public interest first. Elsewhere, we strive to cover a diversity of views without endorsing any of them.

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