Let’s look at a really simple question: does the Federal Budget solve Australia’s economic problems?
The answer is that it goes some way to lifting Australia out of the coronavirus recession, but there’s a major roadblock in the way.
Let me explain.
The recession we didn’t ask for
There’s one thing we’re missing in this recession: memories of good times.
That may sound like a strange this to say, but it’s all too true. You see recessions are all about receding. It’s all about coming back to where you began or withdrawing.
During boom times the economy builds up excess, and that needs to be unwound. While the economy is unwinding now, we didn’t get to experience the build up to that.
It’s a different kind of recession caused by what economists call an “exogenous” shock – a hit to the economy from outside the system.
The bummer about an exogenous shock is that it doesn’t necessarily follow a boom, but the upside is that once the shock has passed it’s simply a matter kick-starting the economy back into gear.
The government fires up the economy
Economic growth comes from spending – spending by the consumers and businesses.
The problem we have now is that businesses aren’t confident their investments will bear any fruit (given the outlook for demand as restrictions remain in place), and consumers are still worried enough about holding onto their jobs that their purse strings are rather tight.
We know that because savings rates have risen dramatically.
That leaves the government and good ol’ Keynesian economic theory.
That is, before the pandemic hit, the Budget was basically balanced. While not in surplus, this still puts policy makers in an ideal position to offer up big spending plans to rescue the economy.
And it’s going big. The spending initiatives will put the Budget in the red to the tune of $213 billion.
Overall, economic support will reach over $600 billion, and move towards a $1 trillion in net debt by the middle of the decade.
Government’s looking to business to get things moving
Specifically, I can, thanks to AMP Capital’s Shane Oliver, tally the government’s initiatives below:
- Instant expensing for tax purposes for any investment undertaken by businesses with turnover up to $5 billion until 30 June 2022 and the ability to offset losses against previous profits to generate a tax refund;
- A reinstatement of R&D tax breaks;
- A new JobMaker wage subsidy tied to employing young people to partly replace JobKeeper;
- $1.2 billion to subsidise 100,000 new apprentices;
- An extra $3 billion in infrastructure spending to state governments on a “use it or lose it” basis;
- More support for housing with an expansion of the First Home Loan Deposit scheme; and
- $1.3 billion in initial funding to help encourage manufacturing.
There are also, of course, tax breaks for workers. Workers will soon benefit from the Low and Middle Income Tax Offset as well as the Low Income Tax Offset.
Will government help work?
The answer to that is, of course, yes.
Will it go far enough?
The answer to that is we just simply don’t know.
All relies on a coronavirus vaccine
Here’s the nub of the problem.
We’re in this predicament because of the coronavirus pandemic. The past few weeks and months have taught us that it simply doesn’t matter how low case numbers get, until there’s a widely distributed vaccine, the risk of restrictions, lock downs and heavy social distancing measures remains.
This is negative for both consumer and business confidence.
In the Budget papers the government revealed that it’s assuming a vaccine will be widely available to the Australian public by the end of next year.
So, yes, you guessed it. $213 billion deficit, unemployment peaking at 8 per cent, and a trillion dollars in debt, and that’s with a vaccine by the end of next year.
If a vaccine isn’t developed by then, the problems will simply remain and Australia will remain at risk of slipping back into recession depending on how much the virus spreads.
Repaying the debt
Repaying the trillion dollars in debt won’t bring about the end of the world because interest rates are so low.
The ANZ’s David Plank knows a thing or two about bonds, credit, interest rates and debt.
He basically says interest rates would have to rise dramatically for it to even start to be a problem.
The government’s basically lucky this time around that the accumulation of debt shouldn’t get out of hand, in terms of repaying it.
So, for now, it’s still about defending the economy against coronavirus, and we’re well-placed to do that.
The bottom line
The next phase is recovery.
The government has handed the economic recovery batten to businesses and households in this Budget.
If they can take it and run with it, the economy will be in great shape to rebound and grow strongly post the pandemic.
In the meantime, there remains an uncomfortable question: why spend government help, as well as wage and income support, when you don’t know what the future holds?
It’s an economic dilemma everyone will be wresting with until this virus threat, as we know it now, passes.
The Opposition will have a chance to address this big problem tonight in the budget reply speech.