Australian economy will need up to $90bn extra after coronavirus shock, report says

Australian governments need to pour an extra $70bn to $90bn into stimulus and support measures to help the nation weather the biggest economic shock since the second world war, according to a new report.
Setting out a wide-ranging agenda for the next six months, the Grattan Institute argues governments need to phase out coronavirus-related emergency support measures more slowly than currently planned to avoid a “fiscal cliff” that could “put a handbrake on the recovery”.
It also calls on governments to roll out other forms of economic stimulus including extra rent assistance and childcare subsidies.
With Australia facing a “globally synchronised deep recession” triggered by Covid-19, the report notes federal, state and territory governments have already sought to cushion the impacts by spending more than $160bn to support households and businesses.
Many of these programs – including the jobkeeper wage subsidy and the increase to jobseeker allowance – are due to expire in or around September.
Australia’s economy is “fragile”, it warns, and an “abrupt withdrawal” of government support would threaten the recovery by leaving a “substantial hole in incomes for households and businesses”.
It suggests extending jobkeeper beyond September for a further three months for some industries still severely affected by government restrictions and expand its coverage to include temporary migrants, short-term casuals and university workers – partly funded by introducing a lower rate for part-time workers.
The report also calls for a further $21bn over the next two years for ongoing reforms such as permanent increases to the jobseeker unemployment payment of at least $100 per week, a 40% lift in commonwealth rent assistance, and more generous childcare subsidies.

And it warns that further temporary stimulus is needed if governments want to get unemployment back down to 5% or below by mid-2022. It suggests tipping another $20bn to $40bn into services, infrastructure and social housing construction.
These proposed measures add up to about $70bn to $90bn over the next two years but the report says now is not the time to “panic” about increasing government debt levels.
“Assuming interest rates remain low, governments should be in no rush to consolidate their budgets while economies remain weak in Australia and across the globe,” says the report titled The Recovery Book: What Australian governments should do now.
“Failing to provide this support will condemn many Australians to unemployment for longer. During the Great Depression, and in many advanced economies in the past decade, premature moves to austerity held back recoveries and, in some cases, created new recessions.”
Additional stimulus will need to be announced soon to support confidence in the coming months, the report says.
It says further support may be required if the economic outlook is worse than expected, especially in the event of a second wave of Covid-19 in Australia. While state governments should do what they can, the federal government will need to fund the lion’s share of any stimulus.
It also says the Reserve Bank should be prepared to use unconventional policy tools more aggressively – including reducing the overnight cash rate below zero.
The report also calls for tutoring and literacy and numeracy programs to be rolled out to help disadvantaged students who have suffered the most from disruptions to their normal schooling during the pandemic.
“It would cost about $1.25bn to help about one million disadvantaged students catch up over the next six months, while helping to stimulate the economy at the same time,” it says.
On energy policy, the report says governments should “ignore calls for stimulus spending for infrastructure that is inconsistent with a low-emissions future” and should consider a mandatory rollout of smart meters.
Noting that parliaments rose and decision-making was centralised at the height of the pandemic, the report calls on governments to act now to strengthen accountability and oversight – saying transparency is even more important in a time of crisis.
It says the national cabinet of federal and state and territory leaders should develop rules to provide transparency, while the creation of a national integrity commission “is now even more urgent, given that emergencies often provide cover for wrongdoing”.
The Grattan Institute’s recommendations on extending and refining jobkeeper follow a warning from the IMF that winding down wage subsidy schemes “should proceed gradually to avoid precipitating sudden income losses and bankruptcies just as the economy is beginning to regain its footing”.

Leave a Reply

Your email address will not be published. Required fields are marked *

*