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The calm before the recession

Sep 17, 2020 • 14m 37s

Australia’s economy has taken its biggest hit since the Great Depression, but so far government stimulus measures have cushioned most people and businesses from the worst impacts. Those stimulus measures are about to dry up. Today, the upcoming danger zone for Australia’s economy, and how we can avoid it.

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The calm before the recession

311 • Sep 17, 2020

The calm before the recession

[Theme music starts]

RUBY:

From Schwartz Media, I’m Ruby Jones. This is 7am.

Australia’s economy has taken its biggest hit since the great depression, but so far government stimulus measures have cushioned most people and businesses from the worst impacts.

However, those stimulus measures are about to dry up.

Today, chief executive of the Grattan Institute, Danielle Woods, on the upcoming danger zone for Australia’s economy, and how we can avoid it.

[Theme music ends]

RUBY:

Danielle, let's start with some of the predictions that are being made about the Australian economy. What's being forecasted?

DANIELLE:

So the latest numbers from the Reserve Bank suggest that we're in for a pretty bumpy ride for the next 18 months or so.

Archival Tape -- Unidentified Man #1:

Looking forward now, there is a high degree of uncertainty about the outlook, and our economic recovery depends on how successful we are in containing the virus.

DANIELLE:

They're forecasting that unemployment will actually rise from the level that it currently is, to hit 10 percent by the end of the year.

Archival Tape --Unidentified Man #1:

The recovery is also likely to be more drawn out than was initially expected, despite the downturn being less severe than expected.

DANIELLE:

And that we’ll still be around eight and a half percent by the end of next year.

Archival Tape --Unidentified Man #1:

“And if we take into account people who are on zero hours, the true unemployment rate is higher than the published measure.”

DANIELLE:

Under that state of the world, the economy won't be back to its pre-Covid levels even by the end of next year. So this has been a very substantial economic shock and it's one that the forecasters are suggesting that we could take a long time to recover from.

RUBY:

And are those sorts of forecasts inevitable, though?

DANIELLE:

No. They're not inevitable. When we look at the level of economic activity and we look at unemployment, there are things that the governments can choose to do to bring those down. So, big-picture stimulus spending can create economic activity in periods of low demand, as we're experiencing at the moment, and that can help create jobs and bring that unemployment rate down. So those are policy decisions, and that sort of long term high unemployment is not something that we have to live with.

RUBY:

Let's go into the Morrison government's fiscal response to the pandemic, the centrepiece of that being JobKeeper, which pays businesses to keep their workers. Do you think that will be looked upon favourably?

DANIELLE:

Look, I do think the emergency response was pretty effective. I do think the JobKeeper scheme was a game changer. It pumped a lot of liquidity into the economy - we're talking $100 billion over the life of the scheme. And really importantly, what it did was allow people to keep their connection with their employer. So even if, you know, businesses, restaurants or cafes or tourism businesses had to temporarily shut their door, it meant the worker was still receiving some income, that they had enough to get by and pay their bills. And it also meant that when the business was ready to reopen, that worker would still have a job and that business had an incentive to keep them on.

So it was a really important scheme. And I think that when we look back, we will look upon it favourably. Of course, it wasn't perfect, and there are a lot of things that people have pointed to around the exclusion of casuals and temporary workers. But overall, I think it has delivered on what it intended to do, which was keep economic activity moving and keep people in work.

RUBY:

And what about the actions of state governments and the Reserve Bank? Have those interventions helped?

DANIELLE:

Look, they've all contributed as well. So, I mean, the federal government has really done the heavy lifting - you know, they pumped about $128 billion into the economy, or 10 percent of GDP - but state governments have also run various support schemes, adding sort of another one to two percent of GDP in support. And the Reserve Bank has really been in there ensuring that liquidity keeps flowing. And they've been ensuring that governments and corporates can continue to borrow at very low rates.

RUBY:

And so all of these measures combined have kept the Australian economy afloat in this crisis, but have they also acted to camouflage the reality of the economic situation?

DANIELLE:

Very much so. So this was unprecedented in terms of the level of fiscal policy support. And it has meant that it's sort of masked the way in which a lot of us are feeling this recession. So people that have lost their jobs absolutely are feeling very acutely that we're in recession. But overall, the rate of business foreclosures, for example, is lower than it was last year.

There's been changes to insolvency laws, which meant that businesses could continue to trade when technically in the past they would have been insolvent. And that has meant that we just haven't seen the sort of widespread business foreclosures that you would normally see in a recession.

Similarly with households, household incomes overall have actually risen during this period - because of those significant government supports they’ve actually outweighed the loss of wage and salary income.
The challenge is when those supports start to be unwound - you know, they are there for that sort of emergency period, so inevitably they'll start to be wound down - those structural weaknesses in the economy are going to become more apparent.

RUBY:

We'll be back in a moment.

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RUBY:

Danielle, since March, there have been substantial economic support measures in place, but soon in a matter of weeks, that support will begin to be rolled back. So let's talk about that rollback and what the effect of it is likely to be.

DANIELLE:

So really, the sort of the danger zone is that end of October period where JobSeeker and JobKeeper start to come off. I mean, it's certainly good that the government's decided to transition them off rather than do a hard turn off of the tap. But the fiscal cliff, if you like, is still there. We're still going from a world where the federal government's pumping about $16 billion a month on average into the economy, to a world where it's putting only about $6 billion a month in there.

So we will feel that. It will leave a substantial hole in incomes for businesses. Incomes for households and the economy as a whole. So, you know that that is the period where those sort of risks around business defaults, mortgage-holder defaults, I think will really come to the fore.

And we've seen some survey data from the Australian Bureau of Statistics suggesting that about 10 percent of small businesses and six percent of medium businesses do expect to close their doors when those support measures are no longer available. And I've certainly talked to a couple of insolvency practitioners and they're expecting a very big year in 2021. So again, you know, those structural weaknesses that are there because of just the huge scale of this economic shock are really going to come to the fore over the next 12 months or so.

RUBY:

What options does the federal government have at its disposal to mitigate some of this? What sorts of measures could help?

DANIELLE:

Well, this is the positive news, if you like; is that there are absolutely things that the federal government can do about this. So we estimate that if they were to roll out substantial government stimulus, something in the vicinity of $100 to $120 billion dollars, they would be able to bring down the rate of unemployment to something closer to the natural rate, about four to five per cent over the next 18 months. You know, that really matters because we know that unemployment exacts such a high cost on individuals, particularly if they're unemployed for an extended period of time. It can scar them, not just during the period, but two years, five years, ten years down the track.

So the sort of stimulus that we're talking about, there are things like shovel-ready infrastructure projects - so things like social housing are really at the top of so many people's lists, because it creates jobs, it creates activity, and you're delivering something that we desperately need as a society. But I think, you know, we can't just think of construction when we look at the ways in which government can stimulate - we need to be thinking more broadly, given that we know services sectors have taken a big hit here. We know that women and young people have been hit disproportionately.

So I think increased government spending on areas of social needs that have emerged during Covid: things like mental health or aged care. We've talked about a programme of intensive tutoring to help disadvantaged students catch up on lost learning during the pandemic. All of those are ways to inject money into the economy, but again, deliver on something of social need. So I would like to see us, you know, looking at those types of options for stimulus as well.

RUBY:

So far, the government hasn't thrown its support behind those kinds of measures, but they have signalled personal income tax cuts as one potential ongoing solution. How effective is that likely to be?

DANIELLE:

So we know they've already legislated two sets of tax cuts that we call stage two and stage three cuts.

Archival Tape -- Unidentified Woman #1:

“Income tax cuts are in the mix as the Treasurer tries to find a way to revive our recession-hit economy…”

DANIELLE:

It is not the sort of best stimulus, and I'd say that for a few reasons.

Archival Tape -- Unidentified Man #1:

“The government is considering bringing forward the last two stages of its $158 billion dollars in personal income tax cuts…”

DANIELLE:

First of all, even if they're bringing them forward, they're unlikely to be rolled out until the middle of next year, so it's not putting cash into the economy in that danger zone period that I'm talking about beyond October. Second of all, particularly the stage three cuts are very much skewed to high income earners, so about two thirds of the total value of those tax cuts goes to the top 20 percent of earners.

And what we know about that group is that they have been saving a lot during this pandemic. So some tax cuts are always lost to savings, but what we are seeing now is actually the highest savings rate in this country since 1974. And the people that are saving are those that have kept their jobs, kept their incomes up, but are feeling uncertain about the future of the world.

RUBY:

Danielle, when you look at this pandemic and the federal response to it, you could say that we're sort of entering a second phase now. We've had the short term economic measures, but now it's time to look at the longer term picture. How worried are you about Australia's economic recovery?

DANIELLE:

I am worried and I'm worried one, obviously, this is a very significant economic shock and as many have said, the biggest since the Great Depression. But I'm particularly worried that we may see some reluctance creep in to take the steps that need to take that effectively with the government's sort of pull back before the job is done. And I think we're already hearing a little bit about that in the sort of discussion of how big the deficit is going to be and, you know, are we taking on too much debt?

What I would say is this is not the time for us to be panicking about debt. When you have an economic shock of this scale, you want the government to be using their balance sheet to spread the cost over time and to act as an insurer so that, you know, certain groups aren’t disproportionately hit. But that case is even stronger in the current world when interest rates are at record lows. You know, the government can borrow for 10 years, 30 years, below the expected rate of inflation - effectively, people are paying the government to hold their money.

So, you know, this is an investment in Australia's recovery and Australia's future. We can do it. But my concern is that we may back out too early before the job's done.

RUBY:

Danielle, thanks so much for your time today.

DANIELLE:

Thanks for having me, Ruby.

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[Theme music starts]

RUBY:

Also in the news today…

The Victorian government has introduced a new fine of just under $5,000 dollars for people living in Melbourne who are caught travelling into regional Victoria.

The new offence is aimed at deterring residents still in stage four lockdown as restrictions lift in regional areas and families prepare for school holidays.

And the Australian National University and the University of NSW are the latest higher education institutions to announce they are firing hundreds of staff this year.

The National Tertiary Education Union said job cuts in Australian universities now totalled well over 11,000, without taking into account several thousand casual and fixed-term staff who haven’t been re-employed.

I’m Ruby Jones, this is 7am. See ya tomorrow.

[Theme music ends]

Australia’s economy has taken its biggest hit since the Great Depression, but so far government stimulus measures have cushioned most people and businesses from the worst impacts. Those stimulus measures are about to dry up. Today, the upcoming danger zone for Australia’s economy, and how we can avoid it.

Guest: CEO of the Grattan Institute Danielle Woods.

Background reading:

The way out of the Covid-19 recession in The Saturday Paper

Listen and subscribe in your favourite podcast app (it's free).

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7am is a daily show from The Monthly and The Saturday Paper. It’s produced by Ruby Schwartz, Atticus Bastow, and Michelle Macklem.

Elle Marsh is our features and field producer, in a position supported by the Judith Neilson Institute for Journalism and Ideas.

Brian Campeau mixes the show. Our editor is Osman Faruqi. Erik Jensen is our editor-in-chief. Our theme music is by Ned Beckley and Josh Hogan of Envelope Audio.

New episodes of 7am are released every weekday morning. Subscribe in your favourite podcast app, to make sure you don’t miss out.

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auspol covid19 coronavirus economy recession stimulus




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311: The calm before the recession