This is not a spending spree - this is about our survival - COVID-19 blog | Deloitte Australia has been saved
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Let there be no mistake about the facts of our situation. Australia is in the middle of a public health pandemic and, arguably, the deepest recession since the Great Depression.
Such a predicament necessitates unconventional measures - from physical distancing and lockdowns to massive increases in government expenditure, bailouts and possibly nationalisation.
In normal downturns, a sharp drop in demand is usually the culprit. And the response is to give people money to spend and revive the economy. Today, though, in this crisis, we want people to stay home to drive infection rates down, not go out and spend.
This is the economic and health conundrum we face.
Some question the response as some backdoor means to the rise of the big state. The truth is that this is not an ideologically driven spending spree for the sake of it; it is about survival.
A pandemic is not a bad flu. It has geometric properties which means it spreads like wildfire; its potency is much worse than the flu - just ask Professor Peter Doherty, Australia's Nobel Laureate who knows this best. A pandemic needs a hard response, early. And the state imposed lockdowns are a response to the public health nature of the problem. To solely leave it all up to individuals of their own accord would be to misunderstand the nature of a pandemic and to diminish the nature of public health. Such arguments give succour to antivaxers and the like who also diminish the notion of public health. A pandemic doesn't care what you believe.
At the beginning of last week, we observed that in the previous week, around a million Australians lost their jobs. In the US, around 10 million filed new claims for unemployment insurance.
Before the Australian government's $130bn JobKeeper package, we observed that Australia's unemployment rate had skyrocketed to around 12 per cent. By any measure, the economy was on its knees. Government actions will now cushion this impact somewhat.
And when it's about survival, it's not a debate about the big spending, high taxing state, it is about what works for survival.
With rapidly rising unemployment and already such low interest rates, Australia is heading for a situation economists call a liquidity trap. In such a world, monetary policy is not as potent as it otherwise would be. But fiscal policy - budget policy - can wield enormous power.
Hence, the federal government, along with state and territory governments, has abandoned triumphalist statements about surpluses and mobilised to provide loans, income supports, wage subsidies, rental relief, free childcare, and probably even some form of nationalisation.
So, if you want to know why governments, of all political persuasions have gone down this route, it is because survival demands this.
This is not about fiscal stimulus as we generally know it - that policy focus for recovery will come.
Indeed, it is stimulus we can take ideological positions over. We can debate endlessly about crowding out about the nature of “big” versus “small” government. But not when it is about survival.
Sure, some of the money will miss the mark. Sure, some people will rort the system, but without this scale and speed of response, the economic and psychological damage to Australians and Australia would be unfathomable.
In just four weeks, the federal government has announced spending of $17bn on 12 March, $66bn on 22 March, and $130bn on 30 March. That's $213bn to be spent in just 18 months.
Deloitte Access Economics chief economist Chris Richardson has put to bed the fears some have raised as to whether we can afford this or not. As Richardson notes: (1) interest rates have never been this low, so governments can borrow and interest costs are low; (2) paying for survival is not that different to how we have paid for wars before - it just takes time and a growing economy reduces the share of this debt over time; and (3) the benefits of surviving and then growing, preserving jobs, not letting them fall on the scrapheap, outweigh the costs for those individuals and the economy.
This is the real story. Our ammunition to fight this is a strong public health response and good, sound fiscal policy. We need to understand the problem we face and the commensurate response needed.
Yes, shutdowns cause widespread economic harm. But so does mass illness.
Economies can recover; the dead can't.
First published in The Australian, Monday 6th April 2020.
Claire is a Partner in Deloitte Access Economics’ economic analysis and public policy team with expertise in microeconomic analysis, economic scenario modelling and public policy reform agendas. Prior to joining Deloitte, Claire worked in the Queensland public sector focusing on economic and fiscal policy development. Claire is passionate about using economics to answer how structural change impacts society – leading projects across governments, the private sector and Australia’s major institutions. Claire’s body of research and analysis for clients focuses on economic transition, disruption to industry and the policy settings that minimise downside risks, while catalysing long-term economic gains.
Pradeep is the Lead Partner for Deloitte Access Economics. He has had a long and successful career in public policy, with deep expertise in economics and proven leadership experience. Pradeep has been a senior bureaucrat, working at the highest levels of public policy, across three jurisdictions in Australia. Pradeep’s experience includes: Director of Policy in the Prime Minister’s office, Secretary of the Department of Health and Human Services in Victoria, CEO of LaunchVic – a company established by the Victorian Government to promote start-ups and entrepreneurship – and Associate Director General of the Department of Premier and Cabinet in Queensland. He holds a PhD in Economics and Bachelor of Economics (Hons) from the University of Queensland.