Posted: 16 Mar. 2020 5 min. read

How big is the stimulus bang?

The defence against a downturn in the time of Covid-19

This opinion piece, from Kristian Kolding, first appeared in the Australian Financial Review, 12 Mar. 2020.

The Federal Government just threw $18 billion dollars at the Australian economy between now and mid-2021 – of which a striking $11 billion will be in the pockets of the punters and of businesses in the next three months alone.

And the Reserve Bank has already cut interest rates, with a further cut in the offing when they meet again in early April.

That’s big bucks. But just how much help does that combination deliver to the Australian economy?

Deloitte has modelled the key elements of the government’s package plus RBA cuts to shed some light on the defences that are in place.

And the results are pretty encouraging: the combination of lower interest rates, higher government spending and increased welfare benefits is set to throw a significant shield around both jobs and retail spending in Australia.

This is a defence against a downturn. But if the Feds and the Reserve had failed to act, then Australia would have had 160,000 more jobs at risk in the next handful of months.

That’s the biggest dividend right there. The lessons learnt from past downturns in Australia and elsewhere are almost unanimous in stressing the need to keep people in jobs. What’s been announced looks set to do that in spades, keeping many more Australians in jobs than would otherwise have been the case.

At the same time the support coming from fiscal and monetary policy will add $9.6 billion to consumer spending between now and the end of 2021, of which some $4 billion will flow through the tills of Australian retailers ($1.3 billion in the next three months alone).

Again, that’s good news. There are cash payments about to line the pockets of the poorest Australians, and they are the ones most likely to spend any extra bucks. Even better, regional Australia has more beneficiaries than the average, and it is regional Australia that has the most to lose from some of the developments of the moment (such as the hit to the tourism sector).

Our results seem to line up with the official thinking. The Treasurer has noted Treasury estimates that this will deliver support to the June quarter national accounts of 1½% of national income. Our own result is much the same, at 1.4%.

And the support flowing into the Australian economy is substantial. Our results indicate that national income will be some $24 billion greater between now and late 2021 than it would otherwise have been if the government and the Reserve hadn’t acted.

This isn’t a done deal. But it is a lot of defence against this downturn. So we’re now fighting fire with fire. And that’s a good thing.

And there are also a bunch of things we haven’t considered in our modelling that would help in fighting the downturn. These include the impact of the lower Australian dollar, the fall in long term interest rates and a fall in petrol prices at the pump (the cheapest we have seen in a while) as oil prices fall. All these would certainly help in the fight against the downturn as well.

And there’s one last thing to note. Compared to the rest of the world, Australia just threw the kitchen sink at the economic damage flowing from the coronavirus. The government has just announced stimulus here that is the equivalent of A$916 for every man, woman and child in this nation. Hard hit Italy’s matching budgetary stimulus weighs in at just A$720 per person. And the US Congress, struggling under the weight of an enormous deficit, is likely to pare back the A$234 per person that President Trump has just proposed.

Those figures point to a simple conclusion:  you’d rather be us.

More about the author

Kristian Kolding

Kristian Kolding

Partner, Deloitte Access Economics

Kristian leads the Macroeconomic Forecasting and Policy team in Sydney and Deloitte Horizon nationally. He specialises in the application of macroeconomic analysis and forecasts to inform policy decisions, corporate strategy, transaction due diligence and stress testing. Kristian was responsible for Deloitte Access Economics' macroeconomic forecast model for a number of years providing him with an integral knowledge of macroeconomic relationships, the practical nature of forecasting and the effect of policy changes on the economy. Kristian has also co-authored a number of editions of Deloitte’s primary thought leadership publication ‘Building the Lucky Country’. He has since presented and facilitated discussions about future economic developments for numerous audiences including Australia’s premier Directors, CEOs, CFOs and senior public servants.