During the global financial crisis of 2008 the Rudd government feared a run on the banks. The recent run on loo paper, which seems far more innocuous, could actually signal a looming economic crisis of similar magnitude. When shoppers in some of Australia’s wealthiest suburbs are panicked into cleaning out the toilet paper shelves of local supermarkets you know there’s a big economic problem. Not from running out of toilet paper but because these shoppers are overwhelmingly university-educated professionals and self-funded retirees. Yet they foresee the need to isolate their families to protect them from coronavirus.
If clever people are fearful of running out of loo paper, they won’t contemplate congregating in public places such as sporting and entertainment events or even at restaurants. The losses in these labour-intensive industries are on top of the direct hit to tourism and universities from the Morrison government’s understandable decision to impose travel bans on China and a widening range of trading partners.
Unlike countries in the northern hemisphere, as the coronavirus spreads in Australia it will collide with the coming flu season. Australians contracting the flu will worry they have coronavirus. The perceived threat of coronavirus is likely to have more severe health and economic impacts than the virus itself. In finalising its economic stimulus package the government should assume that Australia is facing its first recession in 28 years.
Like typical coronavirus sufferers the economy is already enfeebled. It has endured years of sub-trend economic growth and productivity growth that since the turn of the century has been well below its long-term average and for the last three years mostly negligible and sometimes negative.
The bushfires continued to wreak social, environmental and economic havoc beyond Christmas and into the early months of 2020. Add to this hit to the March quarter’s GDP the impact of travel bans from China – Australia’s biggest source of tourists and university students – and it’s likely this quarter’s GDP will be negative. That would be only the fourth negative quarter since the last Australian recession in 1991. One more of them in the June quarter and Australia would officially be in recession.
The Morrison government seems resigned to breaking its promise to return the budget to surplus this financial year but is equally determined to deliver a surplus next year. If a return to surplus in 2020-21 is the government’s self-imposed key performance indicator, it is more likely to preside over a recession. By the time the government gets the imminent fiscal stimulus out the door, most of its impact on the budget bottom line will show up next financial year, not this one.
A mooted temporary investment allowance for small business, similar to the one introduced by the Rudd government in the aftermath of the global financial crisis, could lift small business investment. That’s what the Reserve Bank https://www.rba.gov.au/publications/rdp/2018/pdf/rdp2018-07.pdf found of the Rudd allowance. However, most of the allowance would be claimed next financial year, affecting the budget bottom line then and not now.
More broadly, company tax revenue will be affected by the carry-forward of tax losses incurred this financial year in badly affected industries. That’s what happened for several years following the global financial crisis: Treasury repeatedly underestimated the accumulated tax losses that were carried forward into successive financial years.
Treasury knows all this and will provide that information to the government. If the government insists on fiscal tightening in 2020-21 to deliver a surplus it will, instead, deliver a recession. The Morrison government will be obliged to assess the political cost of failing to deliver a surplus this year and next against the cost of presiding over Australia’s first recession in almost three decades.
Cash payments to households are a more timely and effective stimulus than tax breaks but the Morrison government’s strident criticism of Labor’s recession-averting stimulus package, when it accepted Treasury’s advice to go hard, go early, go households, would appear to rule them out.
Wage subsidies for workers in small businesses could help maintain employment. GST relief in quarterly business activity statements would assist small business cash flow, helping otherwise viable businesses to keep their doors open, but the states, as recipients of the GST revenue, should not be obliged to bear this cost.
A step-up in public housing investment and maintenance would meet a vital social need while generating jobs not only in housing construction but in the flagging retail sector as contents such as carpets, whitegoods and home electronics are purchased.
As for economic reform to revive productivity growth and improve living standards – which, to be successful, involves fiscally compensating losers – it will have to wait. There will be no fiscal room for compensation in the foreseeable future and the Morrison government will not be able to claim a mandate for its reform agenda since it did not present one to the Australian people at the last election.
Craig Emerson is managing director of Craig Emerson Economics. He is a Distinguished Fellow at the ANU, Director of the APEC Study Centre at RMIT and an Adjunct Professor at Victoria University’s College of Business. He was Minister for Small Business in the Rudd government at the time of the global financial crisis.