A cold turkey ending to JobKeeper and JobSeeker would mean a double recession. But that is a risk that the government can avoid.
As Australia endures its deepest recession since the Great Depression the key questions troubling policy makers are how long it will last and what shape the recovery will take. We are in danger of experiencing a W-shaped recovery involving a double-dip recession.
Economic models are constructed, by assumption, to forecast a V-shaped recovery – a bounce back soon after the bottom is reached. Other economists worry about a U-shaped recovery, as the economy bumps along the bottom before eventually taking off again. Pessimists contemplate an L shape: down and out indefinitely. New York University Professor Nouriel Roubini, who predicted the Global Financial Crisis, fears an I-shaped trajectory for the US to a “Greater Depression.” But nobody talks about a W-shaped recovery which, the way the economy and public policy are playing out, looks the most likely of all at this stage.
If, as legislated, the JobKeeper payment is stopped in late-September and the JobSeeker payment is halved to the pre-existing level of Newstart, the economy and the labour market will receive a further blow just as they begin emerging from the COVID-19 crisis. Under a fairly optimistic scenario, the Reserve Bank forecasts an unemployment rate of 9 per cent in late-2020, down slightly from a peak of 10 per cent.
However, the 5.5 million workers receiving JobKeeper are not counted as unemployed, although many of them have been stood down. When JobKeeper is terminated, those workers who are not kept on by their employers will show up in the statistics somewhere.
In the most recent labour market figures, a spectacular fall in the labour force participation rate limited the increase in the unemployment rate. After all, who would realistically have expected to a find a new job when much of the economy was in lockdown?
This could happen again if hundreds of thousands of Australian workers are sacked upon the termination of JobKeeper. The precipitate fall in employment would not be fully matched by a corresponding rise in the number of unemployed as discouraged workers dropped out of the labour market altogether. But limiting the unemployment rate to 10 per cent through a further slump in the participation rate would not change the massive scale of human misery and suffering.
Clearly the Federal Government is worried about the size of the deficits and debt being accumulated during the crisis. In Treasurer Frydenberg’s parliamentary statement last week, he said: “Australians know there is no money tree. Temporary and targeted, the new spending measures were not designed to go forever…”
Cold turkey withdrawal of JobKeeper and JobSeeker would make a W-shaped economy a reality. No recession in 28 years followed by two recessions in two years is a scenario worth avoiding.
The Federal Government should retain the JobKeeper program beyond September 2020 while possibly adjusting eligibility and the rate of payment, while maintaining the JobSeeker payment on an ongoing basis at a level significantly greater than the pre-existing rate of Newstart.
Yes, this would mean ongoing deficits and rising debt. But as long as the economy grows after the recession on a sustainable basis, at a rate that exceeds the interest rate on government bonds, we will have the capacity to repay the debt.
And if the Reserve Bank retained indefinitely its holdings of its large, recent bond purchases from its foray into unconventional monetary policy, there would be no contractionary effect. And since the Reserve Bank would return the profit from interest income on its bond holdings as dividends to the Treasury, there would be no net cost to the Commonwealth from funding this debt.
In more normal circumstances the main risk associated with these sorts of strategies that effectively combine fiscal and monetary policy is inflation. But for several years the global economy has been operating in a deflationary world of secular stagnation.
Australia has a fully independent central bank. Its twin tasks are to keep unemployment low and inflation in the 2-3 per cent range. Neither has been achieved in recent years, but it has committed to do better in the wake of the crisis, by holding rates close to zero out to three years until full employment and inflation in the target range return.
If, through the deployment of unconventional monetary policy and an expansionary fiscal policy, the Reserve Bank assessed there was a risk of inflation significantly exceeding the 3 per cent upper bound, it could cease unconventional monetary policy and apply monetary brakes, such as through APRA increasing banks’ minimum capital adequacy ratios.
Even the most-worthy microeconomic reform program will not magically put the economy onto a strong growth and job-creating path in the next year or two. Like any investment it would take time to yield its gains. The creation of the National Cabinet as an ongoing standing leaders’ meeting of the Council of Australian Governments provides an opportunity for a new, cooperative forum to work towards a seamless national economy. It could commission a stocktake of the 27 deregulation initiatives I oversaw as minister for deregulation a decade ago and, with Minister Assisting the Prime Minister, Ben Morton, agree a new agenda for a new decade.
Meanwhile, Australia desperately needs a new burst of productivity-raising investment. Temporary investment allowances are half hearted in these dire circumstances. A cash flow tax https://www.afr.com/politics/tax-cash-flow-instead-of-profit-say-economists-20181209-h18wjs would provide immediate expensing of investment on a permanent basis, materially increasing the after-tax returns on investment. It would also accelerate the transition to renewable energy, giving Australia the opportunity to become a renewable energy exporter and a mineral processing powerhouse. Now is the perfect time to introduce it.
Craig Emerson is managing director of Craig Emerson Economics, 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.