Liberals fear a backlash from their supporters over the government’s profligacy. But turning off support is the last thing the economy needs.
A technical recession averted, at least for the time being, the task now confronting Treasurer Frydenberg is to inject some life into a busted economy and work out how to pay for it.
In the early months of the pandemic last year, I argued that the challenge for the government was to keep businesses connected to the economy and employees connected to their businesses https://www.afr.com/policy/economy/stimulus-package-will-keep-bosses-and-workers-together-20200323-p54cwm
Those connections were largely maintained back then but are now being broken under the sustained pressure of the Delta variant on an under-vaccinated population.
Business organisations want the economy opened up. Yet five state and territory economies are already open – just not to the big ones of NSW and Victoria. And one of the three big eastern state economies with heavy restrictions –Queensland – doesn’t look like lifting them on travel from Victoria and NSW while daily infections in NSW surge past the 1500 mark and Victoria’s numbers continue to rise because of an outbreak wreaked on it by the failure of the NSW government to lock down early and hard when Delta arrived.
When Attorney-General Michaelia Cash pressured Western Australia to open up, Premier Mark McGowan pushed back, pointing out that his constituents don’t want him to “deliberately infect the public of Western Australia.”
Prime Minister Morrison urged people to come out of their caves, to the puzzlement of residents of Western Australia, the Northern Territory, Queensland, South Australia and Tasmania, who are living under very few restrictions to their daily lives and want to keep it that way.
Since the leaders of these states and territories are accountable to their voters and not to those of high-infection jurisdictions, they simply will not open their borders to those jurisdictions before they consider it safe to do so.
In these circumstances the national economy will remain crippled beyond the September quarter.
But the September quarter will be so bad that the December quarter – while also bad – will look better than its predecessor quarter. Ironically, the worse the September quarter gets the more likely the December quarter’s GDP figure will be positive, even if it is well down on the corresponding period of last year.
These sombre economic realities will be fed into the Prime Minister’s assessment of the best time for the next election due by May 2022.
Sir Humphrey Appleby would describe as “courageous” the calling of a federal election this year. In the absence of such courage, or madness, two windows remain open next year: March and May.
A March election would avert the need to bring down a federal budget with a terrible set of numbers. But the deep and continuing budget deficits will be revealed anyway – in the mid-year fiscal update that will likely be released late this year.
And for good measure, the economic and fiscal estimates and projections will be updated in the Pre-election Economic and Fiscal Outlook (PEFO) that must be released within 10 days of the issuing of the writs for a general election.
Importantly, PEFO is prepared not by the government of the day, since it is in caretaker mode at the time, but by Treasury and the Department of Finance.
Even if the election were held in May, after a federal budget brought forward to April, as happened at the last election, the very fact that PEFO would be released within weeks would put a brake on overly optimistic government budget projections.
Whenever the election is held, the budget bottom line will look horribly sick. Budget deficits will exceed $100 billion per annum and gross government debt, already projected to reach $1,200 billion by mid-decade, will be even larger.
These harsh fiscal realities will ignite a debate within the Liberal party room about winding back any remaining fiscal support lest the Liberals are accused by their voters of fiscal profligacy.
This will be more a political debate than a sound economic one.
As argued in my forthcoming report on the correct macroeconomic policy for Australia, putting the government deeper into debt during a pandemic need not imperil the economy or revive the inflation dragon.
Much of the extra debt can be financed through further quantitative easing (QE), where the Reserve Bank continues to buy Treasury bonds from commercial banks that have bought them from treasury.
It has been presumed that QE would awaken the inflation dragon, but this has not happened, at least so far. The main reason is that, instead of going into financing increased transactions in the economy, the commercial banks that have sold the government bonds to the Reserve Bank have deposited most of the money they received into their accounts at the Reserve Bank.
Getting out of QE might be harder than getting into it and QE has its own side effects: pumping up property and company share prices.
There is a better way, as outlined in my forthcoming paper, and it is not Modern Monetary Theory. I would call it the Third Way, but Tony Blair grabbed that title when mimicking the policies of the Hawke-Keating era.
The bottom line is that further federal fiscal support will be needed to keep businesses connected to the economy and employees connected to their businesses and this shouldn’t be withheld for ideological reasons.
Craig Emerson is director of the APEC Study Centre at RMIT University, a distinguished fellow at the ANU and adjunct professor at Victoria University’s College of Business. He is chair of the McKell Institute.