Beijing fallout riskier than coronavirus, says Lowy Institute

Deteriorating relations with China could do more damage to Australia than COVID-19, it has been claimed.

Senior fellow at the Lowy Institute John Edwards.

Deteriorating relations with China could do more damage to Australia than COVID-19, it has been claimed, and a government “pact” with the Reserve Bank is needed to create money to fund budget deficits.

In a Lowy Institute research paper ­released on Thursday, John Edwards, a former adviser to Paul Keating when prime minister, said the government’s response to the crisis had been “swift, well targeted and substantial”, but singled out the vulnerability of economic recovery to Australia’s relations with China.

“Discord could have a far greater impact on Australian ­security and prosperity than COVID-19,” he said following China’s threat this week to block up to $6bn of Australian wine imports.

“Even without the worsening of Australia-China relations, the larger trade and technology ­altercation between America and China threatens the global openness of trade and investment upon which Australia’s prosperity depends.”

He also urged the government to extend its signature wage-subsidy program, estimated to cost about $86bn by the time it winds down next year, ­beyond March.

“If the JobKeeper program is not extended again … government spending will drop ­abruptly by something over 5 per cent of GDP in 2021 … this is not a serious policy option,” he said.

Dr Edwards, who was a member of the Reserve Bank board until 2016, said the pandemic would wipe $160bn from nat­ional income, add about $500bn to government debt by 2030, and see the ranks of the unemployed reach 1.3 million.

“Stubbornly high unemployment”, he said, would be a central issue at the next federal election expected in 2022 — “the first time unemployment will play such a pivotal role in an Australian election in over a quarter-century”.

Treasury secretary Steven Kennedy expects the jobless rate, predicted to peak at about 10 per cent later this year, to ­remain above 6 per cent for six years, The Australian revealed last week.

Dr Edwards said the RBA, which has bought more than $57bn in state and federal government bonds with newly created money since March, should make a “pact” to “buy half of ­additional government debt” as long as the government aimed to return to a budget surplus within a decade. “The Reserve Bank’s role … has changed radically”, he said, suggesting the central bank would need to keep interest rates low “for a very long time” otherwise the exchange rate would soar.

Now a senior fellow at the Lowy Institute, Dr Edwards said the surge in net debt, which is expected to increase 80 per cent over two years to $673bn, was “well within” the government’s capacity to sustain and equated to about $3bn a year in extra interest payments.

Dr Edwards said the economy was emerging from the ­pandemic sooner and with less damage than originally ­expected.

“The handling of the crisis by Australian governments, hospitals, healthcare workers and public officials has been more successful than in some comparable countries,” he said.

“While the secondary wave of infection in Victoria is a big setback, and there may yet be other regional or local outbreaks, the economic recovery already evident is set to continue.”