Is coronavirus stimulus package big enough to stop a recession?

Australian Treasurer Josh Frydenberg listens to Australian Prime Minister Scott Morrison as he speaks to the media during a press conference at Parliament House in Canberra announcing economic stimulus measures. Picture: AAP

There’s a saying in economics, known as Goodhart’s law, that when a statistic becomes a measure, it ceases to be a good one. That’s very true of Gross Domestic Product, the statistic used to define a recession being two consecutive quarters of economic contraction. Governments will do almost anything to avoid one. But at what cost?

The government’s stimulus package, at almost $18bn, is almost certainly big enough to avoid a recession this year.

And the inevitable public demand for government to “do something” in a crisis makes some sort of budget stimulus politically inevitable.

In an economy that typically grows around 0.5 per cent every three months, the government is poised to inject $11bn, the equivalent of 1 per cent of GDP, into households’ and businesses’ pockets between the end of March and 1 July.

And another $6.5bn will flow in the 12 months after that. For the economy to still contract amid that deluge of cash raining down on households and small business it would have to be very sick indeed.

As far as stimulus goes, the six measures are temporary, targeted, and proportionate. And being delivered through existing payments and tax office infrastructure means they’ll avoid the implementation issues that blighted the Rudd government’s 2009 stimulus. Laudably, the government has also resisted providing grants cash grants to buy houses.

Yet the government is held hostage by the calculation of gross domestic product and the arbitrary, calendar based definition of a recession. Without it, the timing and structure of the economic package released today might have been quite different.

In the US a recession is declared by a research body, the NBER, taking into account a variety of economic factors, eschewing the simplistic definition we use here. Not surprisingly, the Trump administration’s stimulus announced on Thursday wasn’t too focused on the months between March and July.

Another saying in economics is there’s no such this as a free lunch. The extra debt incurred today will have to be serviced. Let’s hope it’s worth it.