Stimulus could need budget boost, says Peter Costello

Former treasurer and Future Fund chair Peter Costello says the Coalition’s stimulus package may need an encore.

Former treasurer and Future Fund chairman Peter Costello says economic stimulus may need a second act. Picture: AAP

Peter Costello has raised the prospect the Morrison government could be forced to unveil a secondary stimulus package in the May federal budget if the coronavirus crisis hits the economy deeper than expected.

The former Treasurer also called on the government to lower the “deeming rate” – the government’s assumed rate of investment return used for welfare calculations - arguing a rate that it was out of step with the falling Reserve Bank cash rate could push retirees into risky investments, such as the stockmarket, when they should be gearing their portfolios conservatively.

Scott Morrison is expected to announce a limited stimulus package this week aimed at encouraging employers not to sack workers and to encourage household spending.

“We don’t want our deeming rates to push people back into risky investments. We will have to change those deeming rates, Mr Costello told a business forum on Tuesday.

“It is a two-edged sword. Overall, lower interest rates stimulate the economy. For some people, it puts them in a worse position.”

Treasury has confirmed it is currently working with the Department of Social Services looking at a cut to the deeming rate in the wake of the most recent RBA rate cut, which took the cash rate to a new record low of 0.5 per cent.

The government changed the deeming rate for the first time in four years in July 2019.

That dropped the lower level deeming rate from 1.75 per cent to 1 per cent and the upper level deeming rate from 3.25 per cent to 3 per cent for assets over $51,200.

Under current social security laws, pensioners are income-tested on the assumption they are earning a specified return on their investments. If a deemed rate is higher than an actual rate, the pensioner loses out.

Mr Costello said the federal government was unlikely to be able to follow US President Donald Trump, who is considering a payroll tax cut to keep workers in jobs, as the state governments would demand the shortfall in revenue to be footed by Canberra.

Mr Costello, who also chairs the $170bn sovereign wealth fund, the Future Fund, said he expected share prices to bounce back at the coronavirus passed.

“We’ve been saying at the Future Fund for some time that stocks are fully valued. You never know what will trigger a correction. When stocks are as highly valued as this, you will expect a correction. That shouldn’t surprise us really,” Mr Costello said

“(But) the thing that has created these huge values, in my opinion, will still be there after the virus passes – it’s largely cheap money. Investors can’t put their money in the bank. At the moment, nobody wants to put their money in stocks. Some of it will undoubtedly go into the stock market. Some of it will go into the property market,” he said.

Mr Costello said if the COVID-19 crisis was still worsening in May, then the federal government would likely announce additional stimulus measures.

“If in two months it’s still expanding, they will back up again in the budget. I think there’s a case for a measured response now, but wait and see what’s going to happen in May this year,” he said.

Mr Costello said he didn’t think the government would lift the rate of Newstart as part of its package. “Generally, political parties have got more interested in raising new start when they are in Opposition,” he said.

“A response to what we think will be a temporary problem should not involve structural changes. You ought to look at Newstart on its merit, free from this immediate example.”

Mr Costello said he expected economic growth to go backwards during the March quarter.

“Estimates are that the coronavirus has taken 0.5 per cent off the (March quarter) figures. It would be different if we were growing at 1 (per cent). Growth rates in Australia have already been somewhat lower,” he said.

“Are we now on the tip of containment or is there a second wave. To be frank, none of us knows,” he said.