Australia shows the rich world how to sustain a post-pandemic recovery

Given the very real threat of economic slowdown and stagnation, the world would do well to take a leaf out of Australia’s book.

Treasurer Josh Frydenberg with Treasury Secretary Stephen Kennedy at The National Press Club in Canberra. Picture: Sean Davey.

Almost nine months after the effects of the Covid-19 pandemic began to ripple through the global economy, Australia’s government is taking no chances: A generous fiscal package was announced this week.

Other advanced economies would do well to pay attention.

The government announced its intention to run deficits of 11 per cent, 5.6 per cent and 4.2 per cent of gross domestic product in the next three years sequentially. It wants unemployment to fall below 6 per cent, from the 8 per cent it expects at the end of the year, before turning to stabilizing debt. Even then, official forecasts suggest continued deficits for years, but ones that are smaller than economic growth.

Other countries acted swiftly in the first weeks of crisis, but political challenges are arising. The British government is voicing concern about rising debt levels, with Chancellor Rishi Sunak promising to balance the books in a speech this week.

Likewise, the prospect of a second round of U.S. stimulus is halted and now depends on the outcome of a November election. The eurozone’s stimulus efforts have been impressive relative to previous crises, but the political tug of war that threatens every effort to provide fiscal support hasn’t gone away.

The contrast with Australia is even greater than it seems, since the hit from the pandemic there appears to be shallower: The International Monetary Fund expects Australian GDP to decline by 4.5 per cent this year, compared with shrinkages of 7.8 per cent, 8 per cent and 10.2 per cent for Germany, the US and the UK respectively.

The structure of any stimulus, of course, will vary by the government: Australia’s center-right administration is concentrated on tax cuts. The budget contains some interesting items such as full expensing for any business with revenue below $50 million ($US35.5 million), meaning businesses can deduct capital investment from tax bills immediately, rather than as they depreciate.

It is tempting to think that Australia has greater room to act because of the lower debt levels it went into the crisis with, but that is only half the calculation: Tokyo’s net interest payments are lower than Canberra’s despite debt levels over four times as high because its interests rates are far lower.

Allowing debt levels to rise in the sector of the economy where borrowing costs fall during a crisis--i.e. the government--is a sensible decision. The main risk is withdrawing support too early, not too late, as Federal Reserve chief Jerome Powell noted this week. Though most warnings about debt crises are well meaning, they have repeatedly failed to materialize in advanced economies issuing debt in their own currencies.

Giving priority to the phantom threat of higher government debt means accepting the very real threat of economic slowdown and stagnation. To avoid the latter, the world would do well to take a leaf out of Australia’s book.

Write to Mike Bird at [e-mail]