Economic stimulus needs to be big says Martin Parkinson

Overdoing a stimulus package is better than not doing enough, former treasury secretary Martin Parkinson says.

Prime Minister Scott Morrison (left) speaks to Martin Parkinson in Canberra last August. Picture: AAP

The Australian government should either deploy a big fiscal stimulus package to offset the impact of the coronavirus or it shouldn’t even bother, former Australian treasury secretary Martin Parkinson says.

In an interview Mr Parkinson urged concerted stimulus, saying that if not the government risks having to top it up at later on.

“If you are not going to do at least half-a-percentage of GDP [stimulus worth around $10bn then don’t bother … You’ve got to aim for something big,” he said.

If the stimulus package was any less than that, the government would be forced to go back and do more, he added.

“It is better to err on the side of being excessively stimulatory and then wind it back, than to do too little and lose confidence,” Mr Parkinson said.

Mr Parkinson, who helmed the Treasury Department from 2011 to 2014, warned that the probabilities are now leaning strongly toward the country sinking into its first recession in 28 years.

“The outlook is pretty grim for the June quarter,” he said, adding that though government action now may be enough to keep the quarter positive, “it’s a really fine line”.

It is clear that there is a high degree of anxiety among the population that will affect economic outcomes, Mr Parkinson said.

“It is better to err on the side of being excessively stimulatory and then wind it back, than to do too little and lose confidence.”

“The sense of fear that has gripped the community is leading people into making decisions that they don’t need to. Which diminishes the chances of a good June quarter,” he said.

With global growth slowing, Australia would feel pain through a number of channels, he said.

“If it looks like the rest of the world is going into recession, or close to it, then the knock-on effects to us will be pretty significant,” Mr Parkinson said.

He applauded the government’s health response to the coronavirus, describing it as “exemplary”.

Prime Minister Scott Morrison confirmed that the government would unveil fiscal measures to fight the impact of the coronavirus on Thursday, saying the response would be measured and targeted in scope.

Deputy Reserve Bank of Australia governor Guy Debelle also said on Wednesday that the central bank still expected the coronavirus would slash 0.5 percentage points from GDP growth in the first quarter by hitting education and tourism exports.

Dr Debelle said the RBA was well advanced in its thinking on how it would deploy alternative monetary policy if needed in the coming months, pointing to the setting of yield-curve targets as the likely first move.

If the virus spreads in Australia in a significant way and people are forced to self-isolate in large numbers, then the government should be ready then to direct cash payments directly into the community, Mr Parkinson said.

“You will want to be able to get money into their hands,” he said. But for the moment, that kind of response wasn’t needed, Mr Parkinson said.

The former Treasury secretary said Australia had entered the current crisis after years of weak productivity growth, so the stimulus package must also address structural reform.

“We need to acknowledge that productivity is poor and has been, and will continue to be unless we find ways to remove inhibitions [to investment],” he said.

The government should look at investment allowances to spark demand, but also look back at the Henry Tax Review, published in 2010, to gather more ideas on boosting productivity growth, Mr. Parkinson said.

The Wall Street Journal