High risk of ‘whatever it takes’

By Tuesday afternoon almost 280,000 businesses had registered an interest in the new $1500-a-fortnight JobKeeper payment. The $130bn wage subsidy scheme is the Morrison government’s third fiscal rescue effort in 18 days, after a $17.6bn first strike and $66.1bn follow-up. That’s almost $214bn in fresh funds from Canberra, or 11 per cent of gross domestic product, to keep businesses running and workers in jobs. Add in $105bn in low-cost loans from the Reserve Bank and other agencies, and Australia’s mammoth fiscal response to fighting COVID-19 has been “whatever it takes”. The “unprecedented level of support reflects the unprecedented moment”, says Josh Frydenberg. JobKeeper won’t be the last fiscal move but is likely to be the showstopper. Scott Morrison said the government would continue to do “all within our power and all within our capacity” to keep the engine of the economy running.

On Tuesday, the Treasurer struck a sober note after the binge, conceding it would take “years and years” just to pay off the new scheme, which is designed to run for six months. It’s possible some earlier emergency measures, such as the overly optimistic expansion of the instant asset write-off, may not cost as much as thought, given the horrendous short-run outlook for capital spending. But the budget, essentially in balance before the coronavirus outbreak, is sliding into a morass. Normally in a downturn, tax from companies and workers falls while welfare spending rises; the budget deficit increases. This crisis is a different proposition as public spending expands at an astonishing rate to cushion the blow from an economy in an induced coma because of the COVID-19 pandemic. The flow of deficits to come, the biggest since World War II, will add to our existing stock of debt, which requires servicing.

This vast public spending will push state and federal government debt towards $1.5 trillion by next year, or 80 per cent of GDP, reports economics editor Adam Creighton, the highest level since the early 1950s. A slump as large as the Depression looms, presaging a “generation of debt”. Canberra’s deficit could balloon by $300bn across this and next financial year. While long-range forecasting is fraught, analysts argue it could take 30 years to get back to surplus. Compared with others, we are far from being a public debt basket case, although very high levels of mortgage, vehicle and consumer debt burden households.

Credit rating agencies are sanguine about our medium-term prospects. That can quickly change. The key fiscal challenge is not to laminate into the budget these emergency responses. We take the Prime Minister at his word when he says the measures are temporary and targeted. It will take courage to turn off the money tap, especially when so many workers still will be unemployed when we cross the bridge to what looks like a recovery. It’s unlikely that we’ll spring out of the chasm when so much of our economy is based on exports. Tourism, education, fisheries and agriculture depend on the economic strength of middle classes in Asia, Europe and the US, where COVID-19 is wreaking its heaviest tolls.

Debt overhang will be a significant burden for policymakers and taxpayers. It could be made more precarious if Canberra has no option but to bail out strategic industries, such as the airlines, with debt or equity deals. We applaud the intent and speed of the economic rescue efforts, but the costume change into big government must not become a permanent look. Those aged under 50, who’ve never known a recession, let alone a depression, will be vested with the recovery and its bill. Young people now learning from home should not be doomed to being “Generation Debt”. “Policies that were thought fair and reasonable only months ago will start to look unfair, even absurd,” Creighton wrote on Tuesday of the clawback of state largesse required. Governments will face blunt choices about how to allocate the burden, while not killing off with punitive taxes the most productive parts and players in our economy.