It’s time to maximise the nation’s economic recovery

The signs are promising that the national economy is starting to emerge well from the self-imposed recession engineered to help combat the COVID-19 pandemic. A rebound in jobs, company profits and the sharemarket performance of the top 200 listed companies are all positive signals. The challenge ahead is for government to skilfully withdraw the support that has helped to keep things afloat, so the job of debt reduction and budget repair can begin.

Withdrawing support no doubt will open the way for opportunistic politics from forces keen to see welfare spending continue to grow. Already there are signs of where this may lead if governments fail to show the necessary spending restraint. Credit ratings agencies have sounded the alarm on Victoria’s latest budget, warning the nation’s second-largest state could be stripped of its AAA rating within weeks.

The challenge for the Queensland budget on Tuesday is to resist Victoria’s profligate example and follow instead the more sober fiscal housekeeping of the Berejiklian government in NSW. For Queensland, which already has lost its AAA credit rating, the devil will be in the detail. The state’s Treasurer, Cameron Dick, says new borrowing will be “significant but reasonable”. With interest rates low, now is indeed a good time for governments to borrow for much-needed infrastructure spending. More worrying, however, is the temptation of Labor governments in Victoria and Queensland to lock in heavy recurrent expenditure to fund a bigger and more bloated public sector workforce.

At a national level, all of the signs suggest that recovery from the worst downturn since the 1930s is gathering pace. The JobKeeper scheme, the federal government’s major response to the pandemic, will cost less than the budget forecasts from Treasury. As Patrick Commins reported on Monday, more than two million Australians stopped receiving JobKeeper payments in October as a result of increased business activity and tighter eligibility rules. Treasury figures show the cut left 1.5 million workers still relying on the emergency benefit. Josh Frydenberg confirmed that 700,000 employees and sole traders were taken off JobKeeper in October because their employer no longer met the required decline-in-turnover test. The Treasurer has pledged to maintain strong fiscal support measures until the unemployment rate is comfortably below 6 per cent.

Falling demand for JobKeeper and other measures is good news. It is followed on Tuesday with confirmation that rebounding sales in the hard-hit industries are starting to flow through into higher profits. The sharemarket has responded with the ASX 200 index of the 200 largest listed companies recording its best monthly rise since it began. It is possible that a hoped for V-shaped recovery out of the pandemic shutdown is starting to appear. According to Australian Bureau of Statistics data, company gross operating profits lifted another 3.2 per cent across the September quarter. The latest increase is on top of a big rise the previous quarter, helped by strong government support. Most promising is the news that sectors hardest hit during the June quarter shutdowns had recorded the strongest lift in sales and profits three months later. ABS figures show accommodation and food services sales were up by 42 per cent, with arts and recreation revenue climbing 27 per cent.

A slowing in emergency withdrawals from superannuation funds is further evidence the worst may now have passed. A total of $35.3bn has been withdrawn under the COVID-19 early release scheme, with only $146m paid out across the most recent week to 20,000 fund members, one of the lowest weekly amounts recorded. Wednesday’s national accounts, meanwhile, are tipped to show the national economy has rebounded out of recession.

The lifting of border restrictions, particularly in Queensland, ahead of the coming holiday season is further cause for optimism. Looking ahead, a successful international rollout of COVID-19 vaccines hopefully will underpin a return to international travel some time next year. This in turn will enable a restart of the high levels of immigration that have helped to underpin Australia’s prosperity. Australia’s success in coping with the pandemic relative to other countries no doubt will boost its reputation as a safe and desirable location.

On the downside, rising trade tensions with China as well as the international financial impact of the pandemic make it difficult to predict the economic future with any certainty. The federal government must navigate the broader international relationships. This includes China’s belligerent assertion and the change in administration in the US. The primary task must be to maintain discipline in the domestic economy. There is a concern that, once freed of the constraints of fiscal discipline in the name of emergency, governments risk becoming addicted to spending money they don’t have. While celebrating the positive signals, the challenge remains to maximise the economic recovery while pulling back on interventions that have served the nation well but already have imposed a heavy cost on future generations of taxpayers.