Plan to go soon, go hard, go business, go pensioners

A global pandemic has been declared, pockets of the nation are being shut down and the budget surplus, a rare plant that flowers in fecund eras, is gone. For how long? It depends on how well the Morrison government manages what was first diagnosed as a supply-side crunch but has quickly become a sharp shock to demand as well. The government’s $17.6bn fiscal response — which has ballooned rhetorically and physically in gestation — has several virtues, as well as risks. Payment systems are in place, so there’s no need to create new bureaucracies or whole industries from scratch, like the home insulation debacle of a decade ago. At this stage, the quantum appears proportionate. A potential flaw is the leap of faith required — that business, facing weaker orders and considering layoffs, can be enticed to spend big on plant and equipment after sitting for years on expansion plans. We shall see. Financial markets, however, were not persuaded by news of the package; the local bourse continued its steady spiral. Traders were even less impressed by US President Donald Trump’s $US50bn ($77bn) plan and his momentous decision to suspend all travel between Europe and the US.

Inevitably, Scott Morrison’s stimulus package will be compared to Kevin Rudd’s October 2008 $10.4bn cash splash in response to the financial infarction following the collapse of Lehman Brothers a month earlier. Treasury’s advice then was to “go early, go hard, go households”, putting money in the hands of consumers in the lead-up to Christmas. In this instance, a rolling health crisis is quickly knocking down the economy’s non-financial parts. First, education and tourism were whacked by the travel bans, which began on February 1. Then supply chains were disrupted for retailers and manufacturers; export sales of food and resources stalled. Now, plummeting confidence is hitting sales, hurting cash flow and imperilling employment.

The Coalition’s response reflects the immediate challenges. Before June 30, there’s a $5.9bn cashflow boost to business and $4.8bn in cheques to low-income households. The “front-loaded” strategy is to put money in the wallets of people who will spend it pronto, using established welfare and tax office delivery channels. At the end of this month, 6.5 million people — age and disability pensioners, veterans, students and eligible concession card holders — will get a one-off $750 payment. Why wait weeks to open the tap? The measures will be put before the parliament at the end of March, the last sitting week before the May 12 budget. It’s inconceivable that Labor would block the omnibus bill for the package.

All up, the government will pump almost $11bn into a sagging economy in the June quarter, a fillip after gross domestic product contracts by perhaps as much as 1 per cent this quarter. The optics are a no-brainer. By quarantining the drop in GDP to March, which was also affected by bushfires, the government is now likely to avoid a second negative GDP quarter in June and the electoral poison of a recession.

But wait, there’s more. Increasing the business instant asset write-off to $150,000 and accelerating depreciation deductions will cost the budget $9.2bn in the coming two financial years; Treasury then claws back $5.3bn in the following two years. In this way, the initial stimulus shot to June 2022 is $22.9bn. Josh Frydenberg argues the package is biased towards maintaining employment. To this end, the Treasurer is spending $6.7bn on helping about 700,000 small and medium-sized businesses cover the cost of wages and salaries. An enterprise will receive up to $25,000 and a minimum of $2000. As well, there’s a $1.3bn wage subsidy for employers to retain apprentices and trainees; the measure would cover half of a young worker’s wage in the nine months to September 30.

Overall, the package meets the tests the Prime Minister set for officials. He asked for measures that were targeted, scalable and up to the task at hand. A $1bn regional fund targets communities reliant on education, tourism and agriculture; fees and charges will be waived for national and marine parks. But to get even more traction on the ground, the states will have to step up their efforts. South Australia has been quick off the mark, but it needs to be. There isn’t much NSW and Victoria can do to speed up mega projects in road and rail, so the focus must be on public asset maintenance work and reducing imposts on employers — licence fees, payroll taxes, tolls and other charges. Like Canberra, state treasuries will be battered — but they start in a weaker, debt-heavy position.

Mercifully, the proposed measures have end dates. Mr Morrison argues this means the structure of the budget is not compromised. We shall see if his claim the budget will roar back into the black when the COVID-19 threat has passed is validated. It may well be that the health crisis imposes a new layer of bureaucracy and ongoing claims for handouts. Given traditional monetary policy is as accommodative as it gets, and printing money to buy bonds is the Reserve Bank’s only option if it cuts the official cash rate again, the weight falls on Mr Frydenberg’s shoulders.

The budget is being framed in crisis. As a nation, we are creative, resilient and flexible; sacrifices are made for the greater good. Australians get change, as long as leaders are straight and explain the benefit of what they are doing. The parliamentary circus is another matter. In any case, the Treasurer must look beyond the horizon of contagion and red ink, slow growth and flagging competitiveness, and offer a path out of the economic mediocrity we are in. Riding mining price booms, scrambling like crazy when hit by shocks, is no way to lasting prosperity. The budget must not use COVID-19 as an excuse to delay or shirk reform. There’s a rare opportunity to reboot how we work, back innovation, invest and grow our economy. Rather than thinking small, leaning low in a defensive crouch, we need a bold government: to go early, go hard and go economy-wide on reform.