The Morrison government faces its moment of truth

Astute economic watchers are noting the fear factor is running way ahead of the coronavirus hounds. “The danger to the Australian economy is not the pandemic, it’s the panic,” Deloitte Access Economics’ Chris Richardson observed, as the nation’s shopping aisles were emptied of toilet paper. Even though this is primarily a health crisis, the nasty economic effects are spreading through the global system more quickly than COVID-19 itself. We are seeing a drop in commodity prices and a collapse in tourism. At home, this evolving, multi-headed beast will make or break the government, with Scott Morrison, Josh Frydenberg and Health Minister Greg Hunt leading its policy and messaging responses. So far, the set-piece information flows have been frequent and clear. May they set a precedent for more stressful times.

Although it is a joint medical effort with the states — the Prime Minister said extra state health costs would be split 50-50 — Canberra is leading the economic rescue mission. Treasury is designing a fiscal stimulus package that will be targeted, measured and scalable. The “back in black” surplus will have to wait, victim of premature adulation and changing priorities. The Treasurer’s reputation, however, won’t depend on falling short of last April’s target. It will rest on halting a recession — strictly, two negative quarters of gross domestic product in a row — something Australia hasn’t recorded for almost three decades. That prospect is a live one, given our top economic officials are in the dark on how large and long-lasting the damage will be to output.

In any case, Treasury secretary Steven Kennedy took a stab at Senate estimates on Thursday. He said March quarter GDP would be “at least” 0.5 percentage points lower because of the COVID-19 outbreak. That takes account of only direct impacts on tourism, international education exports and some exchange rate movements. Supply-chain disruptions and other potential side effects have not been modelled. At this time, Treasury is not forecasting a recession. Besides, it is too early to tell what impact COVID-19 will have in the June quarter. But Dr Kennedy said the economic hit was likely to be “deeper, wider and longer” than the severe acute respiratory syndrome outbreak in 2003, mostly in Asia, which was followed by a quick bounce back.

The Treasury chief stressed the economy was actually quite solid and travelling well. The December quarter national accounts showed an economy at walking pace last year, with GDP growing at 0.5 and 0.6 per cent each quarter. Annual growth is now 2.2 per cent, below par for us but lagging only the US in the developed world. The latest accounts hinted at a revival in consumer spending. Perhaps shoppers finally responded to three interest-rate cuts last year and income-tax relief. For some, higher home values may have encouraged them to spend rather than save or pay down debt.

Labor argues the economy was hurting before the bushfires and COVID-19. In our patchwork nation, there are bright spots and weak links. Government spending and trade are driving GDP growth. Most worrying, in the long term, are the investment strike and productivity malaise, harbingers of a decline in living standards and match fitness for the global trade game.

The weaker dollar makes exports more competitive but imported capital goods, such as computers, aircraft and machinery, more expensive to buy. We desperately need private investment. On Tuesday, the Reserve Bank cut the cash rate to a record low of 0.5 per cent to stoke demand. But the central bank risks firing up home prices, already on the march in capital cities. That’s not a path to prosperity.

So the focus shifts to fiscal policy to provide swift, if temporary, relief to the worst-affected industries, such as tourism, and to accelerate recovery when the health crisis passes — which it will. The policy aim is to support business cashflows, keep people in jobs and promote investment. This will cost billions, at least, otherwise what’s the point? The government will want to limit the drop in production to the current quarter.

The political cost of two negative GDP numbers would be devastating for the Coalition, especially for Mr Morrison and Mr Frydenberg. To date, both have exuded calm, with the Treasurer accentuating positive economic news. The pressure on the custodian is twofold: getting the stimulus design right — neither overkill nor underpowered — and delivering a bold reform budget addressing medium-term weaknesses.

Business has been pushing for an investment allowance for months. Given capital spending is shrinking, it would be prudent to push the button on a tax break immediately. Why waste two months until budget night? The stimulus plan can’t be something for everyone, although given consumer panic, Mr Richardson has raised the idea of “calm down money”. To our mind, that hints of moral hazard, but these are strange days. The Coalition is wary of Rudd Labor’s “too much, too long” spendathon after the global financial crisis. Most likely, public works projects will be brought forward and there will be a review of deeming rates to help pensioners.

Specific support for companies caught up in the supply-chain crunch could come in the form of payroll tax relief, delayed lodgement of GST returns and maybe even social welfare changes to help displaced workers in affected sectors. The fiscal margin for error is slim. Baking in more spending fat or ad hoc tax breaks, thus changing the structure of the budget, will simply mean getting “back on track” will be beyond the scope of this term.