Coronavirus: Australian economy ‘falling off cliff’ higher than 1991 recession

A top economist has warned the Australian economy is ‘falling off a cliff’ much higher than the 1991 recession.

Australia Institute chief economist Richard Denniss.

A top economist says the Australian economy is “falling off a cliff” much higher than the 1991 recession, and warns federal and state governments not to halt spending or risk making it worse.

Australia Institute chief economist Richard Denniss told a Queensland parliamentary committee that the idea the pandemic would cause a short-term economic shock was “wrong, unhelpful” and would cause long-term damage. “The sooner the federal government and the various state governments accept and understand the economic consequences of this will play out for years, the sooner we abandon the idea that perhaps the vaccine will come soon and things will get back to normal,” Dr Denniss said.

The parliament’s economics committee is investigating the Queensland government’s economic response to the COVID-19 pandemic, and on Monday heard from a panel of experts.

Dr Denniss said it was crucial that governments kept spending, because slowing or cutting spending would “literally make it worse”. “We’re falling off a cliff that’s three or five times higher than the 1991 recession,” Dr Denniss said. “And government spending in the short term is key — the No 1 one thing state and federal governments can control, and that change in government spending will have an enormous impact on how far we fall.”

Dr Denniss said future government spending should be tailored by considering the “labour-intensity of different activities’’. Rather than spending on the construction and mining sectors, he said, which created one or two jobs per $1m spent, the education, health and entertainment sectors created far more jobs for the same investment. “It’s not just the size of the stimulus that matters, it’s the shape,” Dr Denniss said.

He said concerns about increasing gross public debt to pay for the extra government spending “paled into insignificance” compared with the consequences of spending less.

But Griffith University professor of economics Tony Makin disagreed, and said government spending should stop, increasing Queensland and federal government debt was a problem, and the economy was “on life support”.

Professor Makin said Queensland’s total government debt was heading for more than $100bn and the federal government would have “well over” $1 trillion in public debt.

“I think the economy is effectively on life support, it’s not really stimulus in the dictionary sense of the word.”

University of Queensland professor of economics John Quiggin said the “focus on gross public debt is a mistake”. Professor Quiggin said the cost of borrowing was very low, and Queensland was in a much better budgetary position than the gross public debt suggested, because the government owned “large and highly profitable” public enterprises.