Coronavirus: Postponed economic pain is still pain, just delayed

Treasurer Josh Frydenberg. Picture: Gary Ramage

The COVID-19 recession has been relatively painless so far, especially for the political class, which hasn’t suffered.

The massive increase in public spending, which will probably push net federal debt beyond $1 trillion by 2022, will keep the official jobless rate around five percentage points below what it would otherwise have been, equivalent to about 700,000 jobs.

While the slump in economic activity will be much larger, the increase in measured unemployment will likely be much lower than experienced in the 1990s recession.

Meanwhile, millions of workers are being paid more for less per hour worked.

The largest deficit since World War II, which Josh Frydenberg has announced on Thursday, seems academic. It could easily turn out much larger or smaller than forecast, given the massive uncertainty over the economy.

Either way, unless the iron laws of economics have somehow evaporated, the bulk of the pain is yet to occur.

At some point, maybe in five, maybe in 10 years, interest rates will increase.

And governments will need to devote more resources to servicing a much larger debt, either increasing taxes further from an already high level or cutting back spending.

At that point, when those facing the remotest risk from the coronavirus have long since departed, the younger generation might not look back so forgivingly on the biggest recession in a century.

Before that happens, the popular programs hiding the true extent of unemployment, which is perhaps as high as 15 per cent, will inevitably come to an end.

It will become more difficult to paper over the malaise.

And even if interest rates don’t rise, the spectre of such massive and growing debts will increase the likelihood of inflation, which tends to wipe out the savings of the poorest and undermines the price signals that allocate resources, as investors wonder about the longevity of the financial system.

The government stresses that 99 per cent of its spending will occur this and last financial year, making it “temporary”.

But who in March would have said JobKeeper and JobSeeker would have been extended, in attenuated form at least, until March next year at an additional cost of $20bn.

There’s also a high likelihood programs will be extended once more.

The risk is governments continue to borrow and spend until it’s too late, always knowing the problem will ultimately be for the next government to deal with.

Reserve Bank governor Philip Lowe said in a speech this week that it would be difficult for a country used to striving for budget surpluses and low debt to suddenly find itself wallowing in historic deficits.

It will, however, be even harder to rein in the largesse once it’s become the norm.