Coronavirus: Why it’s vital to sing from same economic songbook

The economic threat deepens daily. The budget surplus is now lost. Scott Morrison and Josh Frydenberg spoke with the Reserve Bank’s leadership on Monday to ensure they are aligned on policy — more spending from government and interest rate cuts from the bank.

Morrison wants to fight the current crisis, not the crisis of 12 years ago. That demands full co-ordination between government and the bank. Expectations are so high on all sides that the RBA must cut rates on Tuesday to stem the crisis of confidence.

Unlike 2008-09, this is not a crisis within the financial system. That means it should be less damaging and more finite, yet Treasury believes the solution this time is more complex than a decade ago when across-the-board fiscal/monetary stimulus did the job. This time, big stimulus can’t work.

In parliament on Monday, ­neither Morrison nor Frydenberg used “modest” to describe their spending response. That’s a distinct change from late last week. It means more businesses and industries are being hurt and the fiscal response will be wider and deeper.

The Treasurer told parliament government action would be considered, responsible and targeted. Its focus is jobs, keeping business afloat, preventing lay-offs, assisting cash flows and trying to limit any investor panic.

The banks face a critical test: will they pass on the expected RBA rate cut, a cut in response to an evolving global emergency?

The Reserve board meets before Wednesday’s GDP data is expected to show a relatively weak December quarter result ahead of what is likely to be a negative March quarter this year. The US Federal Reserve has signalled its willingness to cut rates to support the American economy.

Morrison and Frydenberg spoke with RBA governor Philip Lowe and his deputy Guy Debelle in Canberra to review the deteriorating situation. In the challenging decisions that lie ahead, fiscal and monetary policy must sing from the same songbook, hardly the story of the past six months.

The government believes the economic problem is not the balance sheets of banks or households. The financial system has not fallen over. Indeed, bank balance sheets are in a good shape. Capital is available. The problem is business and industry being hit by falling demand and supply bottlenecks arising from the China shutdown. Cash handouts won’t address the problem and almost certainly would not be spent.

So the famous correct advice 12 years ago from Treasury chief Ken Henry — “Go early, go hard, go households” — doesn’t work this time. Morrison has told his advisers he wants to solve the right problem, not the wrong problem.

Because this is a health crisis, it has a finite life. When it ends, there will be an economic bounce back. In devising his fiscal response, Morrison wants to honour his election commitment that government will live within its means.

Decoded, that means when the virus is over and the economy returns to normal, that normal is also defined by a budget in surplus.