The government's spending since the COVID-19 crisis began doesn't qualify as fiscal stimulus. Its goal has been to ensure households have enough money to survive the government-mandated lockdown rather than to encourage shopping, eating out and holidays. The sheer scale of the pandemic's economic damage will only be clear once the economy starts to reopen and the fog of the lockdown lifts. That's when fiscal stimulus needs to start. With little choice but to continue spending, the government will regret its talk of a short-term snapback and a quick end to big government.
The idea of a V-shaped recovery at any stage in the near future is optimistic, to put it politely. If government support is a "bridge" to the recovery, that bridge is going to be more like the Sydney Harbour Bridge than the one over your local creek. COVID-19 is not a standard demand-side recession. It has caused deep structural damage to the supply side of the economy, destroyed an unknown number of businesses, devastated the labour force, caused long-term damage to the balance sheets of households, banks and companies, and triggered cascading financial crises across the world. More than 100 countries have sought IMF bailouts.
Ben Bernanke called the early months of the global financial crisis the "fog of war". It wasn't until the fog lifted that the (eerily familiar) forecasts of a V-shaped recovery were exposed as fantasies. The recovery we got looked more like a bathtub than a "V": down fast, flat for years, with a slow incline at the end.
The GFC taught us that, in such an environment, timing is everything when it comes to government supports. It can take up to two years for the full effects of monetary policy to pass through the economy. Structural reforms take even longer. Both are vital, but something needs to fill the gap in the short-to-medium term. That's where targeted and flexible fiscal stimulus comes in.
Consider the short term first. The government is stuck between a rock and a hard place when it considers what to do with income supports. Given very high rates of unemployment, it is under pressure to keep the JobSeeker payment at double the old Newstart rate. Given high rates of underemployment, it is under pressure to raise the minimum wage. Given that 1.7 million people are being paid more than when they were working while millions of others are missing out entirely, it is under pressure to better target its wage subsidy program, JobKeeper. At the same time, it wants to snap back spending altogether and start paying down debt.
Fresh thinking and new approaches could act as a circuit-breaker. The introduction of an earned income tax credit could reset some of the political constraints while ensuring short-term stimulus is sustained and better targeted, and creates better incentives.
COVID-19 is not just a short-term shock. Medium-term stimulus will also be required. The government should take an investment approach to stimulus to ensure it isn't wasted.
An earned income tax credit would top up the incomes of the low paid. It would directly help the millions of Australians who are underemployed and would encourage businesses that can only offer a few hours of paid work to hire more unemployed people because the government would top up the rest. It would take pressure off JobSeeker (while improving incentives to work) because more people would be receiving a combination of wages and the tax credit, and it would take pressure off JobKeeper because the tax credit would pay income support directly to workers. Importantly, it would avoid making unemployment worse, something that can (but doesn't always) result from an increase in the minimum wage or a lack of mutual-obligation requirements on unemployment benefits.
But COVID-19 is not just a short-term shock. Medium-term stimulus will also be required. The government should take an investment approach to stimulus to ensure it isn't wasted. It should target stimulus at projects with long-term benefits to society, the ones that have been on the to-do list for too many years.
One such challenge is social housing. Conservative estimates suggest 650,000 houses would be needed to deal with the current shortfall. Building these houses would provide short-term stimulus for the construction sector and long-term stimulus for the economy through productivity growth. These dwellings need not be built by the government: a bigger bang-for-government-buck could come from increasing rent assistance, releasing more land for housing construction, and easing restrictions on the number of tenants and the eligibility of public housing tenants. These measures would create incentives for the non-government sector to build more purpose-built and demand-driven housing.
Investments to reduce carbon emissions and strengthen climate resilience are other no-regret forms of stimulus. Increased funding for environmental groups that hire local community members to plant trees, clean waterways and undertake initiatives to strengthen biodiversity would provide short-term stimulus, employment and long-term emissions reductions. The same is true for subsidies to encourage household investments in insulation, double glazing, energy-efficient lighting, energy-efficient water heating and solar panelling (while learning the lessons from the pink batts disaster during the GFC).
The other major long-term challenge is the infrastructure deficit. Major projects should not be rushed and would therefore likely take too long to be useful forms of stimulus. But directing funds towards state, territory and local governments for infrastructure repairs and small-scale projects is one way of closing the long-term deficit while stimulating local economies.
The biggest barrier to this much-needed post-lockdown stimulus will be the narrative of snapbacks and budget repair being cultivated by the government. This is at odds with the economic reality. The government will face the prospect of either implementing stimulus and (reluctantly) spending more money, or sitting back as unemployment continues to rise and more and more businesses fail. It will have no choice but to act, and will quickly find itself having to retreat from these misguided narratives. It best start now.
- Adam Triggs is director of research at the Asian Bureau of Economic Research at ANU, and a regular contributor to Inside Story, where this article first appeared.