The government's $90 billion JobKeeper program ends abruptly in March. This massive withdrawal of government support from the Australian economy represents a 'fiscal cliff' unlike anything Australia has seen before.
The Treasurer says there is nothing to fear, pointing to the $200 billion war chest of savings accumulated by households and firms that will be deployed to support the economy. Is he right? Will consumers save the day? Or should we be worried?
Households are indeed sitting on a lot of cash. Household wealth hit a record high in the September quarter of 2019 as wealth in residential assets, bank deposits and superannuation grew 1.2, 5.4 and 1.1 per cent respectively. These are big numbers. Households added an extra $113 billion to their bank deposits from January to November. Business deposits increased $104 billion over the same period. And while asset prices - from real estate and equities to bitcoin and gold - are going up, lower interest rates are making existing debts cheaper as household borrowing costs plummet.
But the question isn't whether households have cash, it's whether they will spend it, when they will spend it, and what they will spend it on. This is when the government's narrative becomes murkier.
Just because households have cash doesn't necessarily mean they will spend it. Many may prefer to save it and pay down high-levels of household debt. If all that cash is concentrated among richer Australians then their propensity to spend it will be even lower.
The data so far suggests a preference for spending, but these are still early days, and consumer confidence can be fickle. Retail turnover was 13.3 per cent higher in November 2020 than it was in November 2019. The Westpac-Melbourne Institute index of consumer sentiment reached a ten-year high in December. Roy Morgan's consumer confidence indicator is back at pre-COVID levels, but still below the long-run average. And while the Commonwealth Bank's measure of household spending intentions is up for January 2021, the results are mixed: high for some consumer items, negative for others.
If consumers do spend more, the other critical question is when that spending takes place and whether it will neatly coincide with the cutting off of JobKeeper. One risk is that we've already seen the peak in the post-pandemic, post-lockdown surge in spending and confidence. Both could now taper off if households decide to switch from spending to deleveraging.
Another risk is that consumer confidence is shattered by further outbreaks, further lockdowns or further delays in getting a vaccine. And don't forget that there are fewer consumers than normal. Australia's annual population increase was the lowest in fourteen years as the low rate of migration takes its toll. Fewer migrants, fewer tourists, fewer students and a toxic relationship with our biggest trading partner, China, mean fewer consumers at home and abroad.
The timing of consumer spending also faces a difficult chicken-and-egg problem: Does a pick-up in consumer spending mean government support can now safely be removed? Or is it the government support that's driving the consumer spending in the first place? The government's narrative argues the former, but it's difficult to see what would fuel household confidence in the longer-term. Unemployment remains high. Around 20 per cent of the people who lost their job or saw their hours reduced to zero during COVID-19 haven't seen their situation improve. Wage growth remains elusive.
But suppose consumers do increase spending, and suppose that this increase in spending neatly coincides with the end of JobKeeper. One final question remains: what will consumers spend the money on? The removal of JobKeeper and talk of the economy as a whole ignores the fact that Australia's economic recovery will be patchy. While consumers might spend big in some sectors, other sectors will be left high and dry.
The November increase in retail turnover revealed a strong consumer preference for things over experiences - unsurprising in a pandemic. The boost to clothing, footwear and personal accessory retailing was four times bigger than the boost to cafes, restaurants and takeaway food services. Reported household spending intentions for 2021 have increased for homes, retail, cars and entertainment, but are negative for travel, education, health and fitness. Reserve Bank analysis suggests that this patchiness will continue. While increased household wealth may boost spending on cars and household furnishings, it does little for spending on education, communications, food or health.
Gambling on consumers saving Australia from a fiscal cliff is exactly that: a gamble. It is a gamble that consumers will continue to prefer to spend than pay-down debt. It is a gamble that consumer confidence won't be shattered by further outbreaks, further lockdowns or further vaccine delays. It is a gamble that consumer spending will coincide with the withdrawal of JobKeeper and that the withdrawal of JobKeeper won't, itself, kill off consumer spending. And it is a gamble that consumer spending will benefit all sectors evenly.
With so many gambles, a better option is to keep JobKeeper as a demand-led program with tighter eligibility requirements: businesses that need it can use it, those that don't can't. This is well-suited to a patchy recovery where some sectors boom while others bust.
Economists fear that such an approach might stop tired old businesses being replaced by innovative new ones. This is a rational fear given that this "creative destruction" is a vital source of higher productivity and thus growth in living standards. But there is no reason that the eligibility requirements for JobKeeper couldn't take a longer view of the viability of businesses, or take a more industry-specific approach to government supports. As fewer businesses need the program, the program could then taper-off gradually rather than abruptly.
With a patchy recovery ahead, governments will need to develop programs that are more innovative and more targeted. Focusing more on places, sectors and cohorts, and less on aggregates and totals is a good start.
- Adam Triggs is director of research at the Asian Bureau of Economic Research at ANU, a non-resident fellow at the Brookings Institution, and a regular contributor to Inside Story.