Can the Federal Government’s fiscal policy fill the gap?

Thursday 8th October 2020 Penny Pryor

Danielle Wood On Tuesday night Federal Treasurer Josh Frydenberg delivered a Budget like no other. It saw the Government double down on its embrace of fiscal policy and the idea of a private-sector led recovery to bring us out of this recession.

But there are questions around whether its measures will be enough, according to chief executive officer of the Grattan Institute, Danielle Wood.

Investment-lead recovery?

One of the biggest measures introduced by the Government in the Budget was immediate expensing for businesses.

“The other really big story for the private sector is hiring credits or wage subsidies for employing young people,” Wood said when presenting at Morningstar Australia’s annual conference this morning.

She believes it is a good measure to have in place as jobseeker comes off but raises some questions around whether or not the amount - $200 per week for 16 to 29-year-olds and $100 for 30 to 35-year-olds – is enough.

“I would have liked to have seen a broader based scheme,” she said.

Her real queries are around whether is it right to for the Government to “bet the house” on an investment-led recovery, noting that even before the crisis business investment was weak.

“There is not much here [indicating] that we are going to see a boon in consumer activity,” Wood said.

“I would have liked to see more measures to shore up consumer confidence… more measures to shore up spending.”

She noted that the announced tax cuts were reasonably well structured for stimulus but that the tax offset for low and middle income earners would not be received until they lodge their tax returns for this financial year – meaning a delay of nearly 12 months.

“Stimulus payments work better as one off payments…[and] my concern is really holding back those tax offsets till next July.”

And where it has introduced schemes to directly create jobs, the Government hasn't necessarily focussed on the sectors that need it most, Wood added

“Social housing is what you should be doing here if you really want to create jobs,” she said.

Stimulus versus debt

On Tuesday the Treasurer also reiterated an earlier statement that the Government would wait until the unemployment rate is “comfortably below” 6 per cent before looking to reduce debt as a share of GDP.

Although that is a responsible approach, Wood says there is a question mark around whether that number is aggressive enough

“You may have to push further before you see things like wages genuinely growing again.”

There is also the need to address long-term unemployment, with studies showing that the longer somebody is out of work, the harder it is for them to get a job. Wood also cited new research that highlights the potential for persistently high long-term unemployment levels to also drag the economy down.

“There is a very strong case for governments to intervene here both from a welfare of Australians potential and the implications for long-term economic growth.”

And despite the constant focus on the large amount of debt the government is taking on to support the economy, Wood, like so many other economists, stressed that it is actually the right thing to be doing and is also extremely manageable on the other side given interest rates are so low.

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