Published in The Australian Financial Review, 1 October 2020
If Josh Frydenberg’s second budget was a gymnastics move it would be the “triple double”: the double backflip with three twists that all but the bravest athletes shy away from.
A pandemic, a globally synchronised recession, and monetary policy almost out of puff all make next week’s budget a high-stakes affair. The Treasurer looks like he has the appetite for a red-hot go, but executing will be no mean feat.
His first flip is jettisoning the straitjacket of the medium-term fiscal strategy. Since the Charter of Budget Honesty was introduced in 1998, governments have set a target of achieving budget surpluses, on average, over the economic cycle.
In the first phase, the government will provide “temporary, proportionate and targeted” fiscal support, with a focus on boosting business and consumer confidence.
This is the right move – the government must continue its support if we are to avoid the significant long-term cost from leaving the economy languishing below potential for an extended period, including the scarring effects of long-term unemployment. And confidence is key to getting there.
A successful landing depends on the government’s willingness to take on stimulus on the scale required: Grattan Institute estimates that additional stimulus of at least $100 billion will be needed to bring the unemployment rate back down to about 5 per cent by the end of 2022. Scale matters to shifting the dial on confidence and jobs.
But getting the fiscal response right is about more than just dollars. It’s about ensuring those dollars are hitting the economy at the right time, in the right places, and in a way that will give good “bang for buck”.
This is where the government must land the second flip: relying too heavily on bringing forward tax cuts, particularly the stage three income tax cuts, is unlikely to do enough to boost the economy.
If the tax cuts are introduced in the normal way, Australians won’t see the extra dollars until July 2021. To boost spending and confidence and underpin the recovery of hard-hit consumer-facing businesses, money needs to flow earlier.
Tax cuts don’t provide as much economic kick as others forms of stimulus, because some of the money leaks to savings. This is even more true in an environment of heightened uncertainty, when people are more likely to save the “extra” income.
And it is doubly so for tax cuts for higher income earners: transactions data shows that savings by people on higher incomes have been historically high during the pandemic. Two-thirds of the benefits of the stage three cuts flow to the top 20 per cent of tax-filers.
In a recent Economic Society poll of the stimulus options preferred by 49 leading economists, only 20 per cent put income tax cuts in their top four.
Fortunately, there are many other good options to boost spending, confidence, and jobs.
Early whispers suggest the government might adopt a new wage subsidy beyond March, when the JobKeeper program is scheduled to end. Creating an incentive for businesses in recovery to create new jobs is a sensible move and one with a big economic multiplier.
There is also a strong case for the Commonwealth to amplify state investments in infrastructure. Social housing is the most obvious choice, given it can be rolled out quickly and delivers something that is desperately needed. Incidentally, this was the policy most popular with the leading economists.
Even if the Treasurer lands both flips, three twists are needed too. This recession is very different to past downturns. It has disproportionately hit the services sectors, and the lockdowns have hurt women and young people the most.
Investing in the care sectors creates jobs that are going to be there for the long haul, and supports the productivity of workers across the economy. Spending in areas of social need such as mental health, aged care and childcare should be the top of the list.
But governments must also do more to restore activity in crucial sectors that have taken the hardest hits, including hospitality, tourism, and the arts.
Early leaks suggest the tourism sector will be supported via small infrastructure projects and support to promote destinations to a local market. These are positive initiatives.
Voucher schemes or discount schemes could also be targeted at these sectors to provide some short-term momentum. The Northern Territory and Tasmania have launched time-limited vouchers for spending on local tourism. Similarly, Britain’s “Eat out to help out” scheme in August provided government-funded discounts for dining, increasing restaurant spending by a third.
Pulling off the triple double requires a willingness to go outside the standard playbook.
Simone Biles landing the triple double was one of the most extraordinary moments of the 2019 World Championships. Let’s hope the Treasurer’s 2020 budget has business and consumers cheering in the same way.