The Treasurer should be planning economic stimulus now
Published by The Sydney Morning Herald, Wednesday 3 July
Less than a year into the job, Treasurer Josh Frydenberg is staring down the barrel of his first real economic challenge. The economy is slowing and ominous clouds loom. The RBA cut interest rates to a record low 1 per cent on Tuesday, while signalling that fiscal stimulus needs to be on the table.
But when should the government move? How much might be required? And what form should it take?
The first challenge for the Treasurer is judging when the economy is sufficiently in the doldrums to justify a fiscal lifeline. There is no question it is failing to fire. Inflation is non-existent, new building approvals are drying up, and per person living standards have gone backwards for three consecutive quarters. Meanwhile the labour market, so long the source of Reserve Bank optimism, is weakening, with unemployment rising to 5.2 per cent.
But we are not in recession territory yet. The Sahm indicator, proposed by US Federal Reserve economist Claudia Sahm as an early indicator of a looming recession, is not yet ringing alarm bells. Australia’s average unemployment rate for the past three months has risen by 0.2 percentage points above the low of the past year, well below the 0.5 point threshold Sahm shows has predicted past US recessions.
The Treasurer won’t yet canvass more stimulus spending if it compromises the planned return to budget surplus. But things can head south quickly. The escalating trade war between the US and China is just one shadow over the global economy. The Treasurer needs to be ready to move swiftly should the economy deteriorate further. This means making plans now.
The best fiscal stimulus policies are temporary, fast to roll out and involve “no regrets” – in other words, spending with a solid policy rationale.
Number one on the Treasurer’s list should be to emulate the 2008 Social Housing Initiative, one of the most effective parts of the Rudd-era stimulus package. It resulted in 20,000 new social housing units being built and another 80,000 refurbished over two years, at a cost of $5.6 billion. The economic hit was immediate: public residential construction approvals spiked within 12 months of the announcement. A repeat today would provide a much-needed boost to housing construction when the pipeline is at risk of drying up.
Building social housing would help tackle the growing scourge of homelessness. More than 116,000 people were homeless in Australia on census night in 2016, up from 90,000 a decade earlier. Half of the tenancies housed in the 2008 program were already homeless, or at significant risk of becoming so. So the spending would also yield significant social benefits.
Passing the first round of the Coalition’s personal income tax cuts would give the 90 per cent of Australians earning less than $126,000 a year a cheque in the mail later this year. And if things get really serious the Treasurer should be ready to order one-off cash payments to households, just like Kevin Rudd did in 2008.
Another no regrets move would be to raise Newstart. The real rate of Newstart has not increased in 25 years. The rate is now so low it presents a barrier to the unemployed finding work.
Although a permanent rather than temporary budget hit, raising Newstart would bring forward something all but the most hard-headed Australians acknowledge needs to be done anyway. And boosting the payment would be immediate stimulus – it puts money in the hands of the people most likely to spend every cent.
There are some policy suggestions the Treasurer should avoid.
Boosting infrastructure spending is often nominated as economic stimulus, but it almost invariably arrives too late to fill any hole in the economy. Large-scale projects are complex, taking years of planning that can’t be rushed. Some states like Victoria already have such a pipeline of large projects that they have little capacity to deliver more. Even small-scale projects are rarely “shovel ready” and can easily turn into regional boondoggles with little public benefit.
Similarly, “innovative” policies requiring careful design and implementation should not be on the list. The 2008 stimulus spending on new school halls and pink batts took too long to roll out to be an effective stimulus and were plagued with implementation problems.
A decade ago, the dramatic collapse of the US financial system made it clear we were staring into an economic abyss and needed to act urgently. Chances are if we end up in recession today, it’ll come as more of a slide than a jolt.
By far the most important lessons from 2008 are the importance of planning and choosing policies that are fit for purpose. We can only hope the Treasurer is doing a lot more thinking behind closed doors than his public statements suggest.