Recovering from the COVID recession
The Queensland Government’s fiscal response to the coronavirus crisis was one of the largest state responses, as a share of the state economy.
But as the economy gradually reopens, new economic challenges will emerge. The risk of renewed outbreaks means a smooth reopening of the economy is far from assured. A globally synchronised recession, continuing consumer and business uncertainty, debt overhang for businesses and households, and a significant hit to population growth will all drag on economic activity in the next year and possibly beyond.
There has been an initial burst of activity as restrictions ease, supported by extensive government payments. But an abrupt withdrawal of government support in a few months’ time would magnify the economic risks. If all, or even most, government emergency supports are withdrawn simultaneously in October, it will leave a substantial hole in incomes for households and businesses, and threaten the economic recovery.
Without further stimulus, unemployment will remain too high and the economy will grow more slowly than it could for many years.
In this submission on the Queensland Government’s economic response to COVID-19, Grattan’s Danielle Wood and Brendan Coates urge governments to start planning for sizeable fiscal stimulus to support the economy beyond October and into next year. If governments want to get unemployment back down to 5 per cent or below by mid-2022 then they will need to be prepared to collectively spend another $70-to-$90 billion on services, infrastructure, social housing, and a more gradual phasing-out of temporary business and household supports.
Both federal and state governments will emerge from this crisis with a lot more debt than pre-pandemic. But they should not risk the economic recovery by moving too fast to consolidate their budget positions. Interest rates are at record lows and the debt position is manageable. Governments can keep debt contained in the medium term by pursuing reforms to boost economic growth and by running tighter budgets after the economy has recovered.Tweet