Fuel injected

It is important not to lose sight of just how unimpressive economic performance going into the pandemic really was. The big-four banks’ economics teams were all anticipating the RBA would cut the cash rate twice – to the effective lower bound of 0.25 per cent – in 2020. QE was not in most economists’ base cases but most had it as a plausible risk factor.

COVID-19 took this limp outlook and walloped it with a lump hammer. As the pandemic spread globally and country after country went into lockdown, forecasts changed from bleak to near apocalyptic. Federal treasurer, Josh Frydenberg, recently reminisced in an interview with the Sydney Morning Herald about being presented with Treasury estimates at the height of the crisis that Australian unemployment could reach 15 per cent and the drop in GDP could be as high as 20 per cent.

It goes without saying that Australia’s public-health, and therefore economic, outcomes in the pandemic have been exceptional. Or perhaps exceptional so far – the misfiring vaccine rollout may present a long tail to the crisis, especially in the context of reopening international borders.

Faring better than other countries in the pandemic simply does not explain, at least not in and of itself, the position and trajectory of the Australian economy in mid-2021, however. Instead of being relieved to find the house still standing after a cyclone, Australia appears to have ventured outside and discovered that it also has a new car on the drive.

Consumer confidence is a perfect example. A 6.2 per cent rise in the April print took the Westpac-Melbourne Institute Index of Consumer Sentiment to 118.8 – its highest level since August 2010. It was at 79.5 in August last year and has only touched 120 three times this millennium.

It is the same in the business sector. The National Australia Bank business survey for March recorded conditions – the combination of trading, profitability and employment – at plus 25, an all-time high for a data set that stretches back to 1997. Business confidence eased back somewhat, to plus 16, but remains close to a record positive level.

These numbers are even more noteworthy in the context of the withdrawal of JobKeeper stimulus at the end of March. It is easy to forget that when this was introduced one of the biggest fears was the possibility of a sharp economic decline when it ended. Far from falling into a ravine at the end of “the bridge”, the Australian economy appears to have completed a Dukes of Hazzard barrel roll as it exited the bridge and landed several dozen metres further up the other side than its point of departure.

All else being equal, this should not be possible. After a long and tiring week at work, on the very unusual occasions on which I wrap up by having far too much to drink I very rarely wake up on Saturday morning feeling better than I did at 3 o’clock on Friday afternoon.

It seems pretty clear that the difference-maker is the scale and breadth of stimulus government has been willing to provide during the pandemic period. The government claims to have committed A$251 billion (US$192.3 billion) of stimulus spending in response to the pandemic, of which about A$150 billion has been distributed.

The money spent represents around 8 per cent of Australian GDP, which dwarfs previous federal-government efforts at offsetting a global downturn. Stimulus spending following the global financial crisis, for instance, was the equivalent of about 1.8 per cent of GDP in 2008-09.

I have written before that it is somewhat ironic to see a Liberal government apparently convert so wholeheartedly to Keynesianism, given its apparently implacable opposition to excessive government spending barely a decade ago. It turns out there is such a thing as good and bad government debt, but it is not what the money is spent on that creates the moral distinction so much as who is responsible for borrowing it.

Equally encouraging, and perhaps even more surprising, is the fact that at least some of the pandemic stimulus found its way into the hands of those who both most need it and are most likely to use it in a genuinely stimulatory way – by spending it.

The JobKeeper scheme and the temporary increase in JobKeeper managed, as I wrote in the last edition of KangaNews, to help Australia come through the worst of the pandemic without a radical increase in wealth inequality despite the economic impact falling disproportionately on sectors with a high representation of casual and low-income workers.

The fact that a government that has always pitched itself as fiscally conservative – to a fault, some might say – managed to execute a rapid and pragmatic pivot to a successful stimulus footing deserves applause. The questions for the next phase of the cycle are whether it will revert to type, if so how quickly, and whether the flip-side of classic Keynesian policy – rebuilding the public balance sheet on the revenue side – might in time be worth revisiting.

I am encouraged to see that the federal government may have learned from some of the worst mistakes of the period after the global financial crisis. Frydenberg recently told media that “it’s not a time for austerity measures”, instead emphasising the “targeted support” in “the next phase of [the] recovery plan”.

By late April, the government was also floating to its preferred media the idea of a second round of tax rebates for low- and middle-income Australians. This will be far smaller in aggregate than the already-legislated cuts coming for wealthier taxpayers, which will of course have a far smaller proportionate impact on the economy. But as an incremental move it is another tick on the ledger of plausibly successful stimulus.

All this deserves a sigh of relief, though it should be self-evident that a headlong and self-flagellating rush to austerity could be catastrophic. By enacting such policies after the financial crisis, a UK government of comparably moderate stripe to the current Australian administration ushered in a wave of discontent and anger that arguably set the scene for Brexit and its associated political crisis.

Australia’s debt-to-GDP position – weaker than it was a decade and a half ago, but still globally enviable – provides plenty of leeway to keep the taps open for the time being. The rapid economic recovery since 2020 and a potentially close general election by 2022 are no doubt sharpening government focus on ongoing support.

In the longer term – whichever administration is in place after the next federal election – it will be interesting to see whether this period of fiscal pragmatism leads to a rethink of Australia’s lingering ties to the budgetary orthodoxy of the past 40 years. In particular, will future governments be able to avoid the siren call of “budget repair” as a virtuous course of action with little regard to economic realities and, as and when fiscal consolidation does make sense, will the policies to achieve it be plausible?

I am sure it will not be long, for instance, before we start reading plaintive missives from the business community and its assorted cheerleaders insisting that corporate tax cuts and greater labour “flexibility” are the only way Australia can maintain competitiveness. If this follows a record period of business investment and a return to a level of wage growth that improves standards of living – and helps the government inflate away some of its accumulated debt – I think those entreaties will bear consideration. Personally, I am not holding my breath.

On the other hand, I will be watching with interest the situation in the US, where the new administration is exploring the shocking idea that the business sector might contribute more to the public purse.

Of course, the US legislative system is such that the chances of these policy ideas coming to fruition must be marginal at best. But there can no longer be any denial of the fact that the government balance sheet is now the engine of economic growth. If we are going to hand back the keys to the private sector, it can only be on the basis that it will deliver certain outcomes – specifically, a fiscally sound future and an answer to the even greater crisis looming in the coming decade or two: environmental catastrophe.

If, as seems to be the case in Australia, federal government is unable or unwilling to lead on environmental transition, at least it could lay the ground for it by providing incentives to business to do the work it will not.