Chances are, you’ve heard the coronavirus has triggered the worst economic downturn since the Great Depression of the 1930s.
You may have also heard a lot of ideas about what the government should do next.
In fact, such was the topic of discussion at the Senate Select Committee on COVID-19 hearing on Thursday.
Against a backdrop of rising unemployment and stagnating wages, prominent economists offered parliamentarians their two cents on the polices needed to get Australians back to work.
The key takeaway? Only governments can get us out of this mess.
That’s because private businesses will have little appetite to borrow and spend in this uncertain economic climate.
And neither will households, which account for almost 60 per cent of national GDP via spending on goods and services.
As Market Economics director Stephen Koukoulas pointed out in his opening statement to the Senate committee: “Who now would be starting to plan to build a new hotel, an office tower, or a housing development? Or invest in new planes, or universities and the like?”
Without ongoing support from government, business investment and consumer spending will continue to decline, undermining the economic recovery and leading to more job losses than we would otherwise suffer.
This is how recessions become depressions.
Weak spending leads to job losses, which feed back into even weaker spending and even more job losses.
It’s a vicious cycle that can easily get away from governments, which is why decisive action is crucial.
“This means the government must not only look to fill the gaps left by the depression-like conditions in the private sector, but it needs to generate growth over and above that,” Mr Koukoulas said.
The economist then told the Senate select committee that government should invest an additional $200 billion over the next two years to help the economy get back on track.
The Grattan Institute on Sunday called for $70 to $90 billion of additional spending over that timeframe, advocating for the extension of JobKeeper for struggling industries and a permanent $100-a-week increase to the JobSeeker unemployment benefit – among other things.
The other economist who gave evidence during the Senate committee’s first session on Thursday was former ANZ chief economist Saul Eslake.
Mr Eslake said talk of a V-shaped recovery was fanciful and government would need to provide ongoing support for a prolonged period of time.
The economic hit is unlikely to be as severe as first feared, he said.
But if you look past the definitional issues associated with the headline unemployment rate, and focus instead on the number of people who are receiving JobSeeker, then that gives you an unemployment rate of 12 per cent.
Government must support the incomes of these people beyond September to prevent the economy falling off a financial cliff, Mr Eslake said.
“The scenarios used by the Parliamentary Budget Office in their June 5 report, on medium-term fiscal projections, show that the level of real GDP won’t return to its pre-pandemic 2018-19 level until the 2021-22 fiscal year,” Mr Eslake said.
“And even then, the level of real GDP will still be 10 per cent below where it was projected to have been in that year in the [government’s] MYEFO, published in December last year.”
Mr Eslake said the figures underscored the point made by Reserve Bank governor Philip Lowe when he last appeared before the Senate select committee: “That we’ve got to keep the fiscal stimulus going until recovery is assured”.
The International Monetary Fund and Organisation for Economic Co-operation and Development have made similar points in recent reports – warning that removing JobSeeker and JobKeeper too quickly would derail the recovery.
The massive spending can’t go on forever, of course.
But Mr Eslake said interest rates are so low at the moment that the federal government can borrow billions more without putting the federal budget in jeopardy.
“So long as interest rates on government debt are less than the growth rate of nominal GDP, growth in the economy will work to lower debt as a share of GDP,” Mr Eslake said.
When asked what the government should focus on as restrictions are eased, Mr Koukoulas reiterated that it shouldn’t withdraw JobSeeker or JobKeeper too early.
“Or if they are modified, make sure that there’s something else to back it up,” Mr Koukoulas said.
“To make sure they have money in their pocket so they’re not evicted from their houses, so they that they don’t have to have a forced sale of their house, so that we consumers still spending in the economy, and that businesses still retain some employment.”