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The government is being urged to forget the surplus and put money in the hands of Australians, as the coronavirus looks set to punch a hole in the economy

Jack Derwin
  • It's time for the government to open up the coffers and spend some money, economists have urged ahead of the RBA rate decision on Tuesday.
  • While the RBA is widely expected to cut interest rates to 0.5%, its impact won't come quickly enough to help offset the coronavirus.
  • Any cut must be supported by government spending, according to economists from Domain and the Commonwealth Bank.
  • Visit Business Insider Australia’s homepage for more stories.

It might be time for the government to cough up.

As the coronavirus looking like it will punch a hole in the Australian economy, and the Reserve Bank of Australia (RBA) set to cut the interest rate, it's the Federal Government that has to step up, according to Domain economist Trent Wiltshire.

"There needs to be a two-prong approach. It can't all be left to the RBA," Wiltshire told Business Insider Australia on Tuesday, ahead of the RBA's rate decision.

While the government has previously ruled out the idea of Kevin Rudd-style handouts, there is a "strong argument" for it, Wiltshire said.

It certainly appears the government is slowly coming around to the idea. In a video conference with Treasurer Josh Frydenberg and RBA Deputy Governor Guy Debelle on Monday, Prime Minister Scott Morrison hinted there was a stimulus package coming "in the not too distant future".

It marks an enormous turnaround for the government which has time and time again rebuked the suggestion it would give up its long-running promise to return the budget to surplus. The same surplus has been looking increasingly unlikely since the disastrous bushfire season and the coronavirus outbreak took bites out of it. Given the economic damage both have wrought on a soft economy, it's time the government gave it up entirely according to Wiltshire.

"It's good to see the government softening its stance on the surplus, which was a crazy decision to promise something in the future you've got no control on, purely for political reasons," he said. "It at least looks like it might be flexible and might implement some stimulus [which] it needs to because it's difficult to say where this [coronavirus] is going to go."

There are many forms that government spending – or fiscal stimulus – could take.

"Right now, the Coalition looks like it might consider a business investment allowance. An allowance would only bring forward investment that was going to happen anyway, but it is needed given how bad the business investment numbers are right now," Wiltshire said.

But Wiltshire, and others, have their own suggestions.

"Boosting things like Newstart and rental assistance would give money to people who have a high propensity to spend would be smart. More likely, however, the government will probably consider tax cuts, but that's going to be less effective than putting money in the hands of those who will spend it," Wiltshire said.

He's not the first to call on the government to step up. Even RBA governor Phillip Lowe has broken ranks, albeit with the utmost diplomacy, to call on the Coalition government to forget its damn budget surplus for just one second. It's a view shared by other economists including those at the Commonwealth Bank who suggest stimulus could increasingly target the hardest-hit segments of the economy.

"A fiscal response would, however, be more appropriate. The budget position has been deteriorating, but there is still scope to support the economy outside of the traditional automatic stabilisers," CBA senior economist Belinda Allen said. "So far there have been some state government initiatives to support the tourism sector and follows the help provided post the bushfires."

Certainly the way in which the coronavirus has blown a hole through Chinese output and demand does not bode well for Australia's economy, let alone the estimated impact on its tourism, education, and export sectors -- all of which will continue to become apparent over the March quarter and likely beyond.

The two are certainly not the first to urge the government to step up. Even RBA governor Phillip Lowe has broken ranks, albeit with the utmost diplomacy, to call on the Coalition government to forget its damn budget surplus for just one second. These latest calls however come just hours before the RBA board convenes to make its monthly decision on interest rates.

With the market having already priced in a cut on Tuesday, and some economists revising their predictions amid the ongoing coronavirus outbreak, the Reserve Bank of Australia (RBA) seems almost destined to take the cash rate lower.

"I think they will cut and I think they should cut. Coronavirus is obviously the trigger but it's really just bringing forward rate cuts that would have happened anyway," Wiltshire told said. "The unemployment rate recently ticked up, wages aren't growing, and economic growth has been pretty slow, so I think the RBA would have cut at some point, and possibly twice, this year anyway."

"Given that the outlook from the coronavirus is worsening every day, the RBA really needs to cut ASAP to try to stimulate," he added.

Not that interest rates can solve everything, Wiltshire acknowledges, with a long lag between when a cut is made and when it actually makes an impact on the real economy. It makes the RBA's interest rate decisions a fairly blunt tool, and one ill-suited to dealing with the sudden uncertainty wrought by the sudden coronavirus outbreak.

"The RBA always needs to be forward-looking but I think they've been behind the curve for a while now and cutting too late. It's why the economy hasn't improved and why wage growth remains weak," Wiltshire said.

"While it's unknown how big the impact will be, even if things improve from today, it will still be a pretty big hit to the economy in the March quarter. But it looks like things are getting worse, and it might drag on for three, six or twelve more months. Right now, it looks unsure."

So while another rate cut might just be too little, too late, the central bank has few alternatives.