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Plenty of temporary Government spending but where are the jobs?

Stephen Koukoulas
·3-min read
Plenty of temporary government spending, but where are the jobs? Source: Getty
Plenty of temporary government spending, but where are the jobs? Source: Getty

For more Yahoo Finance stories on the 2020 Federal Budget, visit here.

The Prime Minister, Scott Morrison and Treasurer Josh Frydenberg have repeatedly said the budget is about “jobs, jobs and jobs”.

They went so far as to say that all of the policy changes and reforms announced in the budget would be aimed at delivering jobs and tackling the nasty unemployment rate that the 2020 recession has imposed on the Australian economy.

Unfortunately, the promise of jobs, jobs, jobs rings hollow.

The Treasurer’s own budget forecasts show that the unemployment rate will be 7.25 per cent in June 2021, easing a little to 6.5 per cent in June 2022. Disconcertingly, the budget papers show the unemployment rate will not reach the pre-Covid-19 level for another five years.

Recall that in the early months of 2020, prior to Covid-19, the unemployment rate was around 5 per cent, even when the pace of economic growth had been sluggish.

While government spending will be adding significantly to economic growth, it is clearly not enough to deliver a timely return to pre-Covid-19 unemployment levels, let alone anywhere near enough to getting the jobs market back to full employment, which reputable economists estimate to be around 4 per cent.

This disappointingly slow recovery is despite a huge increase in government spending, which rose a quite staggering 13.4 per cent in 2019-20 and is budgeted to rise a further 23.6 per cent in 2020-21. This rate of increase in government spending has not been seen in any modern budget.

The problem of high unemployment

Part of the problem in getting the economy back to full employment are the substantial spending cuts in the so-called ‘out-years’ of the budget. Digging into the budget papers shows that government spending is forecast to fall by a staggering 17.5 per cent in 2021-22 and a further 0.6 per cent in 2022-23.

At one level, this is understandable as it is difficult to maintain government spending at a super-elevated level with government debt on track to hit $1.1 trillion. The sonic boom escalation in the level of debt will have to be tackled one day.

At another level, the economic experience around the world shows that high levels of government spending can be sustained, they are effective and they can be easily funded at a time of crisis like the one being experienced at the moment.

The massive and unprecedented spending cuts starting in June 2021 will restrain any recovery and keep the unemployment rate higher than it need be. This is a problem.

Also a concern is that the weakness in the labour market extends to wages growth. Treasury is forecasting annual wages growth of just 1.25 per cent through to mid-2021 after a rise of just 1.8 per cent in the year to mid-2020.

Disconcertingly, the still fragile labour market is expected to cap wages growth at 1.5 per cent in 2022. Over the two years, this represents a 0.5 per cent fall in real wages.

This is a problem for the economy as it means the ability of household spending growth to lift and to be a driver of economic expansion is limited – strong wages are the essential ingredient for strong growth in household consumption.

The support is temporary

The problem with the government paring back support for the economy and job creation within a year of such a deep recession is a legacy of unnecessarily high unemployment.

Even with what might be termed ‘mild’ recessions, it usually takes between 5 and 10 years to get the unemployment rate back to pre-recession levels. This is usually because policy makers take away the stimulus too early.

Given the forecasts presented by the Treasurer, history looks to be repeating.

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