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Will Australia fall into recession? It's in Scott Morrison's hands

Stephen Koukoulas
·5-min read
CANBERRA, AUSTRALIA - MARCH 03: Prime Minister Scott Morrison listens to Deputy Prime Miniser Michael McCormack during Question Time on March 03, 2020 in Canberra, Australia. The Reserve Bank has cut interest rates to 0.05% as the Federal Government works on plans to safeguard the Australian economy amid the current coronavirus outbreak. (Photo by Tracey Nearmy/Getty Images)
The Prime Minister can decide whether or not Australia falls into recession. (Photo by Tracey Nearmy/Getty Images)

Let’s stop the weak-willed hand wringing about the inevitability of a recession.

It is not inevitable.

It can be avoided with bold policy action.

The Morrison government will decide with its policy response to the already weak economy and the fall-out from the coronavirus whether or not Australia slides into its first recession in almost 30 years.

Treasury, the RBA and a swathe of market economists are warning of a recession as the coronavirus hit global trade, world economic growth and the Australian economy which was already travelling poorly prior to this extreme negative shock.

How to avoid a recession 101

In simple terms, here’s the overarching blueprint for avoiding recession.

The government needs to inject cash into the economy. For the most powerful effect, one that will avoid a recession, policy must be skewed to the distribution of money to low and middle income earners because they have a high propensity to spend that money.

That said, it is also important to have a broader distribution of temporary payments to others, knowing that spending will inevitably rise.

Given that the value of economic output is around $500 billion per quarter, a cash boost of at least $5 billion per quarter will add 1 per cent to growth, other things being equal.

We know other things are not equal with tourism and education dropping precipitously and there are supply chain problems hampering business. On what is called a “no policy change basis”, output is falling (which after all is the basis of the definition of a recession) by around $3 or $4 billion per quarter.

This means the government can and should have an initial and immediate injection of $5 billion and be at the ready to with a further $5 to $7 billion injection each and every quarter until the fall out from the coronavirus fades. This is even if this recovery is three, four or five quarters away.

And if things in the economy is even worse, the injection of cash needs to be $10 or more billion a quarter.

How does the government get cash out there quickly?

Accelerated depreciation allowances and the like are of some use but still depend on businesses investing.

There is no guarantee they will take up even generous tax concessions.

The issue, rather, is getting cash into the hands of consumers.

Here are a few ideas. Such policy suggestions need to be costed by Treasury and therefore the details might be marginally different, but the basics are clear.

  1. A temporary rise in all pensions of $50 a fortnight.

  2. Lift Newstart by $50 a week, noting this has a long run cost to the budget, even when the economy improves, but the move will boost retail spending.

  3. Credit every PAYG taxpayer with $200 a month, every month, until the crisis ends.

  4. Ramp up spending in health care aimed specifically at containing the coronavirus.

  5. Spend whatever it takes to provide free appropriate flu vaccinations to everyone.

  6. Fast track government payments to suppliers to support the business sector.

  7. Provide funds to local government to undertake all repairs, maintenance and new construction as required.

There are likely to be other measures which are effective and these should be considered.

The key point is the quantum of cash injected into the economy each quarter.

And if these measures aren’t enough, double or triple them.

Yes, this will mean a deficit; embrace it

These measures will lead to a budget deficit. Clearly.

While this will be a humbling experience for the proponents of paying off government debt and running budget surpluses, it will be world best economic policy.

An annual budget deficit of $20 billion? $30 billion: so what?

If it avoids a recession, keeps the economy growing, businesses open and limits any significant rise in the unemployment rate, it is a small price to pay.

RBA doing a bit to help – could do more

The Reserve Bank of Australia should also immediately cut the cash rate to 0.25 per cent.

While the RBA has been hopelessly slow delivering stimulatory monetary policy to the economy over the past two years, it is learning from its errors and has cut rate four times in the last 10 months.

When is cuts rates, it needs to signal to financial markets, the business sector and community more generally, that it will implement quantitative easing as required which will help to ensuring liquidity in banking.

Indeed, such are the problems, it could look to implement quantitative easing (QE) now, injecting unlimited cash into the banking system. It should have at its core boosting inflation to 2.5 to 3 per cent, a result that would mean a recession is averted.

Timid government? Get set for a million unemployed

If the government spends too little or targets areas that are unlikely to have a strong multiplier effect through the economy, an unfolding recession will see the unemployment rate hit at least 6 per cent.

If the recession is a little deeper and longer than two quarters, the unemployment rate hit 7 or 7.5 per cent in 2021.

This means that close to one million Australians will be unemployed.

This is the base case scenario confronting the government as it prepares a package of stimulus measures to support economic growth in these troubled times.

Over to you, Prime Minister

The choice is Mr Morrison’s.

Run a budget deficit; inject cash into the economy.

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