A Budget balancing act
The Federal Government delivered a record fiscal stimulus in this year’s Budget to kick-start a strong economic recovery, but did they get the balance right? Suncorp Economist Paul Brennan discusses.
Following the Spanish flu 100 years ago, the global economy enjoyed a period of strong recovery during the so-called ‘Roaring Twenties’. Fast-forward to today, and we are all hoping history will repeat itself following COVID-19. But based on the actions of the Federal Government this week, it’s clear they are certainly not relying on this hope, delivering a record fiscal stimulus in this Budget.
The wide range of measures aim to kickstart a strong economic recovery by creating a virtuous circle of more employment, more investment and more consumer spending. The economic forecasts in the Budget assume the strategy will be successful with GDP forecast to rebound by 4.75% in FY22 and the unemployment rate falling from a peak of 8% at the end of this year to 6.5% by the middle of 2022.
The instant asset write-off on all depreciable assets, costing $27bn over the forward estimates, is central to driving business investment and boost employment, while the $4bn new hiring credit and $1.2bn scheme for new apprentices will create new jobs.
Both investment and employment are key elements of demand, but they are also fundamental drivers of the supply side of the economy, and how well they work together will also shape a third driver of the economy’s supply side – productivity.
With significant spare capacity in the economy and heightened uncertainty, many businesses will be cautious about making new investments. Instead, they may initially focus on working their existing capital stock harder by taking on more workers given the large downsizing that followed the onset of the virus and related restrictions. This raises the question of whether there is the right balance between the large expenditures directed at business investment and the lesser amounts on direct employment subsidies. There are also broader issues around whether the design and level of direct employment subsidies will be enough to drive the unemployment rate down quickly enough to avert long-term unemployment in the industries and regions that have been disproportionately impacted by COVID-19.
With significant spare capacity in the economy and heightened uncertainty, many businesses will be cautious about making new investments. This raises the question of whether there is the right balance between the large expenditures directed at business investment and the lesser amounts on direct employment subsidies.Suncorp Senior Economist Paul Brennan
First, the hiring credit represents a pivot from preserving existing jobs under the JobKeeper program to encouraging businesses to take on more workers. This pivot ultimately makes sense, but a longer period of overlap between JobKeeper and the hiring credit may be needed. It’s also the case that the hiring credit is restricted to those currently on JobSeeker and Youth Allowance. In contrast, there are few restrictions on businesses accessing the instant asset write-off program.
Second, while young people have disproportionately suffered job losses, and many face a challenging transition from education to the workforce, middle-aged and older workers also are at risk of long-term unemployment as business models change as a result of COVID-19.
Third, continuing restrictions to deal with COVID-19 including physical distancing and limited travel make it challenging to restart job growth in tourism, hospitality and the arts. A broader hiring scheme would therefore be particularly beneficial in these industries and those regions that are more heavily reliant on these industries.
Indeed, the original proposal for a hiring credit floated by independent economic modelling expert Peter Downes was broad based across all age groups, costing $15bn (0.75% of GDP). Downes argued that by aggressively and directly stimulating employment this ultimately lowers the Budget deficit, both by raising Budget revenue as more people are employed and by stimulating wage growth as the unemployment gap is eroded more quickly.
Related to this, the imperative to stimulate employment growth is high because without sustained faster employment growth it is hard to see how there will be a material pick up in wages. Faster wage growth is needed to support a strong recovery in consumer spending beyond the temporary boost from the bringing forward of personal income tax cuts.
It is also needed if inflation doesn’t remain dangerously low.
However, the wage forecasts stuck below 2% until FY23 and then only reaching 2.25% in FY24 will be a challenge. Unit labour costs may grow by even less given that the budget forecasts imply a noticeable lift in labour productivity as economic growth picks up and as businesses spend more on new business investment.
It may therefore be that in the absence of a different balance between the components of the JobMaker, a designed hiring credit program will be needed to achieve the Budget’s ambition of a sustained path back to low unemployment.