'Rudd mark II': what experts say about Australian government's $17.6bn stimulus package

Economists say the Coalition’s response to the coronavirus will do its bit to boost confidence, but further cash maybe needed

https://www.theguardian.com/business/commentisfree/2020/mar/12/rudd-mark-ii-what-experts-say-about-australian-governments-176bn-stimulus-package

A step in the right direction to boost GDP growth

The government’s announced fiscal stimulus worth around $17.6bn, or about 1.2% of GDP. Importantly, 60% of the spend will land in 2Q, boosting GDP growth sizeably in the quarter. Cash payments to welfare recipients will support consumption, as should the increase in the instant asset write-off for business. The transfer/subsidy to business is also reasonably generous, and should go some way to insulating the labour market by providing an offset to any liquidity issues.

Generally we view this package as a step in the right direction, and it is worth noting that the government retains the option to scale or add to these measures in the May budget if required. The government has been reasonably short term in dictating the duration of stimulus, with all of it to be spent or distributed before mid-2021. This should go some way to insulating budget estimates in the out years from too much deterioration.

– Sally Auld is the head of Australia and New Zealand economics and markets research at JP Morgan.

Handing money to the lowest earners is effective

The government’s decision to provide cash payments and incentives to the supply side of markets, helping companies continue to fund their payrolls (including apprenticeships) and in other ways negotiate supply-chain disruptions, is welcome news. This support could have been even more targeted to sectors that are worst affected. Extra support to the health sector – an obviously affected industry – is also welcome, though the opportunity was missed to underscore facts about hygiene habits, bug virulence, and our country’s preparedness, that would reduce public panic.

The decision to write cheques to welfare recipients seems sourced in the notion, valid or not, that such people are most likely to feel the pinch of supply-side disruptions. Handing out money to our lowest earners is a more effective spending stimulus than handing it out to the highest earners, due to the former’s higher marginal propensity to spend. While a once-off handout to Australia’s worst-off gets my vote, as with the infusions for suppliers the tailoring of this government response to the Covid-19 virus disruption could be better. To counter Covid-19’s effects, we would target directly affected workers, not implement a blanket demand-side stimulus to poor people. I expect administrative feasibility featured in the government’s deliberations.

– Gigi Foster is a professor in the School of Economics at the University of New South Wales, and co-host with Peter Martin of the Economists on ABC RN.

Striking in its similarity to Rudd response

The most striking feature of the government’s response is that it is identical in outline, and in many of the details, to the Rudd government’s response to the global financial crisis. The central elements are a cash handout aimed at sustaining consumer demand and broad measures to stimulate investment. The idea of a modest and tightly targeted stimulus, with a price tag of around $5bn, being promoted by government leaks as recently as last weekend has been abandoned.

Instead, we have a package with an initial cost of nearly $18bn. Allowing for inflation and population growth, that’s very similar to the $10bn cost of the Rudd government’s initial stimulus. As with the Rudd package, the plan is to wind that back rapidly once the crisis is over – we all know how that worked out. It’s highly likely that the economic aftershocks will be felt for years to come, and that the impact on the budget will be well over $100bn by the time we recover.

The big question is whether anything will change in the longer term. In the immediate aftermath of the GFC, we saw some attempts at rethinking the failed ideology of market liberalism, and accepting that a modern society can only function with a strong government and a commitment to a just society. The looming disaster of the coronavirus is exacerbated by growing inequality and insecurity. Hopefully, the response will mark a turning point.

– Professor John Quiggin is the VC senior research fellow in the school of economics at the University of Queensland

Whether this is enough is the big question

Go hard, go early, go business is the message from today’s stimulus announcement and it’s the right one for this stage of the crisis.

The government has significantly ramped up the ambition of its stimulus package from what it was considering just a week ago and will pump close to $18 billion into the economy – around 0.9 % of GDP – this financial year.

The measures to support business cashflow are welcome and should give businesses confidence that the government is willing to support them during what will be a very challenging period. The $25,000 income tax write-off for businesses with turnover of less than $50m is effectively a cash payment for all small and medium businesses with staff. The wage subsidy for apprentices should provide an incentive for businesses to keep on their younger workers, those that are otherwise most vulnerable to losing their jobs in a downturn. And the extension of the instant asset write-off – already on the cards before the coronavirus shock – will underpin investment and provide further cashflow benefits for business with turnovers up to $500m.

Household support of up to $750 goes to those getting government payments – Newstart, pensions and family tax benefits, among others. While some of this will boost demand – most Newstart recipients will spend every cent – pensioners save a lot of their income and will be less economically affected by the virus.

The government has partially addressed the problem of income risk for casual workers required to quarantine, by waiving the waiting period for the sickness allowance. Whether this is enough to cushion the income hit for these and other workers is the big question. In the (likely) event that still more stimulus is needed after virus containment measures like closing schools are workplaces are enacted, this is where the government should focus.

- Danielle Wood is program director, budget policy and institutional reform, at the Grattan Institute

Appropriate response that avoids misallocating resources

The fiscal package is of appropriate magnitude and is focused on alleviating cash constraints and providing incentives to maintain investment spending. It leaves decisions on how to spend and save largely with the private sector and so avoids misallocating resources. The additional resources allocated to the health system are obviously needed and welcome.

The government could have also given consideration to allowing individuals to access their superannuation balances up to a maximum cap.

– Stephen Kirchner is the program director, trade and investment, at the United States Studies Centre at the University of Sydney

Sound package that mimics Rudd’s GFC stimulus

The overall package is sound. Morrison has learnt from the stunning success of the Rudd government stimulus package during the global crisis for examples of how to manage the economy during times of crisis. Pumping cash totalling over 2% of quarterly GDP into the economy in the June quarter 2020 will almost certainly avoid a negative quarter for GDP growth and therefore a recession. This seems to be the key focus politically, but also the benefits are clear for the economy. The residual stimulus measures will underpin growth past the June quarter but more stimulus may yet be needed. Global and domestic events may require further cash injections, but for now, this Rudd mark II package will help the economy and do its bit to boost confidence.

– Stephen Koukoulas is the managing director of Market Economics