Peter Martin Economics

Friday, November 20, 2020

Retirement review finds problems more super won’t solve

Tuesday, November 03, 2020

5 ways the Reserve Bank is batting for us like never before

The most important of the five measures the Reserve Bank announced on Tuesday is the one that won’t whirr into place for a very long time.

Others start immediately. On Thursday the bank will wade into the market and start buying up bonds issued by Australian governments.

It’ll buy Commonwealth government bonds with five to seven years left to run on Mondays, Commonwealth bonds with seven to ten years left to run on Thursdays, and bonds issued by state governments on Wednesdays.

It’ll spend about A$5 billion a week, every week for six months until it has unloaded $100 billion.

1. $5 billion per week, week in, week out

As before, when it did this on a more limited scale, it won’t be buying the bonds from the governments that issued them, but from third parties such as super funds and investment managers.

What’s (very) different is that it will be forcing a particular sum of money into their hands.

Its earlier bond buying program (which will continue) spent only as much as was needed to achieve an interest rate target.

The new program will spend a particular sum of created money (the Reserve Bank creates it out of nothing) every week for six months, whatever happens to rates.

It’ll be true “quantitative easing”, in that it’s the quantity of money that will matter, not the price.

Once in the hands of investors who would really rather own bonds, they’ll have to do something with it, such as investing in a business that employs people. That’s the theory.

As well, with bonds harder to find in Australia, fewer foreigners will move money here to buy them propping up the Australian dollar. That should allow the Australian dollar to fall, making local businesses more competitive against those from overseas. That’s the other part of the theory.

2. Cash rate near zero

And that’s just one of five measures Reserve Bank Governor Philip Lowe announced on Tuesday.

The once-watched cash rate which is the interest rate on unsecured overnight loans between banks, was cut to 0.25% in March amid hope that 0.25% was so low it wouldn’t need to be cut further.

Within days the actual cash rate at which banks transact business had fallen a good deal lower because, at 0.25%, many more of them wanted to lend than borrow.

Target cash rate versus actual

When it settled at about 0.14% the Reserve Bank didn’t bother to intervene to push it back up.

The new target of 0.10% will give banks almost no return for lending to each other and make borrowing from each other almost costless.

The separate rate for cash on deposit with the Reserve Bank will fall from 0.10% to as good as zero, 0.01%

If the cuts were passed on in full to bank customers they would cut the standard variable mortgage rate from around 3.2% to 3%.

The rate on new mortgages would slide from 2.7% to 2.5%. The rates on customer’s deposits, already near zero, would fall further.

3. Bond rate to 0.10%

The Reserve Bank had been targeting a three-year bond rate of 0.25%, buying as many bonds as were needed to keep it there. It’ll cut that target to 0.10% in line with its cut in the cash rate, buying as many bonds as are needed to get and keep the rate at 0.10%.

Three-year bonds are used to fund fixed three-year mortgages and personal and business loans. All will become even cheaper.

This bond-buying program, which will target the rate, is completely separate from, and additional to, the $5 billion per week the bank will spend buying longer-term bonds week in, week out.

4. Near-free loans to banks

Since March the government has been advancing money to private banks for three years for just 0.25%.

The more they expand their lending to business (and especially to small and medium sized business) the more it will it will advance them in accordance with a formula.

The formula won’t change but the rate will. From Thursday new loans under the program will be offered to banks for just 0.10%.

5. A commitment with teeth

Until now, the bank has been fuzzy about the circumstances in which it will eventually change course and start pushing rates back up.

Its commitment was weaker than it sounded

the board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band

Whether or not “progress is being made” is subjective.

The commitment allowed the bank to assert that progress was being made and reverse course at its convenience.

Whether or not the bank was “confident” that inflation would be sustainably within its target band was even more subjective.

One word, big change

On Tuesday, Governor Philip Lowe ditched the fuzziness and replaced it with something measurable.

The board will not increase the cash rate until “actual inflation” is sustainably within the 2% to 3% target range.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.”

So prepared is the bank to bat for Australia that it won’t stop until there’s a “tight labour market”.

And it has used the word “actual”.

No longer will the bank need to merely see “progress towards” an inflation rate of 2% to 3%. It will have to be faced with an “actual” inflation rate of 2% to 3%.

Low rates for a long, long time

Australia’s inflation rate hasn’t been sustainably between 2% and 3% for more than half a decade, and it is likely to be at least that long again until it gets back there, if ever.

Governor Lowe said the bank’s forecasts, to be published this Friday, will put the inflation rate at 1%. It’ll put wage growth at the lowest on record, less than 2%.

By tying the future of the cash rate to an actual inflation rate rather than a feeling about the inflation rate, Governor Lowe is tying the bank to a cash rate of close to zero for as far anyone can see.

It means that not only will it be as cheap as it has ever been to borrow (for a mortgage, a business, for anything) it means there’s no risk of that suddenly changing because the bank gets rush of blood to the head. It’s about the future, but it matters now.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Sunday, October 25, 2020

‘Could do better’: top Australian economists award the budget a cautious pass

Australia’s leading economists have struggled to grade this month’s budget.

Challenged by the Economic Society of Australia and The Conversation to rate it on a scale of A to F when judged by its stated aims of rebuilding the economy and creating jobs, none of the 43 economists who responded gave it the lowest grades of E or F.

But most who gave it a pass were unhappy.

Financial markets expert Kevin Davis praised “the willingness of a conservative government to adopt needed large deficit spending at variance with its ideology”.

Economic modeller and former Reserve Bank board member Warwick McKibbin said he would give it an A for scale.

But Davis said tax cuts “to the better-off employed” weren’t the best way of achieving desired outcomes, and McKibbin said the composition could have been much better designed.

“There was an opportunity to invest in green infrastructure as part of a fiscal response and a climate/energy policy response that would have longer-term economic and environmental payoffs,” McKibbin said.

“For spending support, transfers to low income households rather than income tax cuts would have given a bigger bang for the buck. Greater support of childcare would support incomes and labour supply.”

Bob Breunig said the design of the childcare benefit created a well-documented income cliff for second earners making it difficult for them to work more hours. It was a known problem and would have been easy to fix.

Hard hats instead of soft skills

The Grattan Institute’s Danielle Wood said it was “absolutely the right call to change course on fiscal strategy and recognise the need for sizeable stimulus, so marks for that”.

But the budget “very much bet the house on a private sector-led recovery”.

Where it had spent money directly it mostly went to “hard-hat” professions such as infrastructure, construction, manufacturing, defence, utilities and energy.

“Some of these sectors haven’t even seen job losses during COVID,” Wood said, and there is already a healthy pipeline of work for transport infrastructure projects, so why spend your stimulus dollars here?“

Renee Fry McKibbin noted that the burden of COVID-19 falls on front-line workers in health, caring industries, hospitality, tourism, arts and education, yet she said the budget focused on sectors "traditionally dominated by men”.

Climate change overlooked

Wood said the price of those blindspots would be a weaker recovery than otherwise, unemployment higher for longer than it could have been, and women’s economic disadvantage entrenched.

Labour market specialist Sue Richardson said relying on incentives such as instant asset write-offs and hiring subsidies was risky because the private sector might not respond in the way that had been hoped.

What direct spending there was seemed “intended largely to recreate the economy of the past, rather than invest in the economy of the future”.

“The economy of the future will, among other things, need to have much lower greenhouse gas emissions and much greater ability to cope with the unavoidable damage arising from climate change.”

How we handle the recovery will either set us on a path towards net-zero emissions or lock us into a fossil fuel system from which it will be hard to escape.

Saul Eslake gave the government “great credit for being willing, explicitly, to recalibrate its budget strategy” and run up what (for Australia) were large amounts of debt.

On average, a bare pass

But he said the measures chosen would be less effective in delivering jobs and recovery than others available including vouchers for spending in sectors hard-hit sectors and spending on social housing and childcare.

All but one of the 43 economists who responded to the survey also responded to the pre-budget survey which nominated spending on social housing, education and training and permanently boosting JobSeeker as the top budget priorities.

Assessing the budget, 16 of the 43 (37%) awarded it either an A or a B. Almost half (49%) awarded it a C, or “bare pass”. Six (14%) gave it a D.

Some of the economists who awarded a B said it was really a “B-minus”

One of them, Lata Gangadharan, said when it came to opportunities for women (those worst affected by the downturn) the budget “failed miserably” and would attract a D.

James Morley said he might have been “too easy of a marker” by awarding a B, but that it was “possible to lose the forest for the trees when only evaluating the budget on its specifics”.

‘B’ reflects the big picture, not the details

The big picture was that deficit-financed stimulus was needed and that the budget provided much more than might have been expected given the previous positions of the treasury and the Morrison government.

He said the forward guidance that put off “budget repair” until after the unemployment rate fell below 6% was welcome, even if one could ask why the threshold of 6% number had been chosen.

The more one looks at the details, the more one wants to significantly mark down the grade for budget. But I will still give it a “B” because the big picture is on the right track and I will just hope the Treasurer somehow becomes an “A” student in the future.

Rana Roy said he would have to grade the budget a C rather than an A or B, “more in sorrow than in anger”.

While he approved of the deficits and the tax cuts and the focus on infrastructure, he strongly suspected the measures would not be enough.

“For example, in an immediate sense it is likely that the negative impact of tapering and terminating JobKeeper will overpower the positive impact of the new wage subsidies for new hires.”

Two of those surveyed awarded the budget a B primarily because it had shown restraint. Tony Makin said too much spending would have pushed up the dollar and drawn resources away from the private sector. Geoffrey Kingston said it was important to avoid “maxing out the national credit card”.

Chris Edmond awarded it a C primarily because its assumptions relied on hope.

By simply assuming a widespread effective vaccine will be available next year and not otherwise thinking hard about how to beat the pandemic, the government is being very optimistic.

Others said it had ignored the one thing recommended by most economists, which was to invest in social housing to make housing affordable and create jobs.

A permanent increase JobSeeker would have given a million Australian confidence in the leadup to Christmas. Higher education, a major export earner with a direct impact on productivity, was being left to shrink.

John Quiggin said the budget pursued “cultural/ideological vendettas against perceived enemies like renewable energy and the university sector”.

But he said it was still worth a C. The government was right to budget for a large deficit, and deserved continuing credit for JobSeeker and JobKeeper.

Individual responses

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Tuesday, October 06, 2020

Budget 2020: promising tax breaks, but relying on hope

Tax cuts aren’t the half of it.

The personal income tax cuts promised in the budget will cost A$17.8 billion over four years.

The measures aimed at supporting businesses – the temporary instant tax write off of capital investments, the temporary ability to use losses to reduce previous tax payments, the JobMaker hiring credit and the enhanced apprentice wage subsidy — will cost $26.7 billion, $4.8 billion, $4 billion and $1.2 billion.

That’s a total of $36.7 billion — a subsidy for private businesses without precedent.

The clumsy wording in the part of the budget that sets out strategy says the aim is to “drive sustainable, private sector-led growth and job creation”.

‘Driving private sector-led growth’

Driving private sector-led growth doesn’t quite make sense, but it’s easy to get a handle on what it means.

By itself, business isn’t in a position to drive much.

Even with the budget measures – even with the Australian Taxation Office allowing most businesses to write off everything they spend on equipment over the next two years – non-mining business investment is expected to collapse 14.5% this financial year and bounce back only 7.5% the next.

The JobMaker hiring credit is intended to be a smarter version of the JobKeeper wage subsidy, which was wound back at the end of September, and will be wound back again after Christmas, before vanishing at the end of March.

Instead of helping pay the wages of all employees in businesses affected by the pandemic – the budget papers say right now it is helping pay 3.5 million wages, more than a quarter of the workforce – it’ll help pay the wages only of extra employees taken on.

JobKeeper replaced with something weaker

And only if they are aged between 16 and 35 and have previously been on JobSeeker or a related payment.

It’ll last for just a year and be worth only $100 or $200 a week, depending on the age of the person hired.

The government says it will support 450,000 positions.

But because a much larger subsidy for millions of positions will be withdrawn, there’s a risk employment will collapse as businesses especially affected by the pandemic (in industries such as tourism) find they can no longer afford to keep the staff they’ve got, let alone take on new ones.

It makes the budget a statement of faith, or hope.

Tax cuts in the hope we spend

There’s also hope we’ll spend the tax cuts that have been brought forward.

As of the start of this this financial year (it’ll be backdated), you can earn up to $45,000 instead of $37,000, paying just 19 cents in the dollar tax and nothing on the first $18,200.

High earners can keep paying 32.5 cents in the dollar right up to $120,000 instead of $90,000.

Low earners will get an offset of up to $700, middle earners an offset of up to $1,080 for another year.

Pensioners and recipients of carer payments and family tax benefits will get two extra cash payments of $250, on top of the two of $750 each earlier this yer, to be delivered in December and March.

The government is hoping the payments and the tax cuts will keep the slump in consumer spending to 1.5% this year, followed by a rebound of 7% next financial year.

All being well, unemployment will fall

It expects the unemployment rate to peak at 8% in the last three months of this year and then to fall to 6.5% by mid-2022.

It says the “effective unemployment rate”, which counts as unemployed people who are working zero hours (because of JobKeeper or other reasons) peaked at close to 15% in April, before sliding to around 9.25%.

The economy is expected to grow a larger than normal 4.75% next financial year and then to grow by 3% after falling 1.5% this financial year.

While not returning to surplus at any time in the next ten years, the budget deficit is expected to shrink from an eye-watering $213.6 billion this financial year (11% of gross domestic product) to -11.0 to $66.9 billion in 2023-24 (3% of GDP).

It’ll do it as spending returns to normal, which it might, if everything turns out as assumed.

A lot needs to go right

But the budget says, in words stronger than those used previously, “outcomes could be substantially different to the forecasts, depending upon the extent to which these assumptions hold.”

Those assumptions are that from here on, localised outbreaks of COVID-19 occur but are largely contained, a population-wide vaccination program is fully in place by late 2021, general social distancing restrictions continue until that happens and Victoria’s special restrictions and state border restrictions are lifted by the end of the year — except for Western Australia’s which will be lifted by April 2021.

There are other assumptions.

International travel is expected to remain low until late next year and then climb, allowing net overseas migration to reach 201,000 by 2023-24, still less than the 271,000 per year that was common.

For this year and next year, net overseas migration will be negative, as we lose more people to overseas than we gain from overseas.

Only a (somewhat diminished) birth rate will stop the population shrinking.

A lot could quickly date

The government’s most-recent economic statement, in July, was rendered out of date within days as Victoria went into stage 4 lockdown.

Anything could happen to render the budget forecasts redundant, and probably will.

From my standpoint, the government is putting too much store on businesses driving the recovery after JobKeeper has been wound back.

But if businesses don’t, it has given every indication it is prepared to do more. It’s hard to fault much of what its done. It has certainly shown its willingness to be flexible.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Monday, September 28, 2020

Top economists back boosts to JobSeeker and social housing over tax cuts in pre-budget poll

Overwhelmingly, Australia’s leading economists want the budget to boost social housing and the JobSeeker unemployment benefit rather than bring forward personal income tax cuts.

The 49 eminent economists who responded to Conversation-Economic Society of Australia pre-budget survey were asked to rate 13 options in terms of “bang for the buck” – effectiveness in boosting the economy over the next two years.

Among the options offered were boosting JobSeeker (previously called Newstart), wage subsidies beyond the expiry of JobKeeper, one-off cash payments to households, big infrastructure spending, bringing forward the personal income tax cuts, and company tax cuts.

The options were selected by a committee of the central council of the Economics Society and were presented to each surveyed economist in a random (shuffled) order.

The economists surveyed are Australia’s leaders in the fields of microeconomics, macroeconomics, economic modelling and public policy. Among them are former and current government advisers, former heads of statutory authorities, and a former member of the Reserve Bank board.

Each was asked to nominate the four most effective options for boosting the economy.

Economic Society of Australia/The Conversation, CC BY-ND

The most popular option, endorsed by 55% of those surveyed, was boosting spending on social housing.

Monash University econometrician Lisa Cameron said the budget provided an unusual opportunity to fix things for the long term while boosting the economy.

Social housing would leave us with something worthwhile (as did the school hall building program during the global financial crisis) in addition to providing work for the building industry. Alleviating homelessness would be a lasting benefit.

If it goes to the unemployed, it will be spent

The second most popular option, endorsed by 51%, was permanently boosting JobSeeker, previously known Newstart. The temporary boost in the A$282.85 per week payment was wound back last week and will end in December.

Melbourne University economist John Freebairn pointed out that with no real increase in Newstart since 1993 and many on it in demonstrable poverty, every extra cent spent on it will be spent rather than saved.

Supported by fewer than half of those surveyed, but third most popular at 45%, was more funding for education and training.

Flinders University labour market specialist Sue Richardson said education was labour-intensive, which would help with employment, and would assist young people severely hit by the pandemic to get the skills they would need to get jobs rather than stay unemployed.

Matthew Butlin, who heads the South Australian Productivity Commission, said the decimation of income from student fees means universities will have less money to subsidise research. There was a case for more direct funding of university research in the form of competitive grants for projects with practical applications.

The fourth most popular option was infrastructure spending, supported by 41%.

Why not a Hoover Dam, a new Opera House?

Many made the point that the projects chosen would have to be worthwhile in their own right, and feared this might not be the case. Others looked to big “nation building” projects along the lines of the Hoover Dam in the United States which was built during the Great Depression and employed 21,000 people.

“Why not building a massive dam in Australia? Why not building a new Sydney Symphony Orchestra building like the Berlin Philharmonie? Why not expand the National Parks? Why not building green libraries all over Australia?,” asked Sydney University’s Stefanie Schurer.

Done right, like the Sydney Harbour Bridge which was completed during the Great Depression, big imaginative projects could leave us with something valuable.

There was less enthusiasm for continued wage subsidies (35%) and an expanded investment allowance (29%) with University of NSW economist Gigi Foster saying investment allowances could be replaced with income-contingent loans along the lines of the Higher Education Contributions Scheme.

That way businesses could borrow to invest, with an obligation to repay if the investment paid off.

If it goes on tax cuts, it might not be spent

The same approach was taken by some to funding higher quality aged care (supported by 31%) and increasing subsidies for child care (29%).

Economic modeller Warwick McKibbin suggested funding child care through income-contingent loans (repayable on the basis of income) rather than subsidies.

Bringing forward the leglislated personal income tax cuts as proposed by the government and cash payments to households were relatively unpopular, supported by 20% and 16%.

Saul Eslake said that while he agreed with the treasurer that early tax cuts would “put money in people’s pockets”, there was no guarantee the high earners “into whose pockets most of that money would be put”, would take it out and spend it in sufficient quantity.

Eslake suggested that rather than supporting households with cheques as happened during the financial crisis, households could be handed time-limited tradeable vouchers that could be spent in areas hurt by restrictions, such tourism and the arts, or used for other worthwhile purposes such as childcare or reskilling.

Among those who did support bringing forward the tax cuts was John Freebairn, who said that although presented as cuts, what was proposed would do little more than restore what had been lost to bracket creep, keeping income tax steady.

Company tax cuts an also-ran

Company tax cuts, once touted by former prime minister Malcolm Turnbull as the key to jobs and qrowth garnered minimal support, being backed by just six of the 49 economists surveyed.

The least popular option, backed by only two economists surveyed, was government support for cleaner fossil fuels such as natural gas, as the prime minister is promising. In contrast 13 (26%) backed support for renewable energy.

Individual responses

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Wednesday, September 02, 2020

Six graphs that explain Australia's recession

Australia’s recession is the deepest since the Great Depression of the early 1930s.

Nothing else comes close.

The economy shrank an extraordinary 7% in the three months to June – by far the biggest collapse since the Bureau of Statistics began compiling records in 1959.

The previous worst quarterly outcome was minus 2%, in June 1974.

Quarterly percentage change in gross domestic product

It was going to be worse.

Treasurer Josh Frydenberg told a parliament house press conference that in March his advisers were predicting a collapse three times as big in the June quarter – 20%. In May the forecast was for a June quarter collapse of 10%.

Britain’s economy actually did collapse 20% in the June quarter; the US economy collapsed by nearly 10%.

What staved off a collapse of the order feared was unprecedented government support – more than A$100 billion in JobKeeper and expanded JobSeeker payments alone–enough to actually lift household incomes while 643,000 Australians lost their jobs and many more lost hours.

Contribution of government benefits to household income growth

A better measure of living standards, taking account households and businesses, so-called “real net national disposable income per capita”, fell nonetheless, by a record 8%.

Quarterly percentage change in living standards

Quarterly change in real national disposable income per capita. ABS Australian National Accounts

Consumer spending fell by even more, an extraordinary 12.7%, in part because lockdowns and caution in the face of COVID-19 provided fewer opportunities to spend.

Given that consumer spending climbed not at all over the three quarters leading up to the June quarter, it meant that household spending fell over the entire financial year, for the first time since records have been kept.

Quarterly change in household final consumption expenditure

Spending on goods was barely hit, while spending on services collapsed 17.6%.

Spending on transport services, a category that encompasses everything from flights to public transport, fell 88%. Spending on accommodation, a category that encompasses tourism, fell 55.7%.

Spending on recreational and cultural services, a category that encompasses sporting events, gambling and performances and cinema admissions, fell 54.5%.

Household spending by category

It meant far more income than usual was saved. During the depths of the global financial crisis, Australia’s household saving ratio climbed to a peak of 10.9% as households squirrelled away one in every ten dollars they earned.

In June they squirrelled away a remarkable 19.7% – one in five dollars that came in the door.

Household saving ratio

The Bureau of Statistics says if household income from special initiatives including early access to super was included, the household income ratio would be even higher. What it calls the “household experience savings ratio” would be 24.8%.

It’s possible to see households saving one in every four dollars as a “glass half full”. Frydenberg does.

He says this never-before-experienced accumulation of savings will be useful in the recovery, giving people the capacity to spend big when restrictions ease and they are better able to spend.

What if we remain unwilling to spend…

That’s assuming people aren’t “scarred” by the experience, left with damaged psyches and unwilling spend, a possibility the Treasurer acknowledges.

He says for the next quarter, the current one that encompasses the three months to the end of September, the Treasury is expecting economic activity to shrink only a little further or no further at all.

A lot depends on how soon Victoria’s Stage 4 restrictions and other restrictions are eased, which means a lot depends on things that are unknowable.

…and businesses unwilling to invest?

The Treasurer will deliver the budget in a little over four weeks’ time.

He said a key part of it will be measures to make it easier for businesses to do business, unlocking “entrepreneurship and innovation” at low cost.

Businesses certainly could invest more. Non-mining business investment was down 9.3% in the quarter. On Tuesday the Reserve Bank made available an extra $57 billion at low cost for banks to advance businesses and households.

But they are only likely to want to invest more when they can see returns.

Examining the figures on Wednesday, former Reserve Bank economist Callam Pickering said they showed the economy being held together “with duct tape by JobKeeper and JobSeeker”.

At his press conference, Frydenberg resisted suggestions that he revisit the wind-downs of JobKeeper and the JobSeeker Coronavirus Supplement due to take place over the next six months.

But the Victorian situation is far worse than when he announced the schedule on July 21.

He might find there’s a case for more duct tape, for a while longer.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Monday, August 31, 2020

Australia's top economists oppose the next increases in compulsory super: new poll

Wage Price Index annual growth, public and private, all industries, seasonally adjusted. ABS 6345.0

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Friday, August 07, 2020

No snapback: Reserve Bank no longer confident of quick bounce out of recession

The good news in the Reserve Bank’s latest quarterly set of forecasts is that the recession won’t be as steep as it thought last time.

The bad news is it now expects ultra-weak economic growth to drag on and on, pushing out the recovery and meaning Australia won’t return to the path it was on for years if not the end of the decade.

Its so-called baseline scenario, which is for the worst recession in 70 years, relies on a number of things going right:

the heightened restrictions in Victoria are in place for the announced six weeks and then gradually lifted. In other parts of the country, restrictions continue to be gradually lifted or are only tightened modestly for a limited time, although restrictions on international departures and arrivals are assumed to stay in place until mid 2021

Whereas three months ago in its May update the Reserve Bank expected economic activity to collapse 8% in the year to June 2020 and then bounce back 7% over the following year, it now believes it collapsed a lesser 6% but will claw back only 4% in the year to come.

The direct impact of locked doors and shut shops was smaller than it expected, but the ongoing impacts are “likely to be larger”.

It’ll depend on households

What economic growth there is will be driven by household spending. Business investment, once a key economic driver, won’t be back to anything like where it was until well into 2023.

Business after business has been telling the bank’s liaison officers they have deferred or cancelled planned spending to preserve cash.

In usual times, household spending accounts for 60% of gross domestic product.

The Reserve Bank believes household spending fell 11% by the middle of the year and will start to edge back up, but it warns that household incomes are expected to slide and unemployment grow as government winds back JobKeeper and JobSeeker:

The JobKeeper program ensures that many more workers remain attached to their job than otherwise. However, it is expected some workers will be retrenched once they are no longer eligible for the subsidy in late 2020 and early 2021. Moreover, the reinstatement of job search requirements for the JobSeeker program outside of Victoria in the September quarter and the lifting of restrictions will result in more people looking for jobs

It will have been heartened by the Prime Minister’s recent decision to make the wind-back of JobKeeper less steep.

The bank says that the way businesses and households adjust to a lower income in the months ahead will be “an important determinant of the outlook over the rest of the forecast period”.

It expects employment to fall further over the rest of the year, as job losses from restrictions in Victoria and the tightening of JobKeeper more than offset a continued recovery in jobs elsewhere.

One in ten of the businesses it has contacted through its liaison program report wage cuts, most of them targeted towards senior management, but some implemented broadly.

The proportion reporting wage cuts is “significantly higher” than during the global financial crisis.

By the end of next year the bank expects the published unemployment rate to be somewhere between 11% and 7%.

The forecast range is an indication of how uncertain it is about what will happen.

The bank’s forecasts for recession and recovery have a similarly wide range.

On one hand GDP might not be back to where it was until the middle of the decade, and not back to where it would have been until the start of the following decade.

On the other, it might have made up its losses by the end of next year.

The bank’s central “baseline” forecast points to a worse recession than any since World War II and the Great Depression.

Its upside scenario assumes quick progress in controlling the virus, improving consumer confidence as a result, a quick end to the outbreak in Victoria and no further major outbreaks.

The downside scenario assumes rolling outbreaks and rolling lockdowns along with a widespread resurgence in infections worldwide.

Risks a plenty…

It says if households conclude that low income growth will be more persistent than previously expected, they might “permanently adjust their spending” leaving the economy weaker for longer.

The uncertainty could lower firms’ risk appetite, prodding them to pay down debt and increase cash buffers rather than invest even when conditions recover.

A sustained period of lower investment, combined with “scarring” as people unemployed or underemployed find themselves unable to improve their position could “damage the economy’s productive potential”.

…little harm in spending

The bank says there’s little more it can do. It has considered negative interest rates, and believes they would be of no real help.

It’ll be up to the government to support the economy with spending. Where needed the bank will buy government bonds with money it creates in order to keep borrowing costs low.

To make the point that government shouldn’t be afraid of borrowing, it includes a graph of government debt since Federation.

Its point is that as a proportion of the economy the government has borrowed and spent much much more in the past.

To the extent that it is needed to make households feel able to spend and businesses able to invest, it is worth it.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Friday, November 20, 2020

Most retirees have enough

It’s the pension that matters

There’s a real retirement income problem

No recommendations, but findings aplenty

Tuesday, November 03, 2020

1. $5 billion per week, week in, week out

2. Cash rate near zero

3. Bond rate to 0.10%

4. Near-free loans to banks

5. A commitment with teeth

One word, big change

Low rates for a long, long time

Sunday, October 25, 2020

Hard hats instead of soft skills

Climate change overlooked

On average, a bare pass

‘B’ reflects the big picture, not the details

Tuesday, October 06, 2020

‘Driving private sector-led growth’

JobKeeper replaced with something weaker

Tax cuts in the hope we spend

All being well, unemployment will fall

A lot needs to go right

A lot could quickly date

Monday, September 28, 2020

If it goes to the unemployed, it will be spent

Why not a Hoover Dam, a new Opera House?

If it goes on tax cuts, it might not be spent

Company tax cuts an also-ran

Wednesday, September 02, 2020

What if we remain unwilling to spend…

…and businesses unwilling to invest?

Monday, August 31, 2020

“Not a time to encourage saving”

Opponents more confident

Super and wages come from the same pool

A drag on jobs if not wages

Friday, August 07, 2020

It’ll depend on households

Risks a plenty…

…little harm in spending