Outlook: Benjamin Ong

Thanks to the federal cash splash, the future looks much brighter for employment and growth

‘You must spend money to make money.” This quote is generally attributed to Roman playwright, poet and philosopher Titus Maccius Plautus (254-184BC) and in Keynesian economics it prescribes government intervention (that is, spending) to mitigate the drop in aggregate demand in times of recessions to stabilise economic output.

The proof of the pudding has been found in the Australian government’s budget update, the Mid-Year Economic and Financial Outlook (MYEFO), with the upward revision in GDP growth forecasts and downward revisions in the outlook for the unemployment rate and future budget deficits.

And spend and intervene the federal government did. According to the budget papers 2020-21, this amounts to “$98 billion in response and recovery support, including $25 billion under the Covid-19 Response Package and $74 billion under the JobMaker plan” the Treasury is unleashing onto the economy “to responsibly deal with the greatest challenge of our time” and “rebuild our economy and secure Australia’s future”.

This expenditure, along with the Reserve Bank’s policy response, brightened the outlook for the domestic economy. The treasury now sees GDP expanding by 0.75% in 2020-21 (MYEFO) instead of the 1.5% contraction foreseen in the October budget. However, the following fiscal year’s growth rate was revised down to 3.5% from the 4.75% predicted in October.

But, hey, my back-of-the-envelope calculation shows that the adjustments mean the economy would be stronger overall over the next two years, 4.25% versus 3.25%.

“The unemployment rate, forecast in the 2020-21 budget to peak at 8% in the December quarter, is now forecast to peak at 7.5% in the March quarter 2021, with both employment and the participation rate higher than expected. The unemployment rate is expected to fall to 6.25% by the June quarter 2022, in line with the recovery in activity, reaching 5.25% by the June quarter 2024,” according to the MYEFO.

This wonderful set of numbers could start a virtuous cycle in the domestic economy whereby rising employment boosts consumer optimism, stimulating spending, lifting company sales and profits, encouraging business spending in plant and machinery and staff, stimulating more hiring and lessening the need for more government spending.

The MYEFO budget revision rewrites Titus Maccius Plautus’s quote to become “You must spend money to save

(or spend less) money”.

“The underlying cash balance is now expected to be a deficit of $197.7 billion (9.9% of GDP) in 2020-21 [down from 11% of GDP forecast in the October budget]. The change in the deficit since the 202021 budget has primarily been driven by improvements in the economic outlook, including higher-than-expected receipts and a lower-than-expected number of people receiving the JobKeeper payment. This has been partly offset by additional policy decisions to support the economic recovery and secure access to vaccines,” the MYEFO says.

The next year will see the deficit reduced to 5.3% of GDP (less than the 5.6% ratio predicted in October) and the underlying cash balance is expected to improve over the forward estimates to a deficit of $66 billion (3% of GDP) in 202324 and to further improve over the medium term to a projected deficit of $45.7 billion (1.4% of GDP) in 2030-31.

But this optimistic outlook could be truncated by the simmering Sino-Aussie trade tensions. “Recent trade actions affecting Australia’s exports have not yet had a material impact on the forecast economic recovery, despite significant impacts on specific firms and regions. However, ongoing global trade tensions present a key downside risk to the outlook,” according to the MYEFO.

And Covid-19’s re-emergence in NSW and Victoria prompted tightening of restrictions and renewed border closures. As well, there is the new variant afflicting Europe and Asia and the continued high rate of infections in the US.

Despite vaccine optimism, Covid-19 will likely remain the major uncertainty, as it was last year. Governments around the world will need to spend more money to save money and lives and livelihood.