As JobKeeper calls get louder, PM must be cautious - The Centre for Independent Studies

Just as Sydney was sinking deeper into the morass of a lockdown and Victoria was about to re-enter that familiar territory, the Australian Bureau of Statistics reported a week ago that the national unemployment rate had fallen below 5 per cent to its lowest level in 10 years.

But that was in June, and it is likely to be the last piece of good economic news for some time. So rapidly is the economic rebound unravelling – South Australia also joined the lockdown fray this week – that calls for the resurrection of JobKeeper and fiscal stimulus more generally are growing louder.

It is true that Australia had enjoyed a stunning economic rebound up to the end of June, but the role of fiscal policy in this needs to be carefully assessed before further measures are considered.

The fiscal policies of 2020 have been described as a triumph of Keynesian economics and a template for all future macroeconomic setbacks. One typical recent commentary along these lines in The Guardian proclaimed that the lesson of the past year or so is that “fiscal stimulus works”, “governments can create jobs”, and we should be forever grateful to John Maynard Keynes for providing the blueprint.

This is being far too generous to Keynes and his General Theory. Let’s be clear: few would suggest that fiscal policymakers should have sat on their hands in the circumstances of 2020.

But those circumstances were unique, and the policy responses that might have been appropriate then cannot be generalised as a prescription for all economic setbacks.

Economic activity was depressed by government edict. It bounced back when the edict was withdrawn. Fiscal policy facilitated the rebound through JobKeeper (which kept intact many employer/employee links that would otherwise have been severed) and various stimulus measures that supported household budgets and business cash flows. The sums were massive and – at least with the benefit of hindsight – more than was warranted.

If governments flood every crevice of the economy with borrowed money, there will doubtless be a boost to economic activity – especially when it is backed up by monetary policy that nails interest rates to the floor and creates new money by scooping up copious amounts of the government-issued debt (quantitative easing). But this is not a recipe for the future.

Yes, fiscal stimulus can work, but its effects will always be short-lived.

Yes, fiscal stimulus can work, but its effects will always be short-lived. And the question will always be “what comes next?” Stimulus brings forward economic activity from the future. That can serve a useful purpose in smoothing the business cycle, but it is always going to be exceedingly difficult for governments to get the timing right.

Policymakers also need to be alert to the potential longer-term problems created by short-term stimulus measures. One of these is the risk of unleashing inflation by over-heating the economy – a very live issue now, with inflation rising in some countries.

Other potential longer-term problems include distorted incentives and the difficulties for future fiscal management resulting from a build-up of debt. Economic actors know that today’s budget deficits can lead to tomorrow’s tax increases and adjust their behaviour accordingly.

The experience with fiscal policy during the pandemic is interesting but has done nothing to strengthen or weaken the case for fiscal activism to manage the economic cycle in the future.

Governments will always do it, but they should always be cautious. That advice applies right now, as the Morrison government is urged to step up fiscal support and stimulus again.

Scott Morrison should do as much as his government considers necessary and prudent, not what state governments and others might urge.

The main game for fiscal policy should be mapping a path back to a balanced budget and doing what it can to provide incentives for private sector activity that will strengthen economic growth over the longer term.

Anything else is a short-term detour.