HomeBuilder package is aimed at generating political gains, not economic ones

While in some ways this simply confirms expectations, the narrative of recession will put pressure on the government to indulge in wasteful fiscal stimulus.

The March figures confirmed a small drop in GDP in the first quarter. Everyone rightfully expects the June quarter figures to be horrific, though they are likely to be better than the grim predictions made towards the end of March, when lockdowns were expected to extend past September.

In a matter of somewhat dark irony – given the extent to which it has been driven from public consciousness by COVID-19 – in the end it seems the bushfire crisis probably cost Australia the chance of avoiding a technical recession.

Our streak, which survived the Asian financial crisis, the early 2000s dot-com recession and the global financial crisis, has been broken; albeit by just 0.3 per cent of GDP (less than $10 billion).

Of course, Australia avoided a technical recession during the GFC by an even smaller margin, having grown by 0.3 per cent in the June quarter of 2008, and just 0.1 per cent in the September quarter of the same year before finally falling in December by 0.5 per cent.

Though almost all the focus in Australia was on the 2009 recovery and Rudd’s stimulus packages, much of the world was in recession from the June quarter of 2008.

Had growth not been so robust in Australia in 2007, or a number of other things fallen only slightly differently, Rudd may have been criticised for acting too slowly and the myth-making around the miracle cure of fiscal stimulus may not have been revived.

It is by such margins that narratives are made.

The important point here is that policies that primarily fiddle around with the accounting identity that makes up GDP, or try to influence timing to avoid technical recessions, have little or no impact on people in the real economy.

The GFC would not have been any better – or worse – had Australia gone into recession in 2008 because, for example, growth had been slightly higher in June 2008 and then negative in September.

Policies that primarily fiddle around with the accounting identity that makes up GDP, or try to influence timing to avoid technical recessions, have little or no impact on people in the real economy.

Nor will the economic impact of COVID-19 be any less had it peaked a few weeks later, and therefore pushed the economic impact outside of the March quarter.

Yet, these sort of technicalities may have already started to influence government policy. The government’s HomeBuilder package is a classic example of a policy aimed not at generating long-term benefits but shifting spending around in the short-term for largely political reasons.

The scheme has some serious concerns. First, delaying major renovation projects during a period of serious economic uncertainty is a completely rational step to take – and hence the government is actually incentivising people to take actions that may not be wise.

It is almost certain that some families who access HomeBuilder will end up in financial difficulties due to unexpected cost blowouts, or future job losses.

Another significant problem is that, given the horrendous lags in the planning system in large parts of the country, it would be very difficult for someone not already committed to undertaking new builds or renovations to access the scheme. Of course, for those already partway through the process, HomeBuilder is just a windfall gain at taxpayers’ expense.

Some may be incentivised to bring forward already committed projects, but the long-term impact of this is basically zero.

Moreover, it is not at all clear what the impact of COVID-19 will actually be on the housing market in the second half of the year. It is likely much of the projected gap in building is a response to uncertainty in the job and housing markets in the future, and so may naturally diminish if the economic outlook improves.

The construction sector has been in fairly good shape during the first part of the crisis, and it’s not like home owners have had a tough time of it in the past five years.

Yet, the “tradie” vote is seen as a politically important section of the economy, and as such the pressure to do something specific for that industry no doubt overrode the better instincts of the government.

It is interesting that the criteria of HomeBuilder are difficult enough to meet that it may prove to be cheaper than expected. It is certainly scaled significantly down from what some have called for, suggesting the government is aware this is a political package, not an economic one.

In a sense, the looming gap in construction is simply a reflection of the sharp slowdown in the broader economy: it is not clear this problem is different, or more acute, than in other sectors that didn’t warrant a specific rescue package.

The challenge will be preventing other industries from chasing their own, industry-specific, rescue packages. Government would be far better off offering deregulation as its prime industry assistance tool, rather than financial grants.

In reality, the pressure for stimulus is usually driven by politics. Government comes under pressure to “do something”. Special interest groups see the opportunity to secure massive increases in funding that would not be justifiable under normal circumstances, knowing that cutting spending in the future often proves to be impossible.

Politicians can pretend that deficit spending is somehow a courageous decision, rather than a political instinct that has proven to be extremely difficult to keep in check.

These incentives are a key reason why the narrative of stimulus was not damaged by poor results from Keynesian stimulus in the US, UK or Europe during the GFC.

Yet now that the government knows that it cannot avoid recession through accounting tricks, it may be able to shift focus towards the hard work of rebuilding the post-pandemic economy.

Australia has largely eschewed hard reforms in the years following the GFC, in part because of the complacency caused by decades of uninterrupted economic growth.

That this stretch is now over is unquestionably a cause for sorrow. No one should ever wish for a recession.

Yet the government’s response to this challenge will do much to determine our economic direction for the next three decades.