This article appears in the 23 April issue of the Australian Financial Review
As it grappled with the unprecedented health and economic impact of the COVID-19 pandemic, the Morrison government made the understandable decision to postpone the delivery of the full budget for 2020 until October.
Nevertheless when the trial resumption of parliament occurs in May, the Treasurer Josh Frydenburg should present an economic statement to Parliament.
The Australian Government should present an economic statement to Parliament around late May 2020. Adequate opportunity should be given for Parliamentary scrutiny soon after its delivery.
The statement need not be a full budget, which can wait as already proposed until later in the year. But we should not wait that long for updated assessments and estimates. A May statement could provide an update of economic and fiscal conditions, as well as set out preliminary expectations and the current economic strategy, rather than announcing further new budget measures.
In times of crisis, we need government leaders to anchor community trust, expectations and confidence in the face of great uncertainty. This invariably requires a strong foundation of official information flows and reliable policy communications, even in the face of uncertainty.
We have seen this in the national response to the COVID-19 pandemic. The response has been characterised by openness and transparency, with daily data releases and official briefings.
However, as the apparent success of the pandemic response plays out, our attention must increasingly turn to the economic crisis and its aftermath. Here, the information flows have been more sporadic and piecemeal.
While the rush of events and announcements to date has of necessity taken all priority, we are now rapidly shifting into a situation where our economy and society needs a clearer sense of expectations, policy direction and understanding of goals.
Without this, uncertainty and misunderstanding could itself start to add to the costs we are bearing and delay recovery. Speculation and fear of future developments is more likely to worsen and damage confidence if the Government does not set out its thinking in a timely and integrated way.
An updated economic and fiscal statement would need to stress high levels of uncertainty. But certainty never comes. Since the last mid- year statement is now completely overturned by events, we need better baselines for the current year (2019-20) and the fast approaching 2020-21 year.
But it is not even these numbers that are the main issue.
The main need is to set out insofar as it is possible the key working assumptions of government economic and financial policy at the present time and to provide a more integrated and coherent picture of the revised policy framework being pursued.
The statement should provide the Government’s assessment of at least the following key matters.
- The economic profile of the crisis. This differs markedly from the Global Financial Crisis and most previous crises, given the direct suppression of people movement and supply activity as well as a subsequent financial and demand shock.
It is likely that over time the geometry of the crisis will change, perhaps with growing second round effects, and with substantial asymmetries in experience across the world.
- The fiscal and monetary policy assessment and framework. Prior to this crisis, Australia had continuing but weakening economic growth, with stimulatory but orthodox monetary policies and a push toward fiscal surplus. Now this is all changed, with public revenue collapsing, expenditure soaring and GDP falling. A comprehensive analysis of this change and its strategic implications for policy are clearly needed, particularly a more realistic formulation of the medium term strategy and explanation of the integration of fiscal and monetary policies. The fear of many that we will see a period of austerity policy needs (hopefully) to be put to rest.
- Financing of public spending. Many in the community are understandably concerned about how the change in public spending will be financed, and what the implications of that could be for them, such as for their retirement savings and incomes, future access to bank credit, house prices and affordability and so on. Financial market participants also need a clear understanding of the strategy for funding public spending and the consequences across all sectors of the financial system.
- Commonwealth-State finances. The States have been at the forefront of much of the COVID19 response. This has required very considerable health and other spending. In addition they have sought to supplement Commonwealth assistance programs in areas where they see gaps. At the same time, they likely face a sharp contraction in their own account revenues and in the pool of GST revenues. A strategic statement on Commonwealth-State finances is needed.
- Other medium term strategies. There may be scope to strengthen confidence with other indications of medium term adjustments. Possible examples may include approaches to pandemic readiness (given that adverse future developments remain possible), strategic supply risk, and the structural economic implications of possible longer term restrictions on international people movement. The tax and transfer systems will also need new medium term approaches, especially as JobKeeper expires before the planned October Budget. Australia’s international trade and other economic strategies also may require considerable adaptation.
Any economic statement must at all points stress the need for policy to remain flexible and adaptive to possible future changes in circumstances. Much is unknown and will remain unknown in advance of actual events.
But uncertainty does not mean that economic policy making and political discussion of them should come to an end in the meantime, forever deferred until some mythical point when all is clear. That point never comes. Trust and confidence require ongoing transparency and dialogue.
Read information paper
Read the related information paper from Greg Smith where he explores further the need for a May economic statement. Find it here.