On 2 April, Treasurer Josh Frydenberg handed down his 2019-2020 budget. Many observers, including this author, raised concerns that the projected surplus and the capacity for the government to honour its commitment to 'guarantee essential services like hospitals, schools and aged care, while tackling the cost of living' would be difficult to achieve if there is a downturn in economic conditions.
Fresh from the 'miracle' election victory in May, the Morrison government quickly went about implementing its promised tax cuts. With the key cross-bench senators' support secured, the $158 billion program was passed into law. The concerns raised about the sustainability of government-funded services prior to the passing of the tax cuts may well prove to be a reality.
Fast forward three months. On 14 August, the Dow Jones Industrial Average fell by 3.05 per cent with the UK's FTSE falling by 1.42 per cent. Australia's ASX followed suit, falling 2.85 per cent the following day.
Economic analysts, including those from Bloomberg, are suggesting market traders are nervous about a global economic slowdown and that fears of recession are not helped by ongoing trade tensions between China and the United States.
Concerns about the economic fallout from the ongoing tensions between China and the US are clearly on the government's radar, with the Treasurer recently saying those tensions 'are weighing negatively on the global economic outlook. And what concerns us is that it spills over, not just in the trade area, but to investment and to capital flows.'
Before the economic commentariat goes into meltdown over the recent declines in the share market, though, it is worth noting that Australia's All Ordinaries Index is several hundred points higher since January — even with a correction of around 400 points from its July peak. The US market similarly has shown strong growth since January and, despite the recent 800-point single-day drop, the Dow Jones index is a couple of thousand points ahead of its January 2019 position.
While we need not yet panic, it would be prudent for the government to plan ahead and prepare for any downturn in the global economy to protect Australian jobs. No doubt Treasury officials here in Australia are carefully watching the global economic climate. And you can bet that they are modelling various options to protect the Australian economy. The challenge for them is whether they advise the government to protect the economy through fiscal stimulus — that is, spend their way through the downturn — or go 'austerity' and contract government spending and contain debt.
"We should rationally explore options to protect the economy and the wellbeing of Australians by ensuring that they continue to be employed and, through that, stimulate the local economy."
These were the options faced by the Rudd government during the 2008 Global Financial Crisis. While many European nations, including Great Britain, followed the path of austerity, the Rudd government chose fiscal stimulus, which included measures like a $900 'cash splash' and investment in smaller-scale infrastructure through the school building program and the 'pink batts' program. Despite some serious issues with the rollout of the 'pink batts' program, the upshot was Australia avoided an economic recession.
The financial legacy of the stimulus package was $174 billion in government net debt and a decade of deficits. By international comparisons, Australian government net debt, currently at $361 billion, is very modest relative to other OECD economies. Further, the Commonwealth is scheduled to deliver a budget surplus of $7.1 billion for 2019-20 and larger surpluses in subsequent years.
Again, while the current economic climate is cause for concern, it is not the time to panic. Instead, we should rationally explore options to protect the economy and the wellbeing of Australians by ensuring that they continue to be employed and, through that, stimulate the local economy. Fiscal conservatives may be inclined to argue for austerity, but the impacts of this strategy will be particularly harsh on low-skilled and elderly members of our workforce, as well those dependent on pensions, allowances and government-funded services such as hospitals, schools and childcare.
A more sensible alternative to austerity is for governments, business, unions and charities to come together around a 'charter for the common good' and look for ways in which we can together soften the impact of any global economic downturn. This will require compromise and a bipartisan agreement to sacrifice some or all of the budget surplus. It will also require a commitment to carry increased debt to enable targeted stimulus efforts that protect jobs and maintain economic activity.
Options for the Australian government include spending on short timeline infrastructure projects and increasing payments such as Family Tax Benefits, pensions and Newstart. Targeted cash injections in these areas will stimulate consumer spending and support businesses large and small.
In return for increased financial support from government, the business community and unions should prioritise the protection of jobs, even if that results in lower wage growth and shareholder returns in the short term. The charity sector needs to be ready with well-designed and costed programs that can be rolled out quickly to deal with an upswing in demand for critical social services.
Collectively, governments at all levels, the construction industry and charities, especially churches, should come together to develop new housing models and projects that address the chronic undersupply of social housing stock that is shovel-ready and provide essential infrastructure in a relatively short period of time.
The federal government is rightly seen as the steward of the Australian economy — quick to take praise for when times are good and pilloried by all when the economy tanks. The current global headwinds are a timely reminder that global downturns have both economic and social consequences.
More often than not, it is the most vulnerable in our society — children, the elderly and the poor — who bear the greatest impacts of poor economic conditions. While we might rely on our governments to steer us through difficult times, they can't do it alone. We all have a role to play in dealing with the consequences of an economic downturn and now is the time to get our plans in place.
Joe Zabar is deputy CEO and director of economic policy at Catholic Social Services Australia.
Main image: Treasurer Josh Frydenberg speaks at the Melbourne Convention and Exhibition Centre in May 2019 in Melbourne. (Photo by Tracey Nearmy/Getty Images)