The economy is never as good as it looks and never as bad as it seems

04 May 2021

An aphorism sometimes used by professionals in the financial markets is that ‘things are never as good as they look and never as bad as they seem.’ That is perhaps worth remembering when the Federal Budget is delivered on 11 May. The expected economic devastation from the COVID-19 lockdowns — which caused deep harm to many sectors, especially tertiary education, travel and tourism — has not, at least in aggregate, led to the economy falling off a cliff. Things have not turned out to be as bad as they had seemed a year ago.

It has been an extraordinary financial experiment. What happens when the government prevents a large amount of economic activity by imposing lockdowns and then spends heavily on job and unemployment support to cushion the blow? It sharply increased federal government debt, but would it work?

The answer seems to be a qualified ‘yes’. In particular the resilience in the labour market has shown how adaptive stressed markets can be. The current unemployment rate of 5.6 per cent is a level that treasury did not expect to reach until 2022-2023. It is not all good news, though. There will be an uptick in joblessness due to the winding back of JobKeeper, and the underemployment rate was 7.9 per cent in March, meaning the total under-utilisation rate is over 13 per cent. But a year ago an unemployment rate of 15 per cent seemed likely. It would have spelt deep trouble for the overall economy and had disastrous social consequences.

The Coalition threw away its ‘balance the books’ mantra last year, possibly learning from former PM Kevin Rudd’s $42 billion stimulus package in 2008, the so-called ‘cash splash’, which proved to be a major factor in why Australia was about the only economy in the developed world to avoid a recession. The delivery mechanism was different; it went to businesses to pay employees rather than to consumers.

But although the Coalition will never admit it, it looks suspiciously like there has been some bipartisan institutional learning about how to manage financial crises. If you want to stimulate an economy in times of crisis put the money directly into the economy, either into people’s pockets or to businesses who then pass it on to workers. It works far better than giving it to government departments to spend inefficiently.

It does mean that government spending as a share of the economy is at its highest level since

ECONOMICS

The economy is never as good as it looks and never as bad as it seems

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