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  • Writer's pictureCrest

Winding back the COVID-19 stimulus?- August 2020

The biggest risk from the COVID-19 pandemic remains the uncertainty of finding a vaccine within the next 12 months and ensuing ongoing lock downs. The economic blow from the coming “fiscal cliff” of government support measures will look to be cushioned by household’s prior balance sheet repair and savings.  

In the June and September quarters, government support totalled $65 billion and $102 billion, respectively from various fiscal stimulus measures including the JobKeeper subsidy. With support winding down, this could fall to $22 billion in the December quarter as the number of JobKeeper recipients slide from 3.4 million to 1.4 million and the fortnightly payment was reduced. 

Westpac Chief Economist Bill Evans expects that the government stimulus already delivered to households will help the economy expand at a pace of more than 2% in the final quarter of 2020. Further fiscal evolution and extension is expected ahead with the unemployment rate rising to 7.5% (more than 1 million people out of work). This reflects a real-life example of Keynes economic theory where exogenous government expenditure is necessary to kickstart an increase in Aggregate Demand and thus economic activity. 

On the issue of increasing government debt, policies to restore government balance sheets through winding down expenditure and tax hikes will be disastrous. In such extraordinary circumstances, the government’s aim should be to grow the economy and use the proceeds from growth to pay down debt balances. One such way to measure this is through a declining debt to GDP ratio. 

Reserve Bank Governor Philip Lowe provided support for the Fiscal response, saying that while the spike in debt was a shock for a nation used to low budget deficits and public debt, borrowing to support households, jobs and public investment was the right thing to do.  

“By borrowing today to support the economy, we are avoiding an even bigger loss of output and jobs that would damage our economy for years to come,” he said. 

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