The Era of Big Fiscal Spending Has Only Just Begun

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Australia is fortifying the economy with huge government spending that will last well beyond this year's projected global rebound. With Covid-19 infections resurgent in Asia, prompting fresh curbs on activity, it’s time to shift our thinking about the longevity of big-ticket stimulus. This isn’t going to be a one-shot deal. 

Prime Minister Scott Morrison's team forecast this week a shortfall worth 5% of gross domestic product in the year through June 2022, greater than anticipated. Finances will be in the red at least until 2025, officials predict. (This, in a country once fixated on a balanced budget.) The message contrasts starkly with pledges by Morrison and Treasurer Josh Frydenberg in late 2019 that they would deliver surpluses. Treasury, meanwhile, expects GDP will rise 5.25% this calendar year, before cooling to 2.75% in 2022. The government is also trying to drive unemployment down to levels rarely seen in the past half-century. 

Australia certainly isn't the only place to unleash fiscal stimulus to combat the pandemic; the U.S., Japan and Europe have all primed the pump. What’s distinctive is that previous antipathy to deficits has gone out the window. When you consider that the country's borders are likely to stay effectively shut through late 2022 and the vaccine rollout is severely delayed, the approach makes more sense. “The pandemic has heralded an era of permanently larger public spending,” Marcel Thieliant, a senior economist at Capital Economics, wrote after Frydenberg's annual budget speech Tuesday. It doesn’t hurt that the central bank is sending strong signals that it will extend quantitative easing and, possibly, the practice of capping yields on some government bonds. Both measures would hold down the cost of borrowing to finance deficits.

The budget’s political appeal is potent: An election is due next year and Morrison's conservative bloc commands a narrow majority in parliament. It may only be this year's economic expansion that matters to voters. The opposition Australian Labor Party, which came close to defeating Morrison in 2019, has struggled for a message since the pandemic began. Labor can hardly accuse the government of jeopardizing the recovery through austerity now.

The message could ultimately have more resonance beyond the island continent. Before the pandemic, it had been fashionable to think Australia had some secret sauce, enabling it to cruise for three decades without a recession. It survived the Asian financial crisis of the late 1990s, the dotcom bust of the early 2000s and the collapse of Lehman Brothers Holdings Inc. I was in the audience at a luncheon address to the Economic Club of New York a few years ago when Federal Reserve Chairman Jerome Powell said, only half-jokingly, that Australia seemed to have escaped the ups and downs of business cycles.

If people are still paying attention to what Australia does, it's a sobering message. Normal economic policy just got abnormal for the long haul. The budget challenges any idea that business will come roaring back. Australia allocated A$2.1 billion ($1.6 billion) to support aviation, tourism, the arts and international education providers. They will need it. Few places in Asia look ready to let anyone go much of anywhere.

Then there is China, Australia’s largest trading partner. Ties between the two countries are at their lowest ebb since diplomatic relations were established in the early 1970s. They may get worse still: Canberra is reviewing whether to force a Chinese company to sell a lease to a strategically significant port used by the Australian and U.S. militaries. If divestment is required, Beijing could retaliate. “Ongoing global trade tensions and the potential for further trade actions continue to pose risks to the outlook for Australian exports,” the budget papers said. If the worst scenarios play out, a generous budget could become a matter of survival. 

These days, Australia essentially operates a domestic economy, underwritten by a strong global rebound, local largesse and accommodative monetary policy. Should one of those pillars sag, the picture looks bleak. That’s a message to the rest of the world. The best way to prepare for the forever pandemic may be to generously finance your own fortress. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2021 Bloomberg L.P.

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