Australia’s Recovery Depends on Fiscal Policy, Economists Say

(Bloomberg) -- Australia’s government plays a more important role in supporting the economic recovery rather than the central bank, economists said Thursday.

Appearing on Bloomberg’s ‘Inside Track’ webinar series, Besa Deda, chief economist at St. George Bank, said there’s now a shift in the policy discussion toward asking what more the government can do to support economic activity.

“The government can’t keep the JobKeeper program open forever so policy reform needs to be looked at more broadly, given the likely long-term effects of the pandemic,” she said.

The government will deliver an update on the economic and fiscal outlook on July 23 that will set out its plans for JobKeeper and other fiscal programs. Central bank board member Ian Harper last week urged the government to implement a “tapering arrangement,” warning a sharp cutoff would damage the recovery and potentially drive unemployment even higher.

Alex Joiner, chief economist at IFM Investors who was also on the panel, said that while monetary policy needed to remain supportive during the recovery, there are limitations to its effectiveness.

“I don’t think the Reserve Bank’s policy could fix what was happening in the labor market” or get businesses to invest, he said. “I don’t think they could do that before the crisis, let along after or during.”

Joiner said the government needs to come up with innovative ideas to drive the economy as restricted travel halts population growth, which has been a key contributer to Australia’s prosperity.

“We’re not going to see people coming in, buying more things and demanding housing and accommodation, that sort of thing. So we’re going to need to find other sources of growth,” he said.

Deda said consumer spending is also likely to remain soft due to a combination of higher jobless rates, more underemployment and fear of venturing out amid the the risk of infection.

Echoing Reserve Bank Governor Philip Lowe’s comments this week that fiscal reform is needed, Deda said an agenda that encourages competition and productivity have become “quite critical.”

Joiner, the IFM economist, said that kind of reform agenda would have to be led by the government, not the central bank.

“Businesses need certainty as to what’s going to happen, and that’s not going to be provided by the Reserve Rank,” he said. “It’s going to be provided by the government and a better economic narrative and recovery story going forward.”

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