Australia Bids for Unemployment in 4s, Signals Fiscal Spend

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Australian Treasurer Josh Frydenberg said the jobless rate will “need to have a four in front of it” to generate the faster wage growth and higher inflation needed to repair the economy, signaling a willingness to keep the fiscal spigot open in his May 11 budget.

In doing so, the government is aligning with the Reserve Bank of Australia in trying to drive unemployment down to very low levels. Treasury estimates full employment is now 4.5%-5%, Frydenberg said in a speech Thursday, or higher than the central bank’s estimate of low 4s or high 3s needed to generate pay gains and lift consumer prices.

Australia Bids for Unemployment in 4s, Signals Fiscal Spend

“In effect, both the RBA and Treasury’s best estimate is that the unemployment rate will now need to have a four in front of it to deliver this outcome,” Frydenberg said. Wage growth and annual core inflation are currently hovering around record lows, underscoring the scale of the task. “The best way to repair the budget is to repair the economy,” he said.

Frydenberg’s pivot is important as it ensures Australia will avoid repeating its pre-Covid mistake of the two arms of policy working against each other. Having fiscal and monetary measures in sync will make it easier to achieve faster hiring, with the treasurer noting the last time Australia had a sustained period of unemployment below 5% was between 2006 and 2008.

What Bloomberg Economics Says...

“The supportive tone from fiscal authorities is welcome, but the risk lies with a lack of ambition on the labor market. The government’s full employment estimates are too high, relative to the RBA, and are likely to result in a continuation of the disappointing wage growth experience of the past decade -- continuing the disproportionate burden being placed on monetary policy.”

-- James McIntyre, economist

Australia is experiencing a V-shaped recovery as early suppression of Covid-19 helped boost confidence. That, combined with government cash payments and the RBA cutting interest rates to near zero, has encouraged households to spend and firms to considering resuming investment.

Australia Retail Sales Surge 1.4% on Rebound From Lockdowns

Yet the economy is also at a potential inflection point as some Covid-19 support programs come to a close: from the JobKeeper wage subsidy to loan repayment deferrals.

To date, forward indicators show few signs of JobKeeper’s expiry hurting the labor market, which has seen a wave of hiring that pushed unemployment down to 5.6% in March.

Frydenberg said today the budget will include measures designed to boost the infrastructure, energy and digital-economy sectors, as well as tax and regulation reform. It will also include initiatives to attract skilled workers from overseas, he said.

Treasury estimates the 200,000 more Australians in work equated to almost A$3 billion ($2.3 billion) less being paid out in direct income support payments each year, Frydenberg said. It also generates, on average, over A$2 billion in additional income tax receipts each year, or around a A$5 billion turnaround to the budget. “And these are just the direct effects,” he said.

Iron Ore Bonanza

On top of that, the iron ore price has surged to $193, just shy of a 2010 peak of $194, bringing a wave of cash into government coffers via company tax payments. The government had forecast in its budget for iron ore to ease back to $55 a ton.

At prevailing prices, the windfall could add an additional A$40 billion to government revenue. That suggests Frydenberg has ample scope to provide new spending.

“There are a number of important reasons why our fiscal strategy remains focused on driving unemployment even lower,” Frydenberg said. “Against the backdrop of a highly uncertain global economic environment, it is prudent to continue to support the economy and ensure that our recovery is locked in.”

He also noted the RBA’s conventional rate ammunition is exhausted. The central bank’s cash rate is at 0.10% and it’s operating yield-curve control and quantitative easing programs to support the economy. That puts more burden on fiscal policy.

Frydenberg had previously said the government would begin the task of fiscal repair once unemployment was “comfortably below” 6%. His backtracking on that reflects the goal being achieved much earlier than anyone had expected.

“Looking further ahead, our challenge once we recover from this crisis, is to again rebuild our fiscal buffers. We have done it before and we will do it again,”Frydenberg said. “But we won’t be undertaking any sharp pivots towards ‘austerity.”’

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