One year ago our nation was in lockdown.
We were staring into the economic abyss.
1.3 million Australians had been stood down or had lost their jobs.
At the time, Treasury feared the unemployment rate could reach 15 per cent with over two million out of work.
However, we were entering this crisis from a position of economic strength.
The unemployment rate was 5.1 per cent.
Workforce participation was close to a record high.
Welfare dependency at a 30 year low.
We had returned the Budget to balance for the first time in 11 years.
Budget surpluses were forecast in each year across the forward estimates and government debt was low by international standards.
Australia’s sound economic position enabled us to respond to COVID as required.
Now beyond all expectations, after the first recession in nearly 30 years, employment has not only returned to its pre-COVID level, it has surpassed it.
There are more Australians in work today than ever before.
But we know that the job is not complete.
We need to stick to the Plan.
So today, I want to discuss the principles and the strategy that have successfully guided the Morrison Government’s decision making to date and the approach we will take during the recovery phase and beyond.
Specifically I want to talk about:
- How our Economic and Fiscal Strategy was designed to protect jobs and avoid labour market scarring;
- How the upcoming Budget will continue to prioritise job creation and drive the unemployment rate lower; and
- How we will continue to ensure Australia’s fiscal position remains strong and sustainable.
Preventing Labour Market Scarring
At the outset of this crisis, we laid out a clear set of principles to guide our emergency response.
Our response would be temporary, targeted, and proportionate to the shock and would use existing mechanisms wherever possible.
And all of our efforts would be focussed on keeping as many Australians as possible in work.
We were determined to avoid the high cost of prolonged unemployment from past recessions.
In the 1980s recession the unemployment rate rose from around 5 per cent to over 10 per cent and took over eight years to recover.
In the 1990s recession the story was the same - with unemployment rising from around 6 per cent to over 11 per cent and taking nearly ten years to recover.
In stark contrast, following this recession, we are on track for the unemployment rate to recover in around two years.
From the outset, we were determined to limit the damage to the labour market.
This is why the Government responded with an unprecedented level of support to protect vulnerable households, save Australian businesses and jobs.
We have committed more than $250 billion in direct economic support, including JobKeeper, the single largest and most successful economic support program in Australia’s history.
The assistance was overwhelmingly temporary and front-loaded, with three quarters of the support to be delivered in the first two years.
This ensured that support was delivered when it was needed most and did not structurally weaken our Budget position.
Importantly, fiscal and monetary policy worked in tandem to support our economy.
Just as the Government stepped up to provide unprecedented levels of fiscal support, so too the Reserve Bank moved swiftly to ensure monetary policy was highly accommodative.
As a direct result of our actions, Australia has experienced a smaller fall in economic activity than every major advanced economy.
And we are the first major advanced economy to see both hours worked and employment return to pre-pandemic levels.
Australia is now set to avoid what many feared could be another generation lost to long-term unemployment.
Our Economic and Fiscal Strategy
In the October Budget, as the economy was showing early signs of recovery, we published our revised Economic and Fiscal Strategy.
The strategy was set out in two phases.
The initial phase of the strategy, the ‘COVID-19 Economic Recovery Plan’, continued our core focus on achieving a strong economic recovery, getting people back into jobs and avoiding scarring.
The second phase focused more on securing our longer term fiscal sustainability, by growing the economy in order to stabilise and then reduce gross and net debt as a share of GDP.
When introducing the fiscal strategy last year I said:
- That the first phase would focus ‘sharply on boosting business and consumer confidence and promoting jobs and growth throughout the economy’;
- That the priority must be to secure a strong and sustained economic recovery and drive the unemployment rate down; and,
- That the first phase would remain in place until the unemployment rate was ‘comfortably below 6 per cent’.
This guidance provided a marker on the road to recovery.
It provided a clear signal to households and businesses that the Government would not withdraw support prematurely in pursuit of fiscal consolidation.
With eight out of ten jobs in the private sector, transitioning to private sector-led growth and job creation was central to this strategy.
Private sector growth is the essential ingredient in maintaining a strong economy and a sustainable fiscal position over the longer term.
You can’t have one without the other.
Large scale government support is no substitute for sustainable jobs in profitable firms.
The strategy also provided us with the flexibility we need to keep responding to rapidly changing economic circumstances and the uncertainty a pandemic creates.
Throughout this crisis, the Government has adapted and tailored its policies as the economic environment requires.
Be it the extension and tapering of JobKeeper, temporary regulatory relief or targeted support packages for sectors and regions in need.
This has been a critical feature of our response.
Fiscal support to the economy peaked at 3.7 per cent of GDP in the September quarter 2020, or around $70 billion. By the March quarter 2021, it had more than halved to 1.4 per cent, or to around $30 billion.
Even as fiscal support was reduced, the economy continued to recover and jobs continued to return.
Emergency support programs, like JobKeeper, had to come to an end.
It was the right decision for the economy, for the labour market and for the Budget.
Despite many doomsday predictions of what JobKeeper’s end would mean for the economy, early data indicates the labour market has remained resilient and continued to strengthen.
Over the fortnight to 16 April, immediately following the conclusion of JobKeeper, the number of people on income support has actually fallen by approximately 46,000.
And as the JobKeeper program concluded in March, job ads rose to reach an all-time high and the number of job seekers for every vacancy fell to its lowest level in over a decade.
While this is encouraging, we are not complacent.
We recognise that the COVID-19 pandemic is far from over.
And we know that some businesses and sectors are still doing it tough.
This is why the Morrison Government’s economic support is continuing.
Our Budget - Staying the Course
I would now like to turn to the upcoming Budget.
This will be another pandemic budget being delivered in the midst of a once in a hundred year pandemic and just seven months after the last budget.
The Budget will lay out the next phase of Australia’s economic recovery plan, to grow our economy so we can deliver the jobs and guarantee the essential services Australians rely on, and keep Australians safe.
We should all be encouraged that the economic recovery is on track and ahead of schedule.
Unemployment in March, at 5.6 per cent, is below the most optimistic Treasury forecasts and well below the forecast of 7.5 per cent in the March quarter predicted in the 2020-21 MYEFO.
This represents around 200,000 more Australians in work than we expected just over four months ago.
There is now strength across a range of indicators that suggest ongoing momentum in the broader economy.
Consumer confidence has recovered beyond its pre-pandemic level and sits at an 11 year high.
Business conditions are at their highest on record.
Capital investment intentions for the next 12 months are at their strongest since 1994.
Investment in machinery and equipment, like vehicles and harvesters, was up 8.1 per cent in the most recent December quarter data - the largest quarterly increase in nearly seven years.
All very positive signs.
Nevertheless, we continue to face enormous uncertainty - on both the health and the economic front.
Around the world, more than 800,000 new cases of COVID-19 are being diagnosed every day.
Global deaths have reached over 3 million.
We know that the virus is evolving and that new strains are emerging.
And while the vaccine rollout is progressing both here and abroad, it remains at an early stage.
Many health systems, including India, continue to be overwhelmed.
As long as the virus remains a threat, we face enhanced risks to the global and domestic economy.
Despite the strength in our domestic economic recovery, the unemployment rate is not yet ‘comfortably below 6 per cent’.
Our international borders remain largely closed.
Australia is experiencing the lowest levels of population growth in a century.
Interest rates are close to zero.
These are unusual and uncertain times.
For these reasons, we remain firmly in the first phase of our Economic and Fiscal strategy.
We need to continue working hard to drive the unemployment rate lower.
That is what the Budget will do.
We will not move to the second phase of our fiscal strategy until we are confident that we have secured the economic recovery.
We first want to drive the unemployment rate down to where it was prior to the pandemic and then even lower. And we want to see that sustained.
The last time Australia had a sustained period of unemployment below 5 per cent was between 2006 and 2008, just prior to the GFC.
Before that, you need to go all the way back to the early 1970s.
There are a number of important reasons why our fiscal strategy remains focused on driving unemployment even lower.
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.
Moreover, monetary policy is heavily constrained.
Unlike prior to the crisis, the Reserve Bank has reduced scope to lower interest rates to drive unemployment lower and wages higher.
This has placed more of the burden on fiscal policy.
And estimates of the ‘NAIRU’ or the rate of unemployment below which inflation is expected to accelerate over time, have come down.
The Treasury will today release a technical working paper on the NAIRU, as well as a paper on labour force participation.
As has been foreshadowed, they now estimate that the NAIRU sits between 4.5 and 5 per cent, lower than their previous estimate of 5 per cent.
This lower estimate of the NAIRU means a lower unemployment rate will now be required to see inflation and wages accelerate.
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.
We want more people in jobs and in better paying jobs.
This is what our fiscal strategy is designed to achieve.
Of course in the long run, we know that the key to sustainably delivering higher real wages is through lifting productivity.
That is why the Government will continue to pursue a range of reforms and investments to boost productivity and set Australia up for the future.
This includes measures to be outlined in this year’s Budget in the areas of skills, infrastructure, tax, energy, digital technology and deregulation to name just a few.
We are making the necessary investments to seize the opportunities that will set Australia up for the future, create jobs and lift wages over the long run.
Our Commitment to Fiscal Sustainability
Finally, I would now like to turn to the important issue of fiscal sustainability.
I want to be very clear. This Government’s core values have not changed.
We remain committed to lower taxes, containing the size of government, budget discipline and guaranteeing the delivery of essential services.
We have the track record to prove it.
COVID-19 has had an unprecedented impact on our levels of government debt. As it has elsewhere around the world.
Using the Government’s balance sheet to limit the economic cost and longer term scarring stemming from this crisis, was a responsible and prudent response.
It was also the fiscally responsible course of action. A stronger economy means a stronger and more sustainable budget.
As I have outlined previously, there are consequences that flow from the crisis that somewhat delay the fiscal recovery.
In particular, corporate tax receipts generally take some time to rebound following a downturn, due to the ability of businesses to deduct losses.
In contrast, much of the regular spending in the Budget is less sensitive to movements in the economy and operates more like a fixed cost.
Nevertheless, through the operation of the automatic stabilisers, a larger economy still generates relatively more tax receipts and requires less government expenditure on welfare payments.
Let me give one simple stylised example.
As I said earlier, in March there were around 200,000 more Australians in work that we expected just over four months ago in MYEFO.
200,000 more Australians in work and off Jobseeker equates to almost $3 billion less being paid out in direct income support payments each year.
It also generates, on average, over $2 billion in additional income tax receipts each year.
That is around a $5 billion turnaround to the Budget. And these are just the direct effects.
The indirect effects of a stronger economy and more people in work go well beyond this.
Because of our policy interventions, Treasury had previously estimated that the economy will be 4.5 per cent larger in 2020-21 and 5 per cent larger in 2021-22 than if we had not intervened.
At that time, real GDP was not expected to regain its pre-pandemic level until the December quarter 2021.
All indications are that we will actually have pushed through that milestone nine months earlier.
This stronger than expected economic recovery means that our fiscal outlook in the 2021-22 Budget will be driven off a higher economic base than expected in last year’s Budget.
This will assist us to achieve our medium-term fiscal strategy of stabilising and then reducing gross and net debt as a share of GDP over time.
This again reinforces the point that the best way to repair the Budget is to repair the economy.
This is further helped by our low interest rate environment, keeping our debt servicing costs low.
Despite a substantial increase in gross debt, the MYEFO showed that the cost of servicing that debt is actually lower today than in 2018-19, as a result of historically low interest rates.
This Government has also extended government borrowing to the longer end of the yield curve, by issuing new lines of debt at 20 and 30 year maturities.
An increasing share of our total borrowing is now at longer maturities, making our debt repayments less sensitive to movements in yields.
Treasury’s projections are that nominal economic growth will exceed the nominal interest rate for at least the next decade.
That is, economic growth will more than cover the cost of servicing our debt interest payments.
As a result, by growing our economy we can maintain a steady and declining ratio of debt to GDP over the medium term as we continue to move towards balancing the Budget.
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.
But we won’t be undertaking any sharp pivots towards ‘austerity’.
For fiscal consolidation to be sustainable, it should rely on gradual changes that are made over time and that provide the foundation for a growing, thriving economy.
When we do transition to the second phase of the strategy, we will act in accordance with the principles we have laid out, namely to:
- Focus on growing the economy in order to stabilise and reduce debt;
- To target a budget balance, on average, over the course of the economic cycle, that is consistent with the debt objective.
We will do this by:
- Controlling expenditure growth, while maintaining the efficiency and quality of government spending and guaranteeing the delivery of essential services;
- Supporting revenue growth through policies that drive growth, while maintaining a tax-to-GDP ratio at or below 23.9 per cent;
- Using the Government’s balance sheet to support productivity enhancing investments; and
- By pursuing ongoing structural reforms to boost economic growth.
Our Economic and Fiscal strategy provides the flexibility to respond to changing economic conditions while ensuring we remain focussed on long term fiscal sustainability.
Every Australian can be immensely proud of our nation’s performance in response to COVID and the part they have played.
We have successfully supressed the virus and our economy is recovering strongly.
This is not the result of luck.
Australians make their own luck.
It has truly been a Team Australia moment which has seen government, industry and the public work closely and effectively together.
But while Australia has fared better on the health and economic front than nearly any other country in the world there is no room for complacency.
Particularly as the virus remains a significant threat as recent events in India attest.
This is why the Budget in two weeks time and our fiscal strategy as outlined today will continue to prioritise job creation as Australia’s pathway to a stronger economy and a stronger budget position.
Our economic plan is working but the job is not done.