Spend the $60b windfall on bigger stimulus

The Commonwealth’s $60 billion underspend on its stimulus plans is no more fiscally responsible than a company underspending on its advertising and declaring a boost to profit or a household underspending on car maintenance and declaring it had boosted its savings.

While the blame game over Treasury’s biggest ever policy costing error will go on for months, what really matters is its gross domestic product forecast. In March, Treasury and the Reserve Bank of Australia forecast that GDP would decline 10 per cent in the June quarter. To put that in perspective, GDP fell by less than 1.5 per cent during the 1991 recession.

The government has been talking as if it understands Keynesian economics, but it clearly does not think nor act like in a Keynesian way.

If Treasury still thinks GDP will fall by anything like 10 per cent, the discovery of the enormous JobKeeper underspend shows the Morrison government is spectacularly failing to shift money out the door. Such a failure should alarm any CEO whose profits rely on consumer spending or consumer confidence.

But if Treasury no longer believes we are headed for a recession, the celebrations from the government should have been a lot louder than we heard over the weekend.

So, which is it? Are we massively underspending in an economic crisis or have we dodged a bullet and the government now expects GDP to surge and unemployment to fall quickly?

In normal times, the economy has a bigger impact on the budget than the budget has on the economy. Small changes in the world rate of growth or the exchange rate have a significant impact on government revenues and, in turn, the budget result.

But in times like the present, with consumer spending, business investment, housing investment and demand for exports all falling sharply, there is no doubt that the Commonwealth budget has an enormous impact on both the size and shape of the economy.

Little logic

The government has been talking as if it understands Keynesian economics, but it clearly does not think nor act in a Keynesian way. As consumers buy less stuff and companies invest in less stuff, either the government steps in to buy more stuff or the unemployment rate rises sharply. Trying to minimise government spending in the middle of a recession makes as much sense as minimising your firefighting budget in a bushfire crisis.

Assuming that Treasury is not as bad at forecasting GDP as it was at forecasting the uptake of JobKeeper, and assuming the original budget for JobKeeper was in line with Treasury’s estimate of how much stimulus the economy needed, what should the government do with its huge "budget windfall"?

A recent paper by The Australia Institute spells out the criteria for good fiscal stimulus spending, which can be summarised as supporting projects that are labour-intensive, employ people in the hardest-hit local regions, and deliver lasting benefits.

Extending the eligibility of JobKeeper to casuals and workers on temporary visas will not just help the millions who’ve been hardest hit, but it will also ensure a larger proportion of the stimulus spending goes to the industries and regions that were hit first, and will open up last.

As one employer from the arts and entertainment industry quipped: "Let’s face it, I’m in the business of putting on non-essential gatherings for groups of more than 500 people". Spending stimulus funds on those most in need and targeting industries that have been hardest hit are one and the same thing.

Only last week, Treasury was still saying it expected a big decline in GDP and that the size of the government’s stimulus package was appropriate. Discovering an administrative error doesn’t change the underlying macroeconomic problem that Australians face, and it doesn’t change the amount of money the government needs to spend.

Just as any business that expects to grow over the next few years will be taking advantage of cheap debt to do so, any government that wants to boost GDP now and build strong foundations for faster growth in the future needs to borrow and spend money now.

Underspending on stimulus spending might be good for cash flow but it is no way to build a strong future.