The Treasurer should be planning economic stimulus now

by Brendan Coates and Danielle Wood

Published by The Sydney Morning Herald, Wednesday 3 July

Less than a year into the job, Treasurer Josh Frydenberg is staring down the barrel of his first real economic challenge. The economy is slowing and ominous clouds loom. The RBA cut interest rates to a record low 1 per cent on Tuesday, while signalling that fiscal stimulus needs to be on the table.

But when should the government move? How much might be required? And what form should it take?

The first challenge for the Treasurer is judging when the economy is sufficiently in the doldrums to justify a fiscal lifeline. There is no question it is failing to fire. Inflation is non-existent, new building approvals are drying up, and per person living standards have gone backwards for three consecutive quarters. Meanwhile the labour market, so long the source of Reserve Bank optimism, is weakening, with unemployment rising to 5.2 per cent.

But we are not in recession territory yet. The Sahm indicator, proposed by US Federal Reserve economist Claudia Sahm as an early indicator of a looming recession, is not yet ringing alarm bells. Australia’s average unemployment rate for the past three months has risen by 0.2 percentage points above the low of the past year, well below the 0.5 point threshold Sahm shows has predicted past US recessions.

The Treasurer won’t yet canvass more stimulus spending if it compromises the planned return to budget surplus. But things can head south quickly. The escalating trade war between the US and China is just one shadow over the global economy. The Treasurer needs to be ready to move swiftly should the economy deteriorate further. This means making plans now.

The best fiscal stimulus policies are temporary, fast to roll out and involve “no regrets” – in other words, spending with a solid policy rationale.

Number one on the Treasurer’s list should be to emulate the 2008 Social Housing Initiative, one of the most effective parts of the Rudd-era stimulus package. It resulted in 20,000 new social housing units being built and another 80,000 refurbished over two years, at a cost of $5.6 billion. The economic hit was immediate: public residential construction approvals spiked within 12 months of the announcement. A repeat today would provide a much-needed boost to housing construction when the pipeline is at risk of drying up. Building social housing would help tackle the growing scourge of homelessness. More than 116,000 people were homeless in Australia on census night in 2016, up from 90,000 a decade earlier. Half of the tenancies housed in the 2008 program were already homeless, or at significant risk of becoming so. So the spending would also yield significant social benefits.