• jmcdonnell64

We are in a Depression and it Hurts

A depression is defined as two successive years of negative growth and Treasury is forecasting that the economy will contract by 3.25% this year and although it is estimated to claw back 2.75% next year it will still be in negative territory.

The consequences of depression are horrific. Unemployment will rise to 9.25% by December this year. The deficit in 2020/21 will be $185 billion and counting. Debt is forecast to rise to $850 billion and not be paid off until 2060, although most commentators believe that debt will end up exceeding $1 trillion.

Things are not any better in the rest of the world. The IMF is forecasting that the global economy will contract by 4.75% in 2020 the biggest decline since the great depression.

The Prime Minister is hopeful that growth can return to 1% above trend: that is 4.25% for five years from 2022/23, to help reduce unemployment and get the debt down. This is very optimistic in the present circumstances. In the meantime, 2 million people on jobkeeper will have their incomes reduced by between $250 and $750 in the period between October and March when jobkeeper will end altogether.

Unless the private sector recovers, the unemployment rate will spike well above the forecast rate of 9% next March. However, things could be much worse. The Mid-Year Economic and Fiscal Outlook (MYEFO) was prepared before the second outbreak of infections in Victoria. On Sunday Victoria had 459 new cases of COVID 19 and 11 deaths. It is clear that the virus is not yet under control and the lockdown may have to be continued for longer than six weeks. This will be a massive hit to the economy and the chances of an early recovery.

At the moment the federal government is pumping $18 billion a month into the economy but after October this falls to $3 billion from October to March. These are big numbers but they are still meagre rations on which to build an economic recovery.

The problem is that the private sector doesn’t have any incentive to invest in employment creating activities and even if it did it doesn’t have the capital. At the moment most of the $18 billion in government funding is going into the demand side of the economy with very little going into the supply side. While there is plenty of spare capacity across the country, a large proportion of this is owned by ‘zombie’ companies that will never recover and will eventually be declared insolvent.

We are in a period of creative destruction, where old businesses are going to be replaced by new, dynamic firms. These new firms will be built on innovation and new technology. There is an argument that something needs to be done to ensure that these firms can access seed capital from institutions. One suggestion is that the government should establish a fund along the lines of the future fund into which superannuation funds and banks could invest with a guaranteed minimum rate of return. The fund could, in turn, take equity positions in new businesses.

The MYEFO has set out the parameters for macro-economic recovery but what is needed now is microeconomic analysis. Two years ago the Productivity Commission delivered a report to the government that identified the areas of economic reform that would give the biggest boost to the economy.

It is time for the government to dust off this report and present it to the national cabinet.

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