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Aus fiscal policy promising but victory uncertain, says expert

— 1 minute read

An economist has applauded the government’s fiscal stimulus in response to the COVID-19 crisis, but has warned the nation’s efforts at staying afloat all depend on how long and large the shock will be.

The Australian response to the pandemic has common features to the stimulus packages in the UK and the US, PGIM has noted, with all countries looking to help companies weather the storm, provide support to workers who have become unemployed and ensure a smooth flow of credit to the economy.

Nathan Sheets, chief economist and head of macroeconomic research at PGIM fixed income noted all three nations have a common commitment to “do what is necessary to support the economy”, with all three cutting their policy rate to near zero and kickstarting quantitative easing programs.

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He has ruled Australia’s fiscal response is a “strong effort”, but ultimately its success will depend on the “size and duration of the shock”. 

“The Australian government’s efforts to preserve employment through the JobKeeper payment, strikes us as a first-best policy effort,” Mr Sheets said. 

“Keeping workers in their jobs through the downturn helps ensure that their employers are well positioned to return to operation when the disruptions end. This should minimise the longer term damage to the economy and support a more vigorous recovery. 

“It also keeps income flowing to households and allows them to stay current on their obligations.  Maybe even more important, it reduces uncertainty for workers, since they won’t face stressful bouts of unemployment.”

But the safety net should be strengthened more broadly in the face of unemployment being set to rise, Mr Sheets commented, saying benefits for those seeking employment should be augmented and there should be “ample” liquidity for firms. 

“Both the [package’s] size and structure are fit for purpose,” he said. 

“Even so, the looming question is whether it goes far enough to buffer the extraordinary disruptions that the coronavirus is likely to bring. Only time will tell.

“The upshot is that the government should be prepared to do more, or to restructure its efforts, if the hit from the virus ends up being even more severe than currently contemplated, or if it rips through the economy in ways that are unexpected.”

 

Aus fiscal policy promising but victory uncertain, says expert
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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