As Australia slowly emerges from isolation, the nation’s economy is reopening, and even looking rather better than expected. But Australia still faces grim months ahead as unemployment numbers grow and the true extent of business survival rates emerge.
Treasurer Josh Frydenberg described the economic data as sobering when he recently gave an update to parliament. In this podcast, Frydenberg says there would be greater reason for optimism, especially for the tourism sector, if states were more willing open their borders.
“Now we need to see those state borders opened, whether it’s in Queensland or Western Australia, South Australia or Tasmania,” he says.
The Northern Territory will begin easing its border restrictions from June 15, scrapping mandatory quarantine for interstate arrivals. But both the Queensland and Western Australian governments say they will likely keep the measures in place for several months. Tasmania’s premier too is standing firm on his decision to keep the state’s borders closed.
Frydenberg says the government has reacted to COVID-19 “in an unprecedented way in terms of the scale and the size of our response” but reiterates that “the measures are temporary and targeted. And we want people to get back to work as soon as possible”.
However he acknowledges the housing construction and tourism sectors are in need of particular support.
On housing, “we recognise that there may be contracts in place to July or August, which is going to see the pipeline continue to then, but then we’re going to see probably a steady fall after that. And that’s the gap that we need to try to fill with particular measures.”
“It’s a watching brief, but certainly both areas are a focus for the government.”
Frydenberg also indicates that after the June review of the JobKeeper payment, some people could get less money than they are receiving now.
“There are a few issues we need to look at, including some workers within the JobKeeper programme getting paid more than they normally would otherwise get.”
Transcript (edited for clarity)
Michelle Grattan: Our economy is starting to reopen and indeed things may be better than earlier expected, but we’re still in for a very grim few months as unemployment numbers grow and some businesses won’t be able to survive despite the government’s relief package. Treasurer Josh Frydenberg described the economic data as sobering when he recently gave an update to parliament. Soon, he’ll release new figures about where the economy is heading. Meanwhile, Treasury and the tax office were embarrassed when it became clear the costings for the job keeper scheme had been grossly over estimated. The scheme is now expected to cost some $70 billion rather than the original estimate of $130 billion. But the government is rejecting calls to extend its coverage. Josh Frydenberg joins us today.
Josh Frydenberg, the national accounts are coming out next week. What’s your best guess as to how things will look?
Josh Frydenberg: Well, the first quarter was really a tale of two halves. We had the economy strengthening the backend of last year, and we saw in February that unemployment had fallen to 5.1 per cent. But we also saw throughout those early months of the year the impact of the bushfires not only on the community, but also on the economy. Then in mid-March, we started to see restrictions come in and no doubt that was affecting the economy. We also saw some panic buying, particularly at our supermarkets. And so it will be interesting to see what the numbers are in in the March quarter. But we certainly know that the June quarter is where the real hit to the bottom line will be felt.
MG: Are you betting on negative or positive for the March quarter?
JF: Well, I think the market expectation is for a negative quarter. But again, we’ll just have to wait and see and everyone will turn on Wednesday for the result.
MG: All in all, as you say, it’s going to be bad in the time ahead, even though perhaps not as bad as previously thought. Do you agree we already now in recession?
JF: Oh look, as you know, that is determined by two consecutive quarters of negative economic growth and the numbers will be what they are. But what we do know is that when we came into this crisis and is, of course, a health crisis with a severe economic impact, we did so from a position of economic strength. As I said, GDP growth was increasing at the back half of last year. We saw unemployment fall. We saw the budget balance for the first time in 11 years, we created some one and a half million new jobs. Workforce participation had reached record highs. And we continue to see strong demand for our exports. And that is all been a good sign for the economy. But certainly the impact of the COVID crisis is very severe and we’re going to see the numbers get worse before they get better.
MG: Treasury has explained its forecasting error in the JobKeeper estimate as partly driven by the fact the economy’s not quite as bad as it thought, yet it still has the same unemployment forecast that it had before. Is there some mismatch here?
JF: Well, the announcement of JobKeeper was on the 30th of March. And in the week leading up, we saw double digit increases in the number of daily cases of Coronavirus. And Treasury had thought that there was a possibility that we could go into lockdown, akin to what had happened in Europe. The result of that would have been disastrous for the economy, indeed. And I’ve spoken publicly about it, that the potential impact could have been to see GDP in the June quarter fall by more than 20%. That would have seen a hit to the economy of more than $100 billion. So that’s the cliff that we were standing on.
MG: But what about its unemployment forecast?
JF: And the unemployment forecast of reaching around 10 per cent in the June quarter was announced mid-April and so was announced later than the JobKeeper package was announced. And therefore, at a slightly different time and as you know from Treasury’s statement, that they’ve stuck to that forecast around unemployment peaking at around 10% in the June quarter. But for the JobKeeper package, it would have been around 15%.
MG: Now, the priority has been keeping the virus under control and we have at least so far done very well on that front. Is your priority now, the government’s priority, dealing with unemployment? Is that the first and foremost task?
JF: Well, I think you’ve got to deal with the health impacts and the economic impacts simultaneously. You can’t take your eye off the ball for either of those challenges. And you’re right to underline the progress that we’ve made, Michelle, on the health front. I mean, if you if you look at the United States, more than 100,000 deaths, if you look at the United Kingdom, nearly 40,000 deaths. I mean Australia has avoided the fate of other nations because we moved quickly with closing the borders, but also the quality of our health system and the fact that the public followed the health advice. All of that has succeeded in flattening the curve and seeing the growth number of daily cases going from more than 20% to less than 0.5%. On the economic front, we’re going to see elevated unemployment. There’s no doubt about that. And that is what has driven policies like the JobKeeper programme to maintain that formal connection between the employee and the employer. We’ll continue to maintain a watching brief over the various sectors of the economy that could be slower to recover than others. And I’m thinking particularly about tourism as one, as long as those international borders are closed. But we will continue to do what is necessary to support those economies because we do want to see as many people get back into work. And the best way to do that is to follow the medical advice and to lift those restrictions, because the first three stages of lifting those restrictions, as agreed to by national cabinet recently, will see some 850,000 people get back into work.
MG: And we seem to be going faster, about to go faster on that than perhaps we previously…
JF: It’s a positive. It’s a positive with kids back in school, cafes and pubs starting to open. Now we need to see those state borders opened, whether it’s in Queensland or Western Australia, South Australia or Tasmania. There is no medical reason, according to the deputy chief medical officer, as to why those state borders should be closed.
MG: We know that unemployment is slow to recover after a recession. History tells us that…
JF: That was the experience of the 1990s.
MG: We are now above six and rising. How many years do you think it will take to get back to a number with a five in front of us?
JF: Well, again, the economic environment is very uncertain. And you heard that just yesterday from the RBA governor. What we do know is that there is a lag. It does take time. And certainly the most recent unemployment number of 6.2% did not fully reflect the changes that we’re seeing in the labour force. Nearly 600,000 fewer people in a job in the last month reported as opposed to the month prior. And that’s because people are no longer actively looking for work because they look at the job market and what has been the impact of the coronavirus. So it is going to be a challenging time. We have to look at it sector by sector, but we are putting the support packages in place. And one of the areas that we’re working on right now is the housing construction sector, because we recognise that there may be contracts in place to July or August, which is going to see the pipeline continue to then, but then we’re going to see probably a steady fall after that. And that’s the gap that we need to try to fill with particular measures.
MG: So we can expect a support package on housing in a week or two. And then perhaps a support package on Tourism, is that right?
JF: Well, again, it’s a watching brief, but certainly both areas are a focus for the government.
MG: Would the government rather, as it seems give extra aid through targeted support packages rather than extending JobKeeper out in time?
JF: Well, the JobKeeper programme was always temporary. It was always targeted. And as you know, it’s legislated for that six month period with a review midway. And again, the governor said yesterday that was very sensible to do that review. There are a few issues we need to look at including the some workers within the JobKeeper pay programme getting paid more than they normally would otherwise get. And that’s going to be the subject of the review as well.
MG: So what else will the review look at besides cutting back those particular workers?
JF: Well, it’s going to look at how the programme has been implemented to date. As you know, it’s been we’ve been working with the employers and using their payroll systems and paying them who then pay their employees. We’ll just assess its implementation. And, of course, the very strong take up that we’ve seen. I mean, if you’re talking about 3.5 million people being covered by the JobKeeper programme, and then you add that to the number on the JobSeeker program, you’ve got around half the private sector workforce who are on one of those two programs and that cannot continue indefinitely. As you understand, there is no money tree, Michelle, the government’s going to be very conscious of the overall economic impact of these measures. And we’ve responded in an unprecedented way in terms of the scale and the size of our response. But the measures are temporary and targeted. And we want people to get back to work as soon as possible.
MG: But despite being no money tree, it does seem that there’s going to have to be some more stimulus after September. Do you accept that?
JF: Well, again, it goes back to targeted sector based support is an area that we’re focussing on now and looking at, but as well and understanding the overall position that the economy is in. And it is very uncertain at the current time. But we do we do start to say we are starting to see more economic activity, whether it’s, you know, more people going onto public transport or driving on our roads or going through the shopping centres. More economic activity is being generated as the restrictions are starting to be eased.
MG: Scott Morrison’s flagged tax reform and reform of the federation as part of the government’s agenda. Now, we’ve been there before. Do you think the pandemic will enable changes in these areas that haven’t been able to be achieved before?
JF: I think there’s a really constructive and productive dialogue between the federal, state and territory governments. That’s been accelerated through the crisis. And I think that goodwill is present and and hopefully will continue. I can only speak for the state and territory and and myself as the federal treasurer from the meetings that we’ve had to date. And we made pretty much on a weekly basis. And it’s been really useful to exchange notes, to get briefings, to talk about what we’re seeing and hearing and how we can work together. And, for example, you know, we’ve been working recently on the five year health agreement together. So the treasurers look across the economy, across sectors, work with portfolio ministers and its been a very useful forum. And certainly at the national cabinet level, I think it’s been what the country has wanted and needed at this time to know that the governments, regardless of their geography and regardless of their political persuasion, we’re putting the national interest first.
MG: You’d have to lead a major tax debate if there was one. Do you have the inclination, the energy after all this to do that?
JF: Well, certainly, I think cutting taxes is important, and that’s been our track record. Let us not forget…
MG: Reforming, not just cutting.
JF: Well, if you talk about the reforms that were passed in the last two budgets, it’s been very significant. $300 billion dollars plus of tax cuts, but importantly, one single bracket between 45,000 dollars and 200,000 dollars being created where the marginal rate of tax is no more than 30 cents in the dollar. That’s the vast bulk of income taxpayers and that’s a very substantial reform. On company tax, we succeeded to to reduce company tax down to 25 percent for businesses with a turnover of less than 50 million dollars. Obviously, we want it to go further. But the reality was such that we couldn’t get it through.
MG: You’ve given up on that.
JF: Well, the reality was such that we couldn’t get it through. We’re always been a party that looks for opportunities to cut taxes.
MG: So would there be a new opportunity on company tax.
JF: Well, look, I’ve always said that our company tax rate is particularly high compared to other nations, but we’re in the process now, as I said at the press club recently, we’re in the process now of not putting out a shopping list of reforms, but of going through the various options that are available for us, sifting through those options, analysing them, and particularly, looking at options that have been raised in the past, now with a fresh set of eyes, because we can’t afford to go back to business as usual as far as the economy is concerned. This is a new economic environment that Australia and the world faces right now. And we’re going to need to be more efficient as we try to compete for global capital.
MG: Just a couple of things before we finish. Your retirement incomes review is due to report late September. Can we be sure that the government won’t try to reverse the legislated rise to the superannuation guarantee, which comes into effect mid next year?
JF: Look, we’ve commented on that in the past, as you rightly say. It’s been legislated. What we are focussed on is our reforms.
MG: No change in jobs, no attempt to change.
JF: Well, again, I’ve said I’ve answered that plenty of times in the past, I’ve said this: we had no plans, we have no plans to do that.
JF: But I am obviously looking at all opportunities across the board for ways to strengthen the economy and to create more jobs.
MG: No plans always looks like a little bit of a gate open. Just finally, Josh Frydenberg, are you more optimistic about the Australian economy than you were four weeks ago?
JF: Well, I’m certainly more optimistic than I was at the height of the pandemic here in Australia, where we saw the number of daily cases increasing much more rapidly than they are today. And I think the progress on the health front is going to produce a significant economic dividend as far as getting people back into work and and generating more economic activity. There is a long way to go, as the prime minister has said, it’s a three to five year proposition that we face, and there’ll be lower aggregate demand, there will be higher unemployment. And clearly, the global economy is also suffering right now with the United States seeing 40 million jobless claims in the last nine weeks and major falls in GDP quarterly growth in China and in Europe. So the impact is very, very severe across the economy. But we’re much better placed than many other nations, not only leading into this crisis, but also coming out of it. And and we’ll continue with our reform agenda and we’ll continue to advocate for the national interests as we build that bridge to recovery.
MG: Josh Frydenberg, thanks very much for talking with The Conversation today.
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