With interest rates at historic lows, how does a government stimulate the economy? Every time a further cut is made, there is less room to move and a risk that low-quality loans will be made.
Partner, Deloitte Access Economics
The Reserve Bank of Australia has made it clear that it believes monetary policy alone is not enough to stimulate the economy, and that we may get to zero interest rates.
The economy has been slowing and, over the past year, we have been principally reliant on our exports and government infrastructure spending to keep the economy chugging along.
Although there is some stimulus due to tax offsets and lowering of mortgage interest rates, given the size of the economic slowdown, wage stagnation and weak consumer demand, we really need to get things moving.
It would be prudent to have some fiscal stimulus now. I think there are two key ways to achieve this. The first is regional infrastructure investment. There is a lot going on in the big cities, but the economy, particularly in regional areas, is struggling due to factors such as drought.
“Deloitte Access Economics has also been pushing for a lift in the Newstart Allowance. Yes, it will cost the bottom line of the economy, but it gives back in terms of adding to GDP growth.” Nicki Hutley, Deloitte Access Economics
Infrastructure investment in the regions would be a way of not overspending, but it would have some impact on the economy.
Deloitte Access Economics has also been pushing for a lift in the Newstart Allowance (income support for unemployed people). Yes, it will cost the bottom line of the economy, but it gives back in terms of adding to GDP growth – small growth, but every little bit helps.
"It’s a social imperative in that it affects those worse off in our communities, but there’s also an economic imperative in that it is adding stimulus where it is most needed.
Senior Research Fellow, Melbourne Institute of Applied Economic and Social Research
In its most recent budget, the Australian Government opted to bring forward tax cuts in an attempt to entice consumers to ramp up household spending and thereby encourage additional private sector investment. In theory, bringing forward tax cuts should stimulate consumption at the margins.
A key issue, however, is that the household’s sensitivity to tax cuts may differ this time around. Over the past 25 years, we have observed a significant shift in the types of expenses that households face. In the two largest states, the proportion of renters has risen from about 18 per cent of households in 1994-1995 to 27 per cent in 2017-2018. Similarly, the proportion of mortgagees has risen from about 30 per cent of households to approximately 38 per cent.
An increasingly greater proportion of overall household expenditure is therefore being allocated to housing costs. For many households, it is therefore likely that a more aggressive fiscal policy is needed to achieve the desired spending response.
“One possibility is to bring forward future tax cuts. A second... is to target households likely to fall into the hand-to-mouth category, who are likely to have a higher propensity to consume.” Sam Tsiaplias, Melbourne Institute of Applied Economic and Social Research
One possibility is to bring forward future tax cuts. A second way, possibly in combination with the first, is to target households likely to fall in the hand-to-mouth category, who are likely to have a higher propensity to consume.
These options are likely to be a better way to address immediate concerns than engaging in infrastructure spending, which tends to be longer term in its realisation of economic benefits.
Chief economist, Committee for Economic Development of Australia (CEDA)
There are three areas worthy of attention if the Australian Government wants to add further fiscal firepower to the economy to bolster personal income tax cuts.
The first way is to work with the states and territories to accelerate shovel-ready infrastructure projects.
Infrastructure Australia independently prioritises projects on the basis of economic need and benefit, not pork-barrelling. The most recent Infrastructure Australia audit shows there are opportunities to bring forward infrastructure investments and maintenance currently in the pipeline. These opportunities include basics like local road maintenance, with a A$2 billion backlog in New South Wales alone.
The second way is to get business investment, which is at its lowest levels since the 1990s, firing again. CEDA’s Sustainable Budgets report in March 2019 recommended more generous tax allowances for new investment. In the absence of agreement to reduce the corporate tax rate, a targeted accelerated depreciation measure would go a long way to reducing Australia’s effective corporate tax rate and incentivise new investment at a relatively modest cost to the budget.
“In the absence of agreement to reduce the corporate tax rate, a targeted accelerated depreciation measure would go a long way to reducing Australia's effective corporate tax rate and incentivise new investment.” Jarrod Ball, Committee for Economic Development of Australia (CEDA)
Finally, why not increase the Newstart Allowance? At just A$280 a week, the base rate of the Newstart Allowance has not increased in real terms for more than two decades, and is unliveable. An increase would deliver a shortterm dividend, and that’s before the social compact dividend of lifting the incomes of the poorest Australians.
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Meet the experts
Nicki Hutley leads Deloitte Access Economics’ Urban Advisory Practice. Prior to joining Deloitte, she held senior roles with Access Economics, KPMG and Urbis. She has almost three decades of experience in the application of economic modelling and analysis in urban economics, addressing issues such as affordable housing, infrastructure investment, urban renewal, climate mitigation and social policies.
Sam Tsiaplias is a senior research fellow in the Macroeconomics Research Program at the Melbourne Institute of Applied Economic and Social Research. Tsiaplias has also consulted for many government agencies and private sector organisations relating to the Australian energy market, the retail sector, the Victorian criminal justice sphere, the banking sector and the housing market.
Jarrod Ball joined CEDA as chief economist in 2017 with over 15 years of public and private sector experience. He has worked in the federal government as a lead adviser on microeconomic reform for the Victorian Departments of Premier and Cabinet and Treasury and Finance. He is a member of CEDA’s Council on Economic Policy and the Melbourne Economic Forum, and holds a master’s degree in economics from Monash University and undergraduate degrees in business (economics) and arts from the University of Southern Queensland.