The modest reduction in the unemployment rate and the improvement in the budget outlook announced on Thursday are excellent news but it is still far too early to consider removing any of the stimulus baked into state and federal budgets.
According to the November labour market data the unemployment rate dropped to 6.8 per cent from 7 per cent in October thanks largely to a surge in employment in Victoria as the state’s economy continued its dramatic recovery after the 15-week lockdown. Victoria has added 150,000 jobs in two months. NSW’s unemployment rate was unchanged.
The mid-year economic and fiscal budget update also showed signs of faster than expected recovery. The brighter jobs outlook and a windfall in expected corporate tax, thanks to the surging price of iron ore, flowed through into a reduction in the size of the budget deficits expected in coming years.
The deficits are still enormous, $197.7 billion this year alone, but they will in total be $25.9 billion less than forecast at budget time in October.
Treasurer Josh Frydenberg said the economy was “outperforming all advanced economies”.
While he is right to point to these positive signs, the Australian economy is still weak. Only about three-quarters of the 1 million jobs that were lost at the start of the pandemic have so far returned.
The situation is better than feared six months ago but the unemployment rate is still far too high and the government must stick to the recovery plan it outlined in the budget.
It must exercise caution in weaning the country off the massive fiscal stimulus that has sustained it for the past six months.
While the end of lockdowns has helped the job market recover, the gradual winding back of stimulus foreshadowed in the budget carries major risks in coming months.
Despite Mr Frydenberg’s upbeat remarks, the end of emergency measures – such as the JobKeeper wage subsidy program and the JobSeeker unemployment supplement – will throw sand in the economy’s gears.
The budget update predicts that the unemployment rate will start rising again to peak at 7.5 per cent in the March quarter.
After that the recovery is expected to be slow and patchy. The government is now not expecting our international borders to reopen until 2022, which will prolong the pain for sectors such as tourism and international education.
Unemployment is forecast to remain at an average of 6.25 per cent into the middle of 2022. The federal government said at budget time that it would not worry about the budget deficit until unemployment was safely below 6 per cent. Nothing in Thursday’s data should change that.
There is even room for further stimulus if recovery drags. The budget update included an extra $859 million for aged care, acknowledging the failures that caused so many deaths during Victoria’s lockdown.
The Herald would also support extending the JobSeeker supplement beyond its current end date of March and announcing a permanent increase that keeps the dole above the poverty line.
The biggest risk to the economic recovery, of course, is a new outbreak of COVID-19.
NSW must quickly bring under control the outbreak in the past two days by contact tracing and social distancing. If it cannot, lockdown measures that have only just been lifted might have to come back and states which have only just opened borders could slam the gates shut again.
In that scenario, the economic gains in the past couple of months could evaporate overnight.
Note from the Editor
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Source: Thanks smh.com