Event: Panel interview with Hamish Macdonald and Bill Evans, ABC RN Breakfast
Speakers: Hamish Macdonald, host; Jennifer Westacott, chief executive, Business Council of Australia; Bill Evans, Chief Economist, Westpac
Topics: Response to the Treasurer's Economic and Fiscal Update
Hamish Macdonald, host RN Breakfast: To discuss all of this I'm joined by Westpac's chief economist Bill Evans, who's in Melbourne, and Jennifer Westacott the chief executive of the Business Council of Australia which represents Australia's largest companies. To both of you good morning.
Jennifer Westacott, chief executive Business Council of Australia: Good morning.
Bill Evans, chief economist Westpac: Good morning Hamish.
Hamish: Jennifer can I start with you. We were told yesterday that government expects unemployment to rise to 9.7 per cent by the end of the year. We don't have a specific plan of how that jobless will be brought down. Were you expecting more?
Jennifer: Look I think we have had a lot of actions taken by governments across the country to get that jobless rate down and to keep it down. The actions the government took in their estimate have stopped 700,000 people losing their jobs. Across the country you've seen state governments waive payroll tax, you've seen them do some infrastructure projects. So I don't think it's fair that governments haven't had a plan to keep people in their jobs. What we need now, particularly in the budget, is to see that plan for getting that activity going in the economy, getting businesses investing again, government investing wisely through big infrastructure that has a job creation effect as well as the effect of setting our economy up for the future. But I don't think it's fair to say that people haven't had a plan to keep people in jobs and to try and start to create jobs.
Hamish: But it's necessarily about keeping them in jobs. I mean there's a forecast of another quarter of a million or so people out of work by the end of the year and the figures around the drop in business investment are pretty eye-watering as well. It doesn't all seem to quite marry up in terms of getting everyone back into jobs. You acknowledge that don't you?
Jennifer: And look you know my views. I think we have to get business investment going. I've been on your program many times talking about this. I think it's in freefall now. It's in trouble before COVID. It's in freefall now and it's a very serious problem we've got to deal with and that's about tax incentives. It's also about making sure that we do not bog people back down again with red tape. It's about making our industrial relations system a bit more flexible. So it's all of those things Hamish. All I'm saying is the idea that people haven't been focussed on both job protection and job creation is simply not true. If you look across the states there's a lot of things in the pipeline to try and get jobs going again. There's no doubt the focus of the October budget has to be about job creation. It has to be about getting the economy in a growth phase. Because it's that growth phase that will both create jobs and also start to deal with the debt that you've talked about. And that's what we want to see in the October budget. In the meantime, we've got to get the activity going in the economy again. That's about getting the health situation under control so that we can stay the course on releasing the economy and that will have an effect of creating activity which also has an effect of getting people back to work and hopefully creating some new jobs.
Hamish: Bill Evans, economists say that yesterday's economic update was a missed opportunity to announce even more stimulus measures to boost the economy and jobs. Post-September net debt will nearly double this year by the government's own forecasts. Could we actually afford to spend more? Should we spend more? Some, I suspect, many listeners this morning would feel a deep sense of nervousness about the levels of debt and deficit that we're now talking about?
Bill: Yes Hamish. Well I think if we look at the policy options that the country has at the moment. In previous recessions what would happen is that the Reserve Bank would slash interest rates that would boost housing and the economy would recover eventually. Where this time of course interest rates are at lows that the Reserve Bank isn't really prepared to go any further. So they're on the sideline really. And so fiscal policy really has to play an even bigger role. The good thing about it is that the reason why the Reserve Bank can't move is very, very low interest rates but that gives fiscal policy more scope. So the government can borrow now over ten years at less than one per cent. Financial markets are telling us, and I agree, that those rates will remain in that region for a number of years. So they're in a much better position to fund further expenditure, lock in the funding for a long period of time and eventually when the economy recovers and we expect potential growth around 2.5 per cent then as a share of the economy the cost of servicing that debt will fall substantially. So I think that's got to be the policy. We didn't see any new policies yesterday. We saw the extension of JobKeeper/JobSeeker on Tuesday. We expect that there'll be further extensions. Certainly, on JobSeeker, that will have to go into the first two quarters of next year. JobKeeper I think will go into the June quarter. And there'll be a number of policies, one of which I expect will be bringing forward the tax cuts that are set for July 2022 in the budget. So we'll see a number of...an amount of stimulus in the budget.
Hamish: Can I just ask you to be a little more specific about the cheap cost of borrowing when you're saying in the longer-term, you've just mentioned you're going to lock it in for ten years under one per cent and that you expected it to go beyond that. What sort of period of time do you imagine we're talking about in terms of these very low costs of borrowing? Multiple decades?
Bill: I don't think anyone can forecast financial markets out to multiple decades. But certainly, the markets are telling us, and I agree, that over the course of the next two to three years those rates will stay where they are. The Reserve Bank has committed to holding the cash rate at .25 for three years. They're buying government bonds at .25 for three years. I expect that cash rate will stay for a few years after that and that will determine where the bond rate goes. I think the yield curve will steepen a bit so the bond rate will go up by more than the cash rate. But generally speaking there's a lot of scope for the government to lock in a lot of debt. Even if we get a large fiscal deficit in 2021/22, and I expect it will be well in excess of $100 billion, that will still only have the government's net debt to GDP in the very low 40 per cents. And that's a lot larger than the 19 per cent we had in 2019. But compared to other countries it's still in very, very good shape. US well above 100 per cent.
Hamish: The deficit this year is forecast to be $184.5 billion, the biggest since the Second World War, Bill. You had forecast a much worse deficit, $60 billion worse in fact. What problems did you foresee that the Treasury didn't?
Bill: Well we had 240 but that included a number of new policies. So that included the full extension of JobKeeper/JobSeeker and it included tax cuts in the budget and a number of spending and infrastructure issues. None of that has been covered in yesterday's number. It will be covered in the budget. So we're expecting that on budget night they talk about 240. If you made that adjustment we're talking 210. So we're about $20 billion dollars out. And given the uncertainties in the economy at the moment I think most importantly given the expected profile for government policy associated with the virus which I think is best case scenario. Any slippage from that will lead to further weakness in the budget.
Hamish: Jennifer Westacott these forecasts that we're talking about are based on a number of assumptions. Some might think they're heroic that the Melbourne lockdown will be over in a month, that international borders might be open by January 1. Does any of that seem feasible to you at this point?
Jennifer: Look I think we have to plan for that to happen. And this is my point about getting the health situation under control so we can stay the course on opening the economy. But I do think we do have to be conservative in our assumptions about recovery. And that's why to Bill’s point on the policy side we've got to make sure that the budget sees a very significant policy effort to drive that growth, drive that activity. I agree with Bill. I think that the borrowing and debt issue has to be able to be coped with. I mean that's why after all you’ve had this budget discipline so that you've got the capacity now to put money into the economy. If it's infrastructure, if it's extensions of JobKeeper, if it's bringing forward the tax cuts which I agree with Bill about. I think all of those things have to be in the budget and that's why all of the discipline that government has engaged in this has proven to give us that flexibility. But we do have to be very careful about making optimistic assumptions and therefore not be complacent about the policy work which Ken Henry on this program the other day was making this point. We can't just tinker at the edges, we've got to do substantial things to get that growth back into the economy, to get activity going again.
Hamish: Well what are they?
Jennifer: You and I have talked about them before. You've got to make sure that we get business investing. It's a very serious problem. In the non-mining sector, the second year forecast is a reduction of 25 per cent. That's a huge issue. So we've been calling for an investment allowance to try and encourage companies to invest. You've got to do something on the skills front. You've got to make sure that we're starting to train people in the areas that jobs have to be created. You've got to get rid of the red tape. And you've got to do the infrastructure projects Hamish. Not just any infrastructure project. You've got to do those projects that are going to have that effect on changing the nature of the economy. Particularly in regional Australia which we never talk about. Whether it's opening the Atherton Tablelands to the Cairns Airport. Whether it's say, a new terminal in Busselton. Things that are actually going to change the nature of the economy. All of those things can be done but we mostly have to get the conditions right in the short-term for opening the economy up.
Hamish: You're right in saying that we have spoken about this before and I feel that I should point out to you Jennifer Westacott that when you raise these sorts of prospects even some within the coalition will reach out to me and say, 'well this is just big business wanting handouts'. How do you respond to that?
Jennifer: Well we want to see all businesses get the encouragement to invest. Whether they're the smallest companies in Australia or the biggest. Because we've got to unleash the balance sheets of these companies and get them investing. I mean you can't have it both ways. You can't say it's a business-led recovery and then not give business the conditions to recover. You've got to create the policy environment that allows them to invest, that encourages them to invest. You've got to get rid of the red tape which if you talk to any small business, they are drowning in it. You've got to get rid of that red tape so that they can recover. People can't have it both ways. They can't say it's a business-led recovery but we won't do anything to make the business conditions better.
Hamish: And there are all equally those that worry when you start talking about getting rid of the red tape, the conditions for employment, that there's going to be a whole raft of workers entitlements that are ditched, that processes will be ditched, that environmental impact studies will be passed over as part of your push to get what you want. How do you respond to that?
Jennifer: Well we're certainly not seeking any of those things and you know that. On the environmental front we've said you've got to get a system that protects the environment but that stops the double handling, the duplication between the commonwealth and the state. The lack of transparency in decision making. On industrial relations, we want to see workers protected. We want to make sure that people are in work that is secure. But we also have to get the flexibility into the system so that companies can respond to what's happening at the moment. Because the most insecure work is the companies can't get back up and running and people don't have jobs.
Hamish: Bill Evans we are running out of time but very quickly I just want to ask you about this sort of debt and deficit debate that has been dominating Australian politics for some decades. Not even the RBA Governor now is saying that he thinks we should worry about the new doubling of our net debt levels. Do you think there's a shifting mindset more broadly or perhaps a new consensus on these questions of debt and deficit?
Bill: Oh Hamish that debate has been going on for many, many years and I think it was always my view that the government was too focussed on fiscal surpluses and not focussed enough on the fact that the economy was operating well below its capacity. So this is really brought it all to a head and we're very pleased to see that the approach that government is taking and the debate is moving towards not being so fearful of debt in this world of extraordinarily low-interest rates.
Hamish: Bill Evans, Jennifer Westacott we will have to leave it there. We've got to get to our next guest. So thank you very much for your time this morning.
Jennifer: Thanks very much.
Bill: Thank you.