Introductory Macroeconomics

Lecture 9: fiscal policy (in extraordinary times)

Chris Edmond & Daeha Cho

1st Semester 2020

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 Online Quiz

• Reminder

– 30 minute online quiz, 10 questions

– quiz available from 9:00 April 2 to 16:00 April 3

– covers lectures 1 to 6 and tutorials 1 to 3

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 This Lecture

• Fiscal policy in extraordinary times

– global financial crisis

– coronavirus pandemic

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Fiscal Response to GFC

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 Australia and the Global Financial Crisis

AU don’t result a
recession in GDP during
GDC, growing steadily,
other peer countries fall
below trend and stay
below for many year,
large and persistent
decline in economic
activity.

Okun law,
unemployment also
increase large and
persistently. AU also
increase but less
compare to other
peer countries.

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 Australia Pursued Fiscal Stimulus
• Australia pursued a fairly aggressive fiscal stimulus
nominal
– October 2008: $10 billion. $5 billion for pensioners, $4 billion for
1st
families, $1 billion first home buyers trying to stay in surplus

($1400 one-off pensioner payments, $1000 one-off family benefit,

tripling of first home buyer grant...)

– February 2009: $42 billion. $26 billion infrastructure, $12.7 billion

cash payments, $2.7 billion small-business tax breaks take the buget to deficit
2nd
($200k per school building program, $4 billion insulation scheme,
$950 one-off payment for most taxpayers...)

auterity: “leave within mean”, “tighten belt”, the gov and the household also tigher their belts, the situation is exacerbating downturn not mitigating it
• In many other countries, especially in Europe, fiscal policy focused
on trying to keep budget in balance — ‘ austerity ’
AU operate like Keynesian demand management, the public sector step in and maintain demand that are relatively high level by taking out some of the slack, so
ecnoomy don’t g into a unnecessary slump
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Budget Moves Back Into Deficit

4% of GDP of
fiscal deficit
during GFC

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 Budget Moves Back Into Deficit
• Budget moves into deficit for two kinds of reasons
more newstart allowance
given to receipants
– automatic stabilisers: more unemployed, more newstart etc “systematic”

recipients, less tax collected from individuals and businesses

(in boom, automatic stabilisers work in reverse, reduce deficit)

– discretionary spending: one-off transfer payments, new

infrastructure projects etc

• For future reference, note peak deficit about 4% of GDP

• Optimistic forecasts of return to surplus — ‘back in black’

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Public Spending

High during GFC

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Fiscal Response to Coronavirus Pandemic

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Coronavirus Pandemic: Confirmed Cases

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Coronavirus Pandemic: Deaths

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 Sudden Stop in Economic Activity
decrease face to face activity

• The public health response to the coronavirus pandemic requires a

large reduction in economic activity “warranted” by the public health situation

• Mandated shutdowns mean lost incomes for some workers. That

plus reduced opportunities to spend leads to further reductions in
spending and hence further reductions in income for other workers

• Result is a sudden stop in economic activity

exotic shock causes supply aspects ( “warranted” decrease activity) lead to demand aspects (decrease spending, moves)
classical keynesian

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 Australia: 1.4m Jobs Directly At Risk
au total employment about 13m, unemployment before pandemic is 0.7m

this sector account

normally for all the
1/2
unemployment before
the pandemic

Jeff Borland “Which jobs are most at risk from the coronavirus shutdown?” The
Conversation.
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 Australia: 0.9m Jobs Indirectly At Risk

Jeff Borland “Which jobs are most at risk from the coronavirus shutdown?” The
Conversation.
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US Initial Claims Unemployment

>3m

GFC increase to 10%

~200k

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 ‘Nowcasting’ US Economic Activity
forecasting what happening now using statistical model

rapid sudden stop

steadily fall

GFC

Lewis, Mertens, and Stock “Monitoring real activity in real time: The weekly
economic index” Liberty Street Blog FRB New York.
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 Fiscal Response in Australia
• Why is fiscal policy playing the lead role?

not any scope for short-term interest rate

– monetary policy has almost reached its limits lower any more.

– fiscal policy more direct

• Key elements of fiscal response in Australia (so far)

– March 12: $18 billion. Bulk is business investment and cash-flow

support. First one-off $750 payment to social security etc recipients

– March 22: $66 billion. $550pw coronavirus supplement to JobSeeker

etc recipients. Second one-off $750 payment to social security etc
recipients. Limited early access to superannuation, up to $10k

– March 31: $130 billion. $750pw JobKeeper subsidies for workers in

conditions significantly affected by downturn

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 JobKeeper Program
• Goals: support income and support long-term productivity.

– reduce costs of employing workers, allow businesses to retain

workers even if substantial downturn in revenue

– maintain employer-employee relationships, maintain job-specific

skills and know-how etc

– hope makes it easier for economy to recover after shutdown

• Payments:
long term (>12m), omits short-term casual (<12m)
– fixed $750 per week per worker (full time, part-time, long-term
casual, self-employed) for up to 6 months

– can be topped up, super etc, at employers discretion

– payments as of March 30, paid out from May (backdated)

implementation lags

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 JobKeeper Program
• Eligibility:

– citizens and permanent residents, some visa holders

not large firm

– monthly sales decline > 30% relative to year ago (< $1 billion sales)

or
large firm
monthly sales decline > 50% relative to year ago (> $1 billion sales)

– employer ‘not subject to the Major Bank Levy’

BIg 4 banks + Macquarie not included in this program.

– eligibility backdated to March 1, hence applies to recently

unemployed, stood down

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 JobKeeper Program: Pros and Cons

• Pros
maintains income

– of broadly the right magnitude, addresses the key shutdown

challenge posed by the crisis unlike more traditional tools

(also needed: more investment in public health to address the

pandemic directly — testing, ventilators etc — along with
traditional transfer payments, business support)
eligibility backdated to March 1
– retrospective, eligibility backdated

– somewhat targeted, hard to game such large falls in turnover

– provides more certainty for workers and firms

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 JobKeeper Program: Pros and Cons

• Cons

– gaps in coverage, especially short-term casuals

– hard to justify strange disconnect beetween JobSeeker $550 per

unemployed before 1 of
week and JobKeeper $750 per week March, get 550

– design issues arising from fixed payment structure

– makes it harder for economy to reallocate workers to expanding

sectors (retail, delivery, online tech)
hard to attract new worker because tend to stay in the original firm to get the jobkeeper benefit

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 JobKeeper Design Issues
• Fixed amount per eligible worker, not a proportion of ordinary pay
(unlike UK, Denmark etc schemes)

• A wage floor for eligible workers ordinarily paid < $750 per week

• Employer per se benefits only from subsidy to workers ordinarily

paid > $750 per week fund $750 subsidise

• Can only be claimed once per worker, if multipler employers

worker needs to declare primary employer. Some employers will
miss out because of this ‘indivisbility’

• Employers with many low-paid part-time or casual workers sharing

shifts etc benefit less or not at all relative to employers with mostly
full-time high-paid workers (e.g., corner cafe vs. Qantas)
Within the company, both worker weekly paid are below <750. But one is full-time and one is part-time. inegalitarian generated.

• Proportional wage replacement rate would have solved many of

these design problems, and likely less expensive too
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 How Big Is This Fiscal Response?

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• Approx $200 billion fiscal response in approx $2000 billion
economy, so about 10% GDP on impact this only about spending side, may also decrease taxing
11%

GFC deficit is about 4% of GDP, anticipates the deficit would higher than 11% (include tax)

• Announced programs already 3 to 4 times larger than fiscal

stimulus during GFC

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Fiscal Responses Across Countries

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 Is This A Lot of New Debt?
• Australia begins with low levels of gross and net debt. Existing net
debt about 40% GDP. Adds about 10% GDP
substantial increase off low level

• Approx $200 billion amongst 13 million workers, $15k per worker.

Not nothing, but not a generations-long crippling amount either

• Example debt servicing costs

⇡ $28 per week per worker at 5% interest for 15 years

⇡ $22 per week per worker at 1% interest for 15 years

• Current interest rates for Australian government debt are near zero
and we can lock this in over long maturity

• In short, this is not a lot to pay for a lot of wage insurance

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 After Extended Easter Break

• Monetary policy in ordinary times

– basic monetary policy concepts

– monetary policy tranmission mechanism

– monetary-fiscal interactions

• BOFAH chapter 10

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