After Taming The Pandemic, Australia Tries to Save Its Economy

(Bloomberg) --

After slowing the coronavirus pandemic to just a trickle of new cases a day, Australia's Prime Minister Scott Morrison faces his next challenge: shoring up an economy that's plunged into its first recession in almost 30 years.

His conservative government on Tuesday will deliver its latest rescue plan, with a federal budget expected to include accelerated tax cuts and infrastructure spending to restore growth and tackle rising unemployment.

It's a dramatic rewriting of Morrison's economic narrative that less than 12 months ago was focused on returning the budget to surplus for the first time in more than a decade. Instead, the deficit is expected to blow out to A$198.5 billion ($141.8 billion) in the 12 months to June 30, 2021, according to Deloitte Access Economics.

“The budget will confirm the strong plan we have to recover from the Covid-19 recession and to build our economy for the future,” Morrison said in a speech Thursday. “To recover what's been lost -- the jobs, the livelihoods, the hours, the incomes, the customers, the clients.”

Central to that is a A$1.5 billion plan to revitalize manufacturing, helping firms to become more competitive, resilient and able to scale up, Morrison said.

Read More: Australia to Spend A$1.5 Billion to Revitalize Manufacturing

Australia has been buffeted by lockdowns and border closures, with the economy contracting by the most on record in the second quarter. Unemployment has climbed to 6.8% and is forecast by the central bank to reach 10% by year-end. The government has responded with stimulus packages worth A$314 billion.

An initial recovery, helped by early success in containing the virus, was interrupted by a resurgence of community transmission in Victoria state and a renewed lockdown in Melbourne, the nation's second-largest city. Victoria is now gradually starting to unwind restrictions after subduing the outbreak. The state reported just 13 new cases of the virus on Wednesday, and nationwide, new cases are averaging less than 20 a day.

The government has taken any talk of budget repair off the table potentially for years to come.

Treasurer Josh Frydenberg says the long-term fiscal plan involves supporting the economy through tax measures and structural reforms and there won't be a shift from providing stimulus to rebuilding fiscal buffers until the unemployment rate is “comfortably” under 6%. Deloitte Access Economics is forecasting the jobless rate will average about 8% in fiscal 2021-22 and still hover at 6.8% the following year.

Still, the government retains its conservative impulses. Morrison's signature JobKeeper program of subsidizing employees to keep them in work is already being scaled back and is due to be scrapped by March. Despite pleas from welfare groups and the opposition Labor party to prolong such support for the jobless and underemployed, Morrison said this week that “the idea of maintaining many of those sorts of support in that environment, I think would be counter-intuitive.”

Andrew Hughes, an expert in political branding at the Australian National University in Canberra, said the coronavirus-induced recession had freed the government from the straightjacket of plegding to return the budget to surplus.

“The government may be relieved that the pandemic has given it an out to walk away from its core economic message of providing economic stability through cutting debt, a promise that restricted its ability to give sweeteners to voters,” said Hughes. “That could be liberating, but in the end Morrison knows he will be judged on whether he can steer the economy out of recession and keep voters in work.”

©2020 Bloomberg L.P.