Australia Bids for Unemployment in 4s in Budget Spending Signal

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Jason Scott
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(Bloomberg) -- Australian Treasurer Josh Frydenberg said the jobless rate will “need to have a four in front of it” to generate the faster wage growth and higher inflation needed to repair the economy, signaling a willingness to keep the fiscal spigot open in his May 11 budget.

In doing so, the government is aligning with the Reserve Bank of Australia in trying to drive unemployment down to very low levels. Treasury estimates full employment is now 4.5%-5%, Frydenberg will say in extracts of a speech Thursday. That’s a little higher than the central bank’s estimate of low 4s or high 3s needed to generate pay gains and lift consumer prices.

“In effect, both the RBA and Treasury’s best estimate is that the unemployment rate will now need to have a four in front of it to deliver this outcome,” Frydenberg said. Wage growth and annual core inflation are currently hovering around record lows, underscoring the scale of the task. “The best way to repair the budget is to repair the economy,” he said.

Frydenberg’s pivot is important as it ensures Australia will avoid repeating its pre-Covid problem of the two arms of policy working against each other. Having fiscal and monetary measures in sync will make it easier to achieve faster hiring, with the treasurer noting the last time Australia had a sustained period of unemployment below 5% was between 2006 and 2008, just prior to the global financial crisis.

“We first want to drive the unemployment rate down to where it was prior to the pandemic and then even lower,” he said. “And we want to see that sustained.”

Australia is experiencing a V-shaped recovery as early suppression of Covid-19 boosted confidence. That, combined with government cash support and the RBA cutting interest rates to near zero, has encouraged households to spend and firms to considering resuming investment. Yet the economy is also at a potential inflection point as some Covid-19 support programs come to a close: from the JobKeeper wage subsidy to loan repayment deferrals.

The strengthened economy has unleashed a wave of hiring, with unemployment falling to 5.6% in March. To date, forward indicators show few signs of JobKeeper’s expiry hurting the labor market.

Frydenberg said the 200,000 more Australians in work equated to almost A$3 billion less being paid out in direct income support payments each year. It also generates, on average, over A$2 billion in additional income tax receipts each year, or around a A$5 billion turnaround to the budget. “And these are just the direct effects,” he said.

Iron Ore Bonanza

On top of that, the iron ore price has surged to $193, just shy of a 2010 peak of $194, bringing a wave of cash into government coffers via company tax payments. The government had forecast in its budget for iron ore to ease back to $55 a ton.

James McIntyre, economist for Australia and New Zealand at Bloomberg Economics, reckons the prevailing prices could add an additional A$40 billion to government revenue. That suggests Frydenberg has ample scope to provide new spending.

“There are a number of important reasons why our fiscal strategy remains focused on driving unemployment even lower,” Frydenberg said. “Against the backdrop of a highly uncertain global economic environment, it is prudent to continue to support the economy and ensure that our recovery is locked in.”

He also noted the RBA’s conventional rate ammunition is exhausted. The central bank’s cash rate is at 0.10% and it’s operating yield-curve control and quantitative easing programs to support the economy. That puts more burden on fiscal policy.

Frydenberg had previously said the government would begin the task of fiscal repair once unemployment was “comfortably below” 6%. His backtracking on that reflects the goal being achieved much earlier than anyone had expected.

“Looking further ahead, our challenge once we recover from this crisis, is to again rebuild our fiscal buffers. We have done it before and we will do it again,”Frydenberg said. “But we won’t be undertaking any sharp pivots towards ‘austerity.”’

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