RBA essentially "printing money", casuals getting pay raises and other decisions made on the fly. Was it all worth it?
The Australian Government, through various initiatives, committed $507 bn in fiscal policies from March ‘20 to June ‘21. The largest of these policies by far was the JobKeeper Payment Program. The program allowed struggling businesses to continue employing staff despite severe revenue reduction. The Reserve Bank has also implemented monetary policy in the form of purchasing government bonds whilst slashing cash and interest rates. Below, the success of these policies will be assessed.
The initiative garnering the most headlines to date is the JobKeeper Payment. The policy has allowed businesses to continue employing workers by covering the cost of wages. According to the RBA, the program “saved” 700 000 jobs out of the 3.5 million recipients which is 20%. With 4 out of 5 recipients likely surplus to requirements, the effectiveness of the broad payment has to be questioned. While there are firms who have repaid the money they received, there are examples of debacles where firms have taken advantage of taxpayer dollars despite not meeting eligibility criteria.
Eligibility criteria morphed on the fly, allowing astute financiers to flout the system. More than 25% of total cost was paid out to firms who did not meet the criteria for decreased revenue which total to an astounding $25bn. Employees were not exempt from rorting, anecdotally casual workers saw their wages actually rising relative to their original income. This increase was meant to offset a reduction in hours and ability to cover living expenses due to health orders, however, due diligence was not up to scratch, exacerbating swindling.
Overall, JobKeeper kept unemployment “low” as more people remained in employment despite being unable to work. This prevented the economy from naturally reacting to the pandemic, halting job reallocation to fit new demands in the market while burning a $90 billion hole in the government’s balance sheet. It experienced mixed success.
However, there were positive effects such as suppressing supply chain issues and skills shortages. These benefits should have been highlighted and honed in on, with the extension phase of JobKeeper simply artificially propping up unproductive firms as OECD data shows. Targeted support would have served the economy better than recklessly spoon-feeding.
Moving on to the Reserve Bank’s decision to purchase government securities. In March 2020, the Bank announced a reduction in the cash rate to 0.25, in a bid to stimulate spending. In the same statement, Governor Philip Lowe also announced the purchases of government bonds to achieve a 0.25 target yield on 3-year bonds.
Quantitative easing leads to low interest rates which have a tendency to inflate asset bubbles and spark a bull market, even in sub-optimal circumstances. Alongside downward pressure on the Aussie dollar, the RBA is essentially “printing” money. While this phenomenon has become somewhat of a buzzword, the Bank is inherently creating money, as it is buying bonds in the secondary market i.e. bonds previously issued by the government.
While the purchase of government bonds is not debt in the general sense of the term, it does have its own complexities. Inflation concerns are genuine as bond buying is typically paired with an interest rate cut, lowering the cost of borrowing. However, Deputy RBA Governor Guy Debelle believes that runaway inflation is not a threat to Australia under the current climate. He maintains the view that while wage growth remains subdued coupled with spare capacity, the economy will resist any inflation spikes.
With inflation concerns tapered, the RBA escalated its bond buying program in Feb 2021, to combat the rapidly surging delta variant in July. The RBA has promised to continue purchasing bonds till November. The devaluation of the currency is an obvious downfall of the QE policy undertaken as it raises the cost of imports of a country that is already on the brink of becoming a net importer rather than a net exporter. However, it can be said that at the current juncture, QE is working as indicated by the continual lender confidence in the economy that continues to be signified by repayments.
Australia’s fiscal and monetary approach has resulted in mixed success. JobKeeper saw effects from both the demand and the supply side and could have actually stunted the recovery more than aided it. QE sees no obvious tapering in its immediate future, betting on external factors to cool inflation, with the RBA indicating the cash rate would not be increased until inflation targets were being hit.
Entering 2021, it was clear that Australia was leading the pack when it came to combating COVID-19. As we’ve fumbled our advantage, there could be a limited silver lining in our economic actions towards the recovery.
By Rishab Kumar - 2nd Year Bachelor of Economics (Economics & Accounting)
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