Via the ABC:
Reserve Bank governors aren’t typically prone to dramatic flair.
Their carefully chosen words usually require skilled interpreters to decipher hidden meanings and messages.
When Philip Lowe reflects on the emergence of COVID-19, however, you don’t need to be a central bank analyst to understand how deeply worried the RBA Governor was from the moment cases started to pop up outside China.
“I thought this was going to be perhaps a once-in-a-lifetime event and it required a truly extraordinary response,” Mr Lowe told Four Corners.
In a rare interview, Mr Lowe documents the difficult and at times bold steps taken by the Reserve Bank when developing a rescue package during this crisis.
This included consulting with the Government ahead of its March board meeting.
“But … I gave an outline to them of my thinking, and they’ve done exactly the same with me,” he said.
The Reserve Bank has cut cash interest rates to their lowest level ever and has been buying bonds at a record scale to inject cash into the economy.
“I didn’t think in my term of Governor, I’d be buying $40 billion of government bonds, which we’ve done in the past few weeks and lending over $100 billion to the banking system,” he said.
“So we’re all doing things here that we thought we would never have to do.”
Flying blind
Since this virus came along, we’ve heard plenty of metaphors from “building a bridge” and the “hibernation strategy”, to Parliament’s “Dunkirk moment” and now the “road out”.
Perhaps it’s more appropriate to liken what’s happened over the last six weeks to figuring out how to fly a plane, mid-air, with no instructor.
A lot of levers were pulled, some arguably later than they should have been, but we seem to have stabilised the plane for now.
Out the window we can see other aircraft either battling turbulence, blowing smoke or heading into catastrophic, downward spirals.
No country has handled this crisis perfectly, but Australia has so far proven better than most at slowing the spread of the coronavirus.
The levers pulled to achieve this success on the health front, however, have caused enormous economic pain for an as-yet unknown number of workers.
The collective scramble to deal with this economic shock has been a defining moment not only for the Morrison Government, but for Australia’s political and financial leaders more broadly.
How the economic threat went from ‘manageable’ to ‘devastating’
It may seem a statement of the obvious, but it is truly remarkable how much has changed in such a short period of time.
The Government’s assessment of the economic threat evolved rapidly, as did its response.
This shift wasn’t as speedy as some had urged but given the Coalition’s ideological baggage when it comes to debt and deficit, the leap from limited stimulus to the biggest government rescue package of all time was swift.
In January, Treasurer Josh Frydenberg was expecting only a “dent” to the economy.
In February, that became a “substantial but not necessarily severe” impact.
By early March, Mr Lowe told the Government “it was hard to spend too much money here”, yet it spent less than one per cent of GDP in the first stimulus package.
The long-promised surplus was gone, but at this stage the Government was hoping it might still be able to get the books back in the black before the next election due in 2022.
Mr Lowe said it was “understandable” the Government didn’t go for a bigger package at the time.
At this stage, Finance Minister Mathias Cormann said the economic downturn was viewed as “comparatively manageable”.
“But as the situation evolved rapidly it became very clear that this was going to be quite devastating and that we needed to ramp up our response,” Mr Cormann said.
“What we thought in our first package might help underpin the economy in the June quarter became comparatively meaningless.”
That rapidly evolving situation was being driven by the decisions of the National Cabinet of federal, state and territory leaders.
Its formation, at the request of the Prime Minister on March 13, was a crucial step.
The willingness of Labor and Liberal leaders to put their differences aside and work together gave an anxious community confidence in the process, with the added benefit of sharing the politically difficult decisions.
Not that the process worked smoothly all the time.
Victorian Premier Dan Andrews told Four Corners of the tension that played out on March 22, when he and NSW Premier Gladys Berejiklian pushed publicly for further closures ahead of a National Cabinet meeting that night.
“This thing needed a big jolt, we needed to take a big step,” he said.
Ms Berejiklian said the pair felt they “couldn’t afford to wait a few more days because it would have got out of control”.
Pubs, cafes, restaurants, theatres and gyms were closed the next day.
Almost immediately, long lines emerged outside Centrelink offices.
ACTU secretary Sally McManus said probably up to a million workers were let go within 72 hours.
The deep ‘stretch’ to embrace a wage subsidy
By this point, Ms McManus said the Government should have had a wage subsidy already in place.
Instead, she argues, the Government’s doubling of the unemployment safety net, considered a generous move at the time, had the perverse effect of encouraging employers to let staff go.
After initially resisting the idea, the Prime Minister and Treasurer made the pivotal decision to embrace a wage subsidy.
They didn’t hold back, going for a more generous version than many expected.
Mr Frydenberg revealed he even pushed his own Treasury Department to go further than they initially wanted.
“One of the options that they put to me had [an amount] … a few hundred dollars lower than the $1,500 amount.”
“This was a time to give the Australian people a psychological boost and we had to stretch. We had to stretch as far as we could because we wouldn’t be able to have two bites at this.”
Mr Frydenberg’s “stretch” of an additional few hundred dollars added roughly 20 per cent to the overall price-tag, which wound up being $130 billion.
Labor and the unions wanted more for casuals and temporary visa holders, but Ms McManus acknowledges the importance of the Government’s effort and the “relief” it gave millions of workers.
So far, the Government has committed more than $200 billion to keep the economy ticking and it may need to spend more.
These programs are funded for six months and while the Prime Minister talks of a “snap-back” once the crisis has passed, he’s not saying exactly when that will be.
No one knows.
The Reserve Bank Governor said health concerns must come first.
“If we need to have restrictions for six months to contain the virus, that’s what we need to do,” he said.
‘If ever there’s a time to borrow, now is it’
For those worried about the debt involved, including some Coalition MPs, the Reserve Bank Governor offers some reassurance.
Mr Lowe told Four Corners “we shouldn’t be worried” about the debt.
“It’s the right thing to do… we have the capacity to borrow, our interest rates are as low as they’ve ever been, the Australian Government has a long record of responsible fiscal policy, so the budget accounts are in reasonable shape. And if ever there’s a time to borrow, now is it,” he said.
There is, however, a gentle reminder to either side of politics who think they can avoid tough decisions in the future about this debt.
We still don’t know how much spending and therefore debt will be required to survive this crisis.
The Prime Minister is also flagging a “pro-growth” strategy on the other side to help get the economy up and running again. In other words, confronting the debt burden won’t be the immediate priority.
After stabilising the plane, those in the cockpit are now trying to work out how to land it.
Bravo. The weekend press suggested Scummo got the message. But he is talking about using the deficit to fund tax cuts for the rich and corporations which makes absolutely no sense at all.
As we saw last year with Recessionberg’s failed tax cut stimulus, when the private sector wants to save, the government must spend directly, and preferably upon those with the greatest marginal propensity to consume, the less wealthy.
