“Change in mindset”: RBA governor Philip Lowe wants Treasury to fire the fiscal cannon and consider extending JobKeeper

Reserve Bank governor Phillip Lowe says the Morrison government should consider extending JobKeeper wage subsidies past September if the economy does not bounce back adequately in the wake of the COVID-19 pandemic.

Appearing at a Senate committee hearing into the response to the coronavirus crisis on Thursday morning, Lowe said fiscal spending would need to “play a more significant role” in underpinning Australia’s economic prospects moving forward, with the capacity of monetary policy to stimulate aggregate demand diminished.

“In the next little while, there’s not going to be very much scope at all to use monetary policy, and so I think fiscal policy will have to be used,” Lowe said.

“That’s going to require a change in mindset.”

The comments come just days after Prime Minister Scott Morrison re-affirmed his government’s commitment to budget hawkism in a National Press Club speech, claiming the Commonwealth must spend “within its means” while drawing an incoherent comparison with indigenous sustainability philosophy.

The speech dashed hopes a $60 billion windfall from bunk JobKeeper forecasts could be redeployed to expand the scope of the wage subsidy scheme or extend it.

Now Lowe says that’s exactly what the government should consider if the economy doesn’t recover well enough from the pandemic by September, which is when the program is due to expire.

“It’s clearly going to be a critical point when that scheme [JobKeeper] comes to an end,” Lowe told the committee.

“It will be important to review the parameters of that scheme. It may be in six months’ time we bounce back well and the economy is doing reasonably well, and these schemes, which were temporary in nature can be withdrawn without problems.

“But if the economy is not recovered reasonably well by then, as part of that review we should be looking at, perhaps, the extension of that scheme,” he continued.

The insolvency industry already fears a flood of firms will fall off the edge of a financial cliff in September, when JobKeeper and several other coronavirus protections end, such as an effective pause on statutory debt collection.

Treasury is forecasting unemployment to reach upwards of 10% in the June quarter, which will be an all-important metric for determining how successful the JobKeeper scheme has been.

The wage subsidy program is covering more than 3.5 million workers at the moment, and this figure is expected to increase in the coming months as more firms enrol for the program.

Initial forecasts, published before Treasury revised its JobKeeper estimates last week, suggested unemployment would exceed 15% in the June quarter without JobKeeper.

Lowe said the outlook for Australia’s economy is still mired in uncertainty, making it hard to say what the fiscal response should be in September.

But the capacity of monetary measures to prop up demand is expected to be diminished for some time, with official interest rates already touching the effective lower bound, making further cuts less potent or even potentially detrimental to economic prospects.

The RBA is, however, able to support fiscal stimulus indirectly by snatching up government bonds in the secondary market (or directly from Treasury but that’s not politically palatable).

The RBA has purchased about $50 billion in public debt since the pandemic began, in an attempt to control the three-year yield rate on government bonds at about 0.25%.

While it tapered off this activity in April, Lowe has previously said the RBA is prepared to rekindle its efforts to buy up government debt should the need arise.

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