Episode 1: Jeremy Thorpe on recovering from a pandemic induced recession

Episode transcript

Peter Van Onselen: As our nation faces the biggest economic contraction since the 1930s, attention turns to how we work with international trading partners in order to recover and grow. In this episode of the PwC Federal Budget podcast we explore the social economic and geopolitical impacts of the Federal Budget and what it means for resetting Australia's economy in the midst of a global pandemic. My name is Peter Van Onselen and you are listening to the PwC Federal Budget Podcast.

Joined now by Jeremy Thorpe, Chief Economist at PwC. Jeremy thanks for your time.

Jeremy Thorpe: No it's great to be here.

Peter Van Onselen: So the budget's been delivered. Now we've seen a lot of the ins and the outs there's a lot of things for us to go through. But what's your initial impression from what Josh Frydenberg had to say as well as the finer detail of the budget papers themselves?

Jeremy Thorpe: It feels very much once the handbrake came off from spending there's no other thing to stop it. I think this is clearly a budget for its time and probably is not surprising given that we've been spending so much on JobSeeker and JobKeeper. We weren't going to suddenly stop. But I still think it's a shock when you just see some of the big numbers when we’ve been talking about getting back in black. And we're just so far away from that now. And quite appropriately too.

Peter Van Onselen: Yeah well you say quite appropriately and that's one of the interesting things about this. I mean obviously you're the chief economist you talk to economists about this and there seems to be some interesting mixed reactions. On the one hand yes huge quantums of debt which concern people obviously, but by the same token the sheer scale of the downturn and the global nature of it has meant that there is this sort of attitude of we have little choice but to go down that path. Where do you sit on that about the little choice and indeed about whether the government has gotten the balance right?

Jeremy Thorpe: Well I think let's go back to the Reserve Bank. They've been talking for quite a while now about what we actually need to see more stimulus coming from the government. You can't just rely on cutting interest rates to get us out of this. And so in a sense the government's called their bluff and they've spent money. Normally we would be apoplectic about the level of debt we're talking about even though it's not out of kilter with other advanced economies and in fact it's still very low. But what an amazing thing now and it's different in this recession to previous recessions is that the cost of borrowing is so low so we're effectively going to double our net debt after this budget.

But if you look at the net interest payments that we've got, in other words the kind of interest payments you might have on your mortgage, they're not going up. The price of debt has come down so much that we have doubled our debt and are effectively not paying more for it. So why wouldn't we do that. Well we still want to make sure that we're spending wisely but as the Reserve Bank said, and I think we agree with them PwC, the cost of not getting people back to work is so significant as an intergenerational challenge and it's a multi-year decade challenge. The cost is worth it to get people back to work because the best defence against intergenerational problems coming out of this is jobs.

Peter Van Onselen: It's really interesting to hear where you started talking about the fact that interest payments are so low so therefore even though the quantum of debt is so high the repayments aren't nearly as bad as they might have been in years past because that is exactly what Josh Frydenberg was saying to me and some other journalists shortly after delivering his Budget speech. So I guess the next question that this leads to in the minds of a lot of Australians is how long do we expect that to be the case because that's a good thing when you're burdened with debt in the short term, but is there a risk I guess in the medium to long term that that might change?

Jeremy Thorpe: There is absolutely a risk and one of the mantras this government has put onto this recovery process very early on was not locking in additional costs. Now it hasn't quite lived up to that in some senses with bringing forward the tax cuts but it's tried not to have a much higher cost base that is locked in perpetuity. So many of the things that we're doing and we're seeing here are time limited or they will drop off as economic activity picks up and the capacity to claim certain expenditures falls away.

So there are some safeguards that we're building into this but if you look at the forecasts that we're seeing in the budget now they're consistent with what we've been looking at really over the last three months or so. We were looking at getting back to pre-covid GDP level in about two years.

Victoria has probably dragged us back. We're now looking into that third year. So it's still going to see higher unemployment even after that period. And this is why this government has really started to focus very much on getting that jobs growth going as quickly as possible. Jobs and unemployment should be better out of this recession because it's a covid induced recession. It is different from previous ones but we know that the costs of unemployment are so significant that we need to be acting sooner rather than later.

Peter Van Onselen: Jeremy what about corporate Australia. What is there in the budget that you've seen that particularly will have an impact on that part of Australian society?

Jeremy Thorpe: I think there's two elements here. I think one is that if you have a company that wants to really think of this as an opportunity to grow and get market share there's stimulus that has been provided in the form of incentives for investment. The stimulus that's been provided for bringing on new workers who are younger. This is actually an opportunity for those that favour the brave and to actually take a growth mindset to come out of the recession.

The other element that I think is interesting is the issue that we’re effectively smoothing some of the losses from the previous tax year. And so that loss carry forward provision means that companies might actually have a better chance of coming out of this from a cash flow perspective. That's gotta be good news for all of those businesses that have been particularly challenged.

Peter Van Onselen: One of our primary purposes in this episode is to talk about growth and how it's impacted by the budget and also in the context of where the global growth situation is at. First up in terms of growth out of the other side of this, a big I guess question mark that this budget is predicated on is that there will be a vaccine delivered by the end of 2021. Is that a concern?

Jeremy Thorpe: I think it is always a concern. The first and foremost issue here is about managing the health risk because the health risk has created the economic risk. I'm an economist and I shouldn't be the one to be talking about health, but I think there are two issues here. One, the vaccine solves that problem if you can roll it out quickly enough broadly across the community. But just managing the economy well or managing the health risks in the economy well even at that later time will get us not too far away from a vaccine at least in many sectors. We're already seeing in the states that have no or very low community transmission activity has picked up in many sectors that haven't needed international movement of people or even in some cases movement across borders in any particular way. So we can get a fair way even if we don't have a vaccine as long as the health risks are being managed smartly.

Peter Van Onselen: We will be getting into some of those health issues in later podcasts but let's get into the international trading environment and indeed how our recovery and growth going forward in that domain can be sustained. Anything in the budget that particularly caught your eye for that?

Jeremy Thorpe: Well I think the one that every economist has been looking at for the last couple of years in budgets has been the price of iron ore. The government has consistently underestimated the price. I think it's gone with the same price it estimated last year. So if you didn't get it right last you have another go.

I think it is fair that the risks are more on the downside so our budget has been propped up on on the revenue side because of iron ore, prices have been higher and therefore there's good tax revenue associated with that. We've been very lucky because some other countries have messed up their supply chains and prices have been artificially I would argue propped up. It feels like that has a bigger risk of easing and the current budget is certainly reflecting that.

What's interesting also and it's not so much in the budget but what we've seen with the current environment is we are importing less into Australia and we're exporting less but we're importing far less than we are exporting less. So we've actually increased our net trade environment. But what we've actually done is increase our reliance on China.

So roughly 35 or 36 per cent at the beginning of the year about trade of goods was with China and it's now closer to 50 percent. So it's interesting in an environment where we've become more destabilised in a geopolitical sense and our relationship with China has become more challenging, we've actually come to rely on them even more for our goods

Peter Van Onselen: Is that avoidable or was there something inevitable about that. It's interesting when we talk about, how, if at all the government is looking at resetting the economy in the context of the global pandemic that seems important not just in relation to the pandemic but as you mentioned that relationship specifically with China which has deteriorated in recent months.

Jeremy Thorpe: It is almost a perverse outcome that when everyone probably thinks that we've got a more fragmented trade relationship our alliance has become even stronger. And I think that this is just something that spans multiple countries at the moment actually who are having more challenging relationships with China and it's just something we are going to have to manage and we talk about de-risking our economy and diversifying, it's something we've been talking about but we haven't actually been very good at it because you follow the money and China has been a very good market for us and it will continue to be a very good market. But that is a big risk that sits I think underneath this budget.

Peter Van Onselen: Let's talk about some of the geopolitical impacts just now we've obviously started by looking at some of the economic effects. What about the social impact. What is the budget done for I guess the social impact of the pandemic on Australia and then of course we expand it out to how we sit in a global context?

Jeremy Thorpe: I think there's a whole lot of issues obviously from a social perspective. There's a lot more spending on mental health, I'm very pleased to see the recognition that that’s a challenge that we have coming out of this environment.

I'm particularly keen to see spending to continue to support female workforce participation. We've seen the sectors that collapsed first out of COVID were predominantly female. Men have caught up but the sectors that will recover last are going to have a stronger female challenge to them as well.

But particularly youth unemployment I think is one of those issues. We know that coming out of every recession the people that lose their jobs more consistently are the young and it's because they get less experience.

If you have a choice between two workers you'll take the more experienced and we know that if you don't nip that in the bud and get people into work or at least into productive and meaningful training to find new work that could be a generational challenge. If you don't get a job you have a potential for a lifelong reliance on welfare that is unhealthy for the economy but for the individuals and for their families as well.

Peter Van Onselen: It's certainly good to see some of that spending as you mentioned towards women more disproportionately impacted by the pandemic than men and then absolutely towards younger Australians that was really a centerpiece of the budget and certainly early in the Treasurer's address he got right into some of the elements there around the wage subsidy.

What about older Australians though we know that there's been a focus on the health impact of COVID it on them, but what about the economic impact? I've seen some commentary where there's real fears that older Australians who lose their job may well be somewhat forgotten perhaps in this budget.

Jeremy Thorpe: Yes. So let me come back to one group that wasn't forgotten. Pensioners are getting some direct cash payments again and that's a group that in a really low interest rate environment certainly often feels left out but you're quite right the older generations are a challenge and closely following after the young who lose their jobs are the older workers, so they are not far behind in their being a challenging cohort.

And again we saw coming out of the GFC for example which forced many people to either come back into the workforce or stay in the workforce longer. Now traditionally we'd say that's not necessarily a bad thing, older workforce participation is a good thing because it expands the capacity of the economy.

But when people are doing it because they have potentially lost savings or they've lost the work at the pay levels that they might have been hoping or expecting that does become a challenge.

And we haven't directly addressed it I don't think in this budget. But I think that is a secondary issue particularly if I had to prioritize to focusing on younger workers.

Peter Van Onselen: Just finally focusing on growth for our listeners. What's your one big take out that you've identified from this budget?

Jeremy Thorpe: I don't think it's from this budget but I think it's reinforced by this budget. To me one of the real sleeper issues is our population and what that looks like over the next couple of years.

I think we have forecast to have negative migration this year and we have lower migration for the next couple of years. Our preliminary modelling suggests we might lose two years of population growth over the next five.

It doesn't sound terrible but if you are in a business that relies on a growing population and about half of our GDP is coming from population growth that's a real challenge; if you're in housing construction, if you're selling mobile phones there's only so many people that need them unless you have a population coming in.

Governments flagged that we'll get back to about 160000 a much higher number for skilled or migrants bringing capital to invest in the economy. So I think population is going to be one of those sleeper issues from a corporate perspective because it drives some element of economic growth but also from a social perspective when we talk about what is that mix of migrants look like between skilled and humanitarian.

Peter Van Onselen: So that's really interesting. Where do you where do you think? Do you think there is some button points in relation to that in terms of what is necessarily the economic needs around it versus perhaps some of the political challenges?

Jeremy Thorpe: This goes very much to how do we want to come out of this recession. The politics for some would say let's slow down migration. If there's a higher unemployment than normal we need to be focusing on getting jobs for those people that are here and I would be concerned that that's a very inward looking view and we should actually be prioritizing growth.

We're looking to get our population back up again growing at a more traditional level. Now population growth has its challenges and we've seen that with congestion and hospitals and roads and schools and a whole lot of others but we've been focusing on fixing that issue really for the last five or six years and we're on that path, to give that up now feels like an economic gap that we shouldn't actually be willing to accept.

Peter Van Onselen: Jeremy Thorpe Chief Economist for PwC thanks so much for your insights.

Peter Van Onselen: Thank you for listening to the PwC 2020 Federal Budget podcast. We hope you enjoyed our commentary. For additional in-depth analysis head over to wc.com.au/federalbudget where you will find articles and information about the 2020 Federal Budget and what it means for the economy, our society and you.

This PwC 2020 federal budget podcast brings together experts to explore what the budget means for you and your business.

Don't miss an episode. Make sure you subscribe to this podcast via Apple podcasts Spotify or your favorite platform. While you're there feel free to leave a writing or a review. Thank you for listening. Goodbye for now.