This post was originally published on this site

Cutting the jobseeker rate back to $40 a day would create a “fairness issue”, the Australian Reserve Bank governor has said, while advocating for a permanent increase in unemployment benefits.

Philip Lowe made the comments at the National Press Club on Wednesday, while revealing that Australia’s economy was expected to recover to its pre-pandemic size by the middle of this year.

According to the RBA, faster than expected recovery during the Covid-19 recession was expected to translate to growth of 3.5% this year and next, with unemployment set to fall to 6% in 2021.

But despite the positive news, Lowe warned withdrawal of wage subsidies in March would cause “some slowing in employment growth”, and the recovery was at risk from fresh coronavirus outbreaks or bouts of saving.

On Tuesday, the RBA kept the cash rate on hold at 0.1% and extended its government bond-buying by $100bn. Lowe said the “very significant monetary support will need to be maintained for some time to come”.

Lowe said he had a “high degree of confidence” inflation would not return to the 2-3% inflation target range until at least 2024, and that official interest rate would not rise until then, but warned this did not amount to a “pledge”.

In the December quarter, Australia’s unemployment fell to 6.6%, which Lowe said meant the economy had passed the peak of unemployment, beating even the RBA’s upside projection of almost 10% out of work.

Lowe said Australia had responded well to both the health and economic crisis posed by coronavirus, citing indicators including retail sales and new house building as signs of economic strength.

He credited “very significant fiscal policy support”, with a change in the aggregate budget position of Australian governments of “almost 15% of GDP”.

In the 2020 budget, the federal government spent $214bn more than it received, due to large stimulus measures including the $100bn jobkeeper wage subsidy program.

Lowe said when jobkeeper ends in March there “will be some job shedding”, which could cause “a month or two” of rises or slower falls in the unemployment rate.

But Lowe noted the economy was “otherwise recovering” and there was “quite a lot of job creation going” – so he did not call on the government to extend the “temporary” wage subsidy program.

On jobseeker, Lowe said “there is a wide consensus in the community that the previous level should be increased permanently and I’ve said on previous occasions that I would join that consensus”.

Lowe said the decision was “entirely up to” the government but a decision to cut the $150 fortnightly coronavirus supplement “would obviously have some effect because … the bulk of [recipients] spend the income they get”.

“For me it’s not a macroeconomic management issue, it is a fairness issue: what is the appropriate level of support we should provide to people who are unemployed?”

Lowe said people could have “legitimately different views” but “my own view is that some increase is justifiable”.

Lowe warned there was “still quite a way to go before we reach our goals of full employment and inflation consistent with the target” due to “substantial spare capacity”.

Despite a return to growth, the “level of GDP is 4% lower than where we thought it would be a year ago”, he said, describing it as “a big gap”.

“The unemployment rate is higher today than it has been for almost two decades and many people can’t get the hours of work they want,” he said.

“And wage growth is the lowest in decades, with the wage price index increasing by just 1.4% over the past year .”

Lowe warned low inflation, currently 1.25%, and low wage growth were “likely to be with us for some time”.

Wages were forecast to pick up from the current low, but “to do so only very gradually and still be below 2% at the end of next year”, he said.

The RBA would publish fuller forecasts on Friday, Lowe revealed, including upside and downside scenarios.

The downside scenario would reflect “further sporadic domestic coronavirus outbreaks, a delay in the rollout of vaccines and a worsening global outlook”.

The upside “involves further good news on the health front, with a strong pick-up in consumer and business confidence propelling a stronger self-sustaining recovery” – which could result in unemployment falling below 5% in the second half of 2022.

Lowe noted one key factor in the recovery would be households’ substantial savings, after the savings rate rose to 22% in the June quarter with shops closed and consumers uncertain about the future. Treasury has estimated that households and businesses have saved $200bn.

Lowe said over the next six months “aggregate household income is expected to decline as the pandemic support payments unwind” and normally, that would trigger a fall in consumption.

“But we are not in normal times. The extra savings over the past six months and the bigger financial buffers can support future spending – people will have more freedom to spend as restrictions are eased and be more willing to spend as uncertainty recedes.

“So we are expecting the recovery in consumer spending to continue.”

Lowe said the RBA was “watching carefully” because bad health news could trigger more savings, or good news could see people “run down their extra savings buffers quickly”.