Australia's bushfires have given officials plenty of cover to do what they should be doing anyway: ramp up fiscal spending. A lot hinges on whether they can get comfortable with the idea.
An area larger than Ireland has been destroyed, at least 25 people are dead, 2,000 homes have been razed, and 25 million acres of forest and bush have been wiped out. As many as a billion animals may have been incinerated since September, some species almost to extinction. Tourism, farming and consumer confidence have taken a hit. Prime Minister Scott Morrison has been lambasted for too little action, too late. His government announced a $1.4 billion recovery fund over the weekend; with more than 100 fires still tearing through the country's most populous state, more is bound to be needed.
The truth is, Morrison has the fiscal bandwidth to rebuild Australia and then some. Treasury projections published last month pencil in a return to surplus for the year ending June.
The economy can certainly use the help: Its famous three-decade expansion has been under strain over the past year, as I wrote here and here. Gross domestic product rose 0.4% in the third quarter, and without some tax rebates, growth would have been even slower. The labor market is also weakening.
While the Reserve Bank of Australia cut interest rates three times last year – and hinted at more – there's not much of a buffer before hitting zero. Policymakers have sketched out the possibility of quantitative easing, a concept that once seemed unthinkable.
The solution – more fiscal stimulus – seems blindingly obvious: Australia has a triple-A credit rating and can borrow for 10 years at little more than 1%. Government spending already boosted growth in the third quarter.
The country's mystifying attachment to an Antipodean version of austerity may explain Morrison's reluctance. In the 1980s, after floating the Australian dollar, the currency – which earned the nickname the "South Pacific peso" – swung dramatically on budget news. While Australia hasn't recorded a surplus since 2008, successive administrations going back more than a generation have treated it almost like a sacrament.
Recently, Morrison has deflected questions about the budget, saying the surplus isn't a focus of his attention right now. Fair enough. But it's rich to cite a national crisis and seek photographs with firefighters left, right and center only to have national economic strategy fail to rise to the occasion. Residents of the fire-ravaged town of Cobargo, which Morrison visited last week, heckled him and demanded more resources.
Measuring the economic impact of sustained fire devastation is tough, particularly because the summer has months to run and fires still rage. Economists at Goldman Sachs Group Inc. estimate the crisis will lower growth by about 0.3% between the last quarter of 2019 and first three months of this year. Hits to agriculture, tourism and private consumption are likely to be offset by spending on rebuilding and residential construction.
One reason the fires haven't caused even more economic damage is that, over the past century, rural areas have emptied into cities. Australia has become one of the most urbanized societies on earth, with about 80% of GDP coming from 0.2% of the landmass, according to the Grattan Institute, a Melbourne think tank. Any calculations about the GDP impact in coming quarters can't address longer-term questions about whether and how Australians will change the way they live, manage land and try to salvage what's left of the country's fragile ecosystems.
Fiscal policy is being deployed in a growing number of economies to buttress expansion: Japan, Indonesia, Spain and Italy are just a few. The International Monetary Fund has been banging this drum for a while and RBA Governor Philip Lowe takes almost every opportunity to drop hints that he could use some help. If ever there was a time for Morrison to stop wringing his hands over the prospect of a deficit, this is it.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.