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Low rates aiding budget spend: Treasury

Colin Brinsden, AAP Economics and Business CorrespondentAAP
Treasury secretary Dr Steven Kennedy says unemployment could stay persistently higher than forecast.
Camera IconTreasury secretary Dr Steven Kennedy says unemployment could stay persistently higher than forecast.

The recovery from the biggest economic contraction on record is under way, but Treasury secretary Steven Kennedy has warned there is a risk unemployment could stay persistently higher than forecast.

The Morrison government's budget response, to what Dr Kennedy describes as the "novel shock" from the coronavirus pandemic, should have a greater impact on the economy in a low interest rate environment.

He told a Senate estimates hearing that usually when budget policy stimulates the economy, the monetary policy response from the Reserve Bank of Australia either results in higher interest rates or the exchange rate rises.

On this occasion, Treasury expects monetary policy to be accommodating for some time.

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"All of our fiscal impulses should ... have a larger impact than what we have seen in the past," Dr Kennedy said.

The hearing comes against the backdrop of speculation the central bank could ease interest rates even further as soon as its board meeting on November 3 - a gathering Dr Kennedy will attend.

The delayed 2020/21 budget released earlier this month saw $98 billion in additional support, bringing the government's direct response to the pandemic to $257 billion.

"As we have suppressed the spread of the virus there have been positive signs in the economy with a rebound in activity now under way," Dr Kennedy said.

The economy had contracted by seven per cent in the June quarter, the largest decline on record.

The Treasury boss said history shows that after the 1990s recession it took around two years for economic growth to return to previous levels but 10 years for the unemployment rate to recover.

"With policy support we expect unemployment to fall to 6.5 per cent by the June quarter 2022," he said.

"But there is a risk that a substantial dislocation that has occurred in the labour market could result in persistently higher unemployment than forecast."

The jobless rate is forecast to peak at eight per cent in the December quarter 2020, compared to 6.9 per cent as of September.

The government has said it won't be pursuing a budget surplus again until the unemployment rate is comfortably below six per cent.

Treasury does not expect that to happen until the 2023/24 financial year.

Treasury analysis indicates government support since the onset of the pandemic is expected to result in the unemployment peak being around five percentage points lower than would otherwise be the case..

However, deputy Treasury secretary Luke Yeaman said the situation in Victoria has had a significant impact across the economy overall, affecting the recovery.

Treasury had calculated the Victorian lockdown cost the economy $9 billion during the September quarter or $100 million a day.

At the same time, 1200 jobs were lost a day on average during the lockdown, which carried on into the early stages of the December quarter.

In a positive step for the economy, Victorian Premier Daniel Andrews announced a substantial easing in restrictions on Monday, which included that from midnight all retail, restaurants, hotels, cafes and bars will reopen.

"These are big steps," Mr Andrews told reporters.

"This virus is not going away. It is going to continue to be a feature of our lives, it is going to be a feature of our lives every day until a vaccine turns up."

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