Australia will have to inject up to $90 billion of additional fiscal stimulus over the next two years if it wants to return the economy to full employment, a new report from Grattan Institute says.
The $70 billion to $90 billion required accounts for 3% to 4% of the GDP.
And it is on top of the $160 billion that the federal and state governments have already spent so far.
But it is needed to lower the unemployment rate - which stood at 7.1% in May after climbing up from 5.2% in March - Grattan says.
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Grattan says the extra needed in stimulus spending should include temporary as well as permanent measures, and must be announced soon, by or during the October 6 federal budget.
Grattan is recommending three main temporary measures which will cost about $30 billion over 2020-21, economists led by John Daley said in Grattan Institute's The Recovery Book: What Australian governments should do now.
These temporary measures are: extending JobKeeper beyond September for businesses that are still struggling ($12 billion to $15 billion cost) and including temporary migrants and casuals in the program ($3 billion), phasing down the Coronavirus Supplement more gradually after the JobKeeper is removed ($10 billion to $15 billion), adding a catch-up loading for schools to provide intensive tuition for students hurt by school shutdowns ($1.2 billion).
Grattan's permanent solutions recommendations will cost $7 billion in 2020-21 and $14 billion in the year after that.
Grattan is recommending: increasing the JobSeeker unemployment payment by at least $100 per week from April 2021 ($2 billion plus and $8 billion plus over the two years), increasing Commonwealth Rent Assistance by 40% ($1 billion, $1.5 billion), and increasing childcare subsidies to improve incentives to return to work ($4 billion, $5 billion).
On top of the temporary and longer-term solutions, Grattan says $20 billion to $40 billion of discretionary fiscal stimulus will be required over the next two financial years to reduce unemployment by 1.5ppts and returning Australia to something like full-time employment.
"While state governments should deploy what stimulus they can to support the economic recovery, and should avoid premature fiscal tightening, the federal government will need to fund the lion's share of any stimulus," the report said.
"Such spending would not impair the federal budget in the long term.
"Even assuming no boost to GDP from the spending, public debt by 2029-30 would be only 3-4% of GDP higher than otherwise. In practice, accelerating the pace of economic recovery, and preventing the long-term costs of sustained high unemployment, would result in stronger economic growth in the long term, and therefore debt-to-GDP would be lower than presented here."