Pandemic cash splash let inflation genie out of bottle

Unnecessary COVID-19 spending and Reserve Bank delay in lifting interest rates significantly worsened inflation, a review of Australia's pandemic response finds.

While supports like JobKeeper and HomeBuilder were desperately needed and an important intervention in a pandemic crisis setting, wastage and policy missteps cost the economy dearly, according to the review.

Modelling shows peak inflation could have been reduced by 2.1 percentage points if economic policies better matched health restrictions and the RBA started lifting the cash rate earlier, said the report released on Tuesday.

Australia's economic recovery was much stronger than anticipated and with the benefit of hindsight, excessive stimulus measures provided throughout 2021 and 2022 - especially to the construction sector - should have been scaled back.

"Combined with supply side disruptions, this contributed to inflationary pressures coming out of the pandemic," the report said.

Treasurer Jim Chalmers said Labor at the time called for support to be rolled out faster and better targeted.

"We saw some very good ideas badly implemented and poorly targeted," he said.

"We could have provided more assistance to those who genuinely needed it by wasting less on the businesses, in particular, who didn't need JobKeeper. We know subsequently that billions and billions of dollars were wasted."

The Morrison government's economic stimulus packages represented the largest fiscal expansion in Australia's history, amounting to $213.7 billion in excess spending.

The report found JobKeeper in particular was pivotal to Australia's health and economic response, but decisions such as excluding temporary migrants and foreign companies exacerbated skills shortages and inflationary pressures.

"On the HomeBuilder program, the report makes it clear that that overheated the industry and contributed to inflation in the post pandemic era, with many Australians experiencing the consequences of this now through higher inflation and through lack of access to housing," Dr Chalmers said.

Australia's economy was also found to have copped a $31 billion hit due to delays in the vaccine rollout, which caused additional lockdowns and economic disruptions.

The slow rollout also led to more deaths and overall cases because it meant transitioning to "living with COVID-19" as the Omicron variants became prevalent in late 2021.

The report recommended the government review pandemic-era programs including boosting cashflow to employers, the coronavirus supplement, HomeBuilder, the pandemic leave disaster payment, the COVID-19 disaster payment and the early release of superannuation.

Giving people blanket early access to superannuation "was not an appropriate policy response, and in future existing financial hardship processes should be relied upon instead", the review said.

Treasury has already conducted an evaluation of JobKeeper, which found it was implemented incredibly effectively given the circumstances, but could have been better targeted.