The greatest threats to the sustainability of our economic recovery are spin, complacency and policy inaction. The federal budget will be determinate in this.
Sure, our growth, employment and unemployment figures have been much better than the original Treasury/Reserve Bank pessimism. On growth, Prime Minister Scott Morrison claims we have recovered some “85 per cent of the COVID-induced fall six months earlier and twice as fast as we might have expected in last year’s October budget”.
So we should have, given that his government spent 15 to 17 per cent of GDP to cushion the impact of the medical responses of lockdowns, border closures and social distancing. The recovery?? numbers have come off the base of a 75-year low.
It is also important to recognise that the interpretations to be placed on economic data may need to change given the significant shifts in household, business, government and institutional behaviour, reflecting significant shifts in the way we work, travel, save and spend, and in what we expect of government and each other.
Surveys of business conditions and expectations are relative, not absolute. And, although recently very positive, business is still to see the complete resumption of debt and rent payments, and restoration of insolvency requirements.
The RBA has estimated that our GDP is still some 10 per cent less than it would have been if pre-COVID projections had been realised – a significant “output gap” that will only be recovered if we can sustain above-trend growth.
With the wind back of the government’s stimulus, with the expected budget deficit to more than halve this financial year, there is a very real question of whether the 3-plus per cent growth achieved in the past two quarters can be sustained, even with very cheap and available credit.
This is especially so when it is recognised that immigration and the numbers of itinerant workers, major sources of growth over many decades, have collapsed, and when sectors including universities and international tourism, both important employers and exporters, haven’t been supported. They await the opening of our international border, still perhaps a couple of years away.
The key assumption is that the virus “behaves” and domestic transmission is contained while the vaccine rollout is ultimately effective, especially in the face of mutations.
Morrison told the Business Council dinner this week that the budget will deliver “the second phase of our national economic recovery plan”, which he described as “private-sector driven” and retaining “a clear focus on lower taxes, competitive policy settings for Australian industry, sensible industrial relations settings, deregulation, open trade, open markets”. Really? How many times have you heard that list since the mid-90s? It certainly didn’t achieve much from when the Coalition regained government in 2013 through to 2019 – what economist Ross Garnaut has tagged as the “dog days”, with much slower growth, with stagnant output per person and decline in the typical household’s real wages and income.
It isn’t much of a benchmark to aspire to regain the pre-COVID economy, which wasn’t very strong, and was riddled with mounting structural weaknesses and challenges.
For the government’s wish for a private sector in the “drivers’ seat”, with growth underwritten by consumers and business investment, it needs a national productivity strategy with a clear objective to perhaps double national productivity by 2025, to underwrite the essential increase in wages and incomes, and genuinely encourage business investment, especially in non-mining plant and equipment investment.
This would include broad-based reform of the complicated, inefficient, inequitable and vulnerable tax system, an “education revolution” based on universal childcare and early learning, through to higher education, research and effective vocational training, a universal income support system, and gender equality in incomes and opportunities.
It would also include effective transition strategies to a low carbon society – renewable energy for domestic use and export, electrification of the vehicle fleet, regenerative agriculture, more green buildings and materials, and green gas and electricity for industrial processes such as steel, smelting and cement.
Finally, we need an “infrastructure revolution”. With global interest rates so low, and expected to stay low for at least a further three to four years, and using our AAA credit rating, the government could easily borrow over 30 to 50 years, or longer. we would be rushed – hundreds of billions if we wanted it – including from central banks, pension funds, sovereign wealth funds, insurance companies and a host of other significant asset holders.
This money could then be managed in a fund, separate from government, allocated as debt/equity, perhaps supporting public-private partnerships, in conjunction with private sector financiers, to projects independently assessed on a cost-benefit basis by, say, a revamped and independent Infrastructure Australia. Carefully selected, projects could deliver benefits in transport, schools, hospitals, aged and disability residential care, affordable housing, and many more of economic, social and environmental significance.
Our post-COVID recovery is “so far so good”. The government’s promise includes more money for housing, training, some technology and infrastructure, and a nod and a wink to the aged care royal commission rather than addressing its call for significant reform. We can expect the budget to be largely political – the last before the next election – with a few big announcements, rather than a bold and courageous response to our myriad policy challenges.
Most of Morrison’s “quiet Australians” will be stuck with low wages, a standard of living further restrained and job insecurity.
First published at the Sydney Morning Herald on Thursday 22 April 2021.
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