The economic picture painted by the Morrison government’s fiscal update just doesn’t seem to hang together – it’s not that the numbers are rubbery, just that they are unpersuasive.
The title of the second volume of Robert Skidelsky’s massive biography of John Maynard Keynes is The Economist as Saviour.
By Laura Tingle
He writes in the introduction about how Keynes – the economist who would make the world rethink how the economy and governments’ role in it can work – found himself after World War I “in a world emptied by war of its old faiths and certainties; one in which monsters prowled, ready to devour what remained of Europe’s civilisation”.
Among Keynes’ other legacies was the elevation of his profession in the eyes of governments and the public. Economists – for much of the second half of the 20th century, and long after Keynes had gone slightly out of fashion – seemed such an anchor of reassurance about what was happening in a confusing world and a source of confidence about their policy solutions for making things better.
Getting economists to give you the measurement of a problem felt like you were half way to solving it.
But COVID-19 sees economists in the same sort of empty world Keynes found himself in a century ago.
This week, the government announced its plans to start winding back income support rolled out in the first days of economic collapse that came with a global pandemic.
Separately, it also released a revised economic and fiscal update that tried to bring to account what has happened to the economy in the past few months (and as a result, the federal budget), and then take the wildest of stabs at what was likely to happen next.
The government painted the scenery for the drama and has now gone on a smoko until the budget in October.
It’s not that the numbers are rubbery, or full of political skulduggery. They are just completely unpersuasive – because no one knows what is going to happen next, and because, well, the economic picture they paint just doesn’t seem to hang together.
Consider the forecasts for the financial year that has just begun. Household consumption is predicted to fall by 1.25 per cent; dwelling investment by 16 per cent; and business investment by 12.5 per cent (including a 19.5 per cent drop in the non-mining sector).
Public demand (the impact of the government on the economy) is forecast to contribute about the same as it has done in the past couple of years, while exports will be down 6.5 per cent (and net exports down 0.5 per cent), while the terms of trade are forecast to fall 12.25 per cent.
That’s a rather large number of negatives. Yet somehow the forecasts still contain a graph with a rather elegant “V” shape’ in the recovery. Sure, that might partly be driven by the fact we are coming from an off-the-cliff slump in the June quarter, but the outlook contains some optimistic statements about how there are good signs abroad about businesses slowly getting back to work.
“Consumption growth is expected to pick up strongly in the September quarter on the assumption that health restrictions broadly continue to ease in all states except Victoria, accompanied by an improvement in both labour demand and confidence”, the outlook statement says.
This seems to ignore the fact that what is happening in Melbourne doesn’t just have a mathematical effect on economic activity, but a massive psychological one too.
Melbourne illustrates the possible perils
Businesses across the country may be reopening but Melbourne reminds them of how perilous things remain.
Assumptions that things will just resume normal programming, that borders will reopen around the country and, specifically, that international borders can open from January 1 are reasonable enough, if you have to make a guess, but they feel pretty heroic at this point.
So there are short-term questions about what the government should be doing for the economy just now, which it certainly didn’t answer on Thursday. It painted the scenery for the drama and has now gone on a smoko until the budget in October. That seems a perilous delay when the economy is on such a precipice.
Then there are the long-term questions about how we restart, and remake, the economy.
The Prime Minister said on Friday that “our goal is to create jobs and to reduce the effective rate of unemployment”.
On Thursday, Treasurer Josh Frydenberg was asked whether he was hoping the economic numbers would act as a springboard for the wide-ranging, nothing-off-the-table economic reform that has been canvassed by Scott Morrison in the past couple of months in order to boost jobs.
“I can tell you the first cab off the rank will be labour market flexibility and a continuation of the industrial relations reforms that accompanied the JobKeeper introduction,” he said.
Of course, Attorney-General Christian Porter has already been holding roundtables on IR reforms, and everybody is trying to be constructive.
The usual round of reforms relating to income tax cuts, increasing the GST, deregulation, skills and energy have been mentioned.
Time to tackle Liberal shibboleths
And hell, why not bring forward income tax cuts, overhaul transport, and broaden and increase the GST, while you are at it? The only question should be: are income tax cuts actually going to stimulate spending in such an environment? People become cautious in times of such uncertainty. You would want to be sure the measure was going to have some sort of effect.
If the government really wants to have a “nothing is off the table” reformathon to help get the economy going again, it has to be prepared to confront its own shibboleths, too.
The issue is not how much the government spends. The issue is identifying its own ideological roadblocks. Public housing – one of the fastest and most effective spots to inject economic stimulus – is one area where the federal government suddenly discovers a great purity in not treading into state government territory, a purity that has never stopped it in the past when it has been convenient.
For all its talk about infrastructure spending, the government’s puerile hostility to universities reflects a broader lack of focus on the country’s human capital, as opposed to its physical infrastructure.
The shocks to the Australian economy – and the global economy – of the past few months are also likely to lift the camouflage that has hidden past government decisions which, in the name of savings, have created industries that just don’t work very well. The government’s Jobactive program and private training networks come to mind.
Yet again, there has been much harking back to the “good old days” of reform as governments look for answers to the multiple problems thrown up by the coronavirus.
But something that is usually overlooked – whether it be the reforms of the Hawke-Keating years, or John Howard’s GST – is that politicians, a bit like John Maynard Keynes, thought outside the box in the way they put policy solutions together.
We are yet to see any signs that this is happening this time around.
Laura Tingle is the ABC’s Chief political correspondent and a colmunist for the Australian Financial Review (AFR).
First published at the AFR, Saturday 25 July 2020. See; https://www.afr.com/politics/federal/reformathon-won-t-go-far-without-outside-the-box-thinking-20200724-p55f2d