Can you imagine the Australian government in the early 1940s releasing economic forecasts for a four-year budget period? The budget might read: “After an early contraction associated with the outbreak of World War II, the economy is expected to return to trend growth in the third year of the forward estimates.” Then, in its statement of risks, the budget would add: “Invasion of Australia is a significant risk to these forecasts.”
We are not in a World War, but we are in the midst of a global pandemic the likes of which haven’t been seen in more than 100 years. And yet, in its economic and fiscal update released last week, the government indicated it will provide four-year forecasts and projections in the budget to be released on 6 October.
Sensibly, in last Thursday’s update Treasury conducted forecasts for only one year, instead of the usual four. In a masterful understatement, the update warned: “The evolution of the health crisis presents a significant risk to the outlook …”. It would have been unconscionable for the government to refuse to release forecasts at all. But, in truth, the update doesn’t tell us much other than we’re in a world of pain.
Rather than just being in the first recession in almost three decades, defined as two quarters of negative economic growth, Treasury expects Australia to be in two full years of negative growth. According to the update, the effective rate of unemployment in April 2020 was not the official rate of 6.2 per cent but “close to 15 per cent.”
Instead of a $5 billion budget surplus for 2019-20 forecast in the December 2019 budget update, the government is now estimating a deficit of $86 billion for that year, with a further estimated deficit of $184 billion to follow.
The real story from the economic update is that the political dog fight over the size of budget deficits is over. The Coalition was shocked, shocked to find the Rudd government sent cheques to dead people while averting a recession from the Global Financial Crisis. Such inconsiderate seniors, failing to phone Centrelink with their dying breath to cancel their payments. Government spending as a percentage of GDP reached 26 per cent in 2009 – when the Abbott-led Coalition railed against the Rudd government’s “debt and deficit disaster” – but is projected to hit 34 per cent this financial year.
The debate is more likely to move onto the nature of revenue and spending measures rather than their size. Here the economic forecasts provide telling guidance. Private non-mining investment is estimated to have shrunk by a whopping 9 per cent in the financial year just passed, but the forecast is, wait for it, a double-whopping 19½ decline in the current financial year.
The Reserve Bank, having rejected the proposal by Percy Allan and me https://www.afr.com/policy/economy/how-to-avoid-a-september-cliff-edge-20200629-p5573z to partly finance the deficits by purchasing government bonds in the secondary market and holding onto them, has left the government with only the option of growing the economy fast to pay off the massive debt.
Unless we wish and hope and pray successfully for another round of good fortune courtesy of China which, in these times of heightened geopolitical tensions, seems unlikely https://www.afr.com/world/asia/get-ready-for-when-china-no-longer-needs-us-20200713-p55bgs the only way of growing the economy is through productivity improvements.
But Australia’s productivity, having grown by more than 2 per cent per annum during the productivity boom of the 1990s from the economic reforms of the Hawke-Keating era, its growth rate began sliding from the turn of the century. It fell away to 0.7 per cent per annum from 2013 and a year ago it actually slipped into reverse gear.
Productivity growth depends crucially on private investment embodying the latest technologies. But with private investment forecast to crash, we have no hope of productivity growth, economic growth, jobs growth or wages growth.
A cash flow tax https://www.afr.com/politics/tax-cash-flow-instead-of-profit-say-economists-20181209-h18wjs which allows the immediate expensing of new capital spending, would provide a powerful incentive for new private investment. It is a supercharged version of the investment allowance Labor took to the last election.
Productivity growth and wages growth decoupled around the turn of the century, with the Productivity Commission’s latest review https://www.pc.gov.au/research/ongoing/productivity-insights/recent-productivity-trends/productivity-insights-2020-productivity-trends.pdf reporting labour’s share of national income has fallen consistently since then.
To ensure workers aren’t relying on a small trickle down from the owners of the new investment but share fairly in the benefits of productivity growth, a cash flow tax should be accompanied by labour market reforms, hopefully emanating from the five working groups involving government, business and unions. Offering workers only precarious, casual employment isn’t the way to get the best productivity from them.
Australian economic growth, wages growth and productivity growth were all weak before the pandemic struck. Returning to that enfeebled economy post-COVID-19 would lock a generation of young people out of decent jobs, consigning them to picking up a few scraps here and there from intermittent casual work. And as they approached retirement, with lousy superannuation savings, governments would be squeezing them to pay off the remaining debt incurred during the pandemic.
Without a new economic reform program capable of attracting a degree of bipartisan support and the cooperation or at least acquiescence of the union movement, the Australian economy will resume its mediocre growth path after the pandemic has passed and our youngest and most vulnerable citizens – most particularly young women – will pay the price.
Craig Emerson is managing director of Emerson Economics, a distinguished fellow at the ANU, director of the APEC Study Centre at RMIT and adjunct professor at Victoria University’s College of Business. He was microeconomic adviser to Prime Minister Bob Hawke in the 1980s.