A range of half-measures will doom young Australians to a prolonged post-virus burden.
During the Great Depression policy makers made crucial mistakes that extended the misery by years. We are at risk of refusing to learn the lessons of history, dooming us to repeat it.
While arguments continue over the policy errors that prolonged the Great Depression, crucial facts are irrefutable: in the aftermath of the 1929 stock market crash the US administration tightened monetary policy, increased taxes to reduce budget deficits and put restraints on international trade.
Yet in the early months of the present recession, several global economic institutions predicted a V-shaped recovery. Their thinking was that businesses and consumers would take advantage of the suddenly underutilised capacity in economies caused by COVID-19, spending up big for a quick bounce back. Their models predicted a V-shaped recovery for one simple reason – they were built to assume one.
If the national accounts for the September quarter show GDP growth of, say, 1 per cent, it will be assumed Australia is beginning its rapid journey up the other side of the V. But Australia’s economy would still be 6.3 per cent smaller than its pre-pandemic level, with more than one million people unemployed.
And who’s to say the December quarter won’t be negative, producing a W-shaped trajectory https://www.afr.com/policy/economy/time-to-worry-about-a-w-shaped-economic-slump-20200518-p54tv0 following the cuts to JobKeeper and JobSeeker, the withdrawal of mortgage and rental deferrals and an end to insolvency restrictions?
Expect at least some new fiscal support measures in the October budget. But also expect persistent errors from the Reserve Bank and the government that could very costly. The government is persevering with the argument that all the debt – likely to reach $1 trillion –has to be repaid.
That means higher taxes and lower spending on services such as health and education. Optimists point to a third way – grow the economy faster. But even a return to feeble pre-pandemic annual growth rates of 2.4 per cent – of which three-quarters was attributable to population growth – is unlikely to be achieved at sharply lower rates of immigration.
And for good measure, if the government cancels the legislated increase in employer superannuation contributions and extends allowances for early access to superannuation savings, the young will be required to pay for the greatly increased age pensions demanded by a cohort of retirees who will constitute one-quarter of the voting population https://www.afr.com/policy/economy/the-coalition-s-weird-policy-on-super-20200824-p55olx
In a deflationary world, the correct policy response is for the Reserve Bank to buy government bonds directly from Treasury to finance a portion of the debt and hold onto them indefinitely. But the Reserve Bank has ruled this out, apparently for fear of creating inflation. Of all the problems in all the world, inflation isn’t one of them.
Australia’s central bank is running a tighter monetary policy than those of the rest of the world, allowing the exchange rate to rise, damaging Australia’s international competitiveness.
Strong economic growth will require lots more productivity-raising foreign investment. An investment allowance, which I have been advocating since 2015 https://www.afr.com/policy/gsts-mystical-powers-in-tax-reform-package-overrated-20151123-gl5ghs is likely to be included in the October budget. But if it includes both accelerated depreciation and ongoing tax deductibility of interest payments, it will foreclose on a cash flow tax https://www.afr.com/politics/tax-cash-flow-instead-of-profit-say-economists-20181209-h18wjs which would be a permanent reform. By giving away accelerated depreciation the government will never be able to resist the lobbying of business organisations to retain full interest deductibility.
At the same time as it is contemplating policy measures to attract foreign investment, the government is sending signals to the world’s second-largest economy that its investment is no longer welcome, blocking the sale of Japanese-owned Lion Dairy and Drinks to Mengniu Dairy. Australia, too, has numerous anti-dumping cases against China, which the Productivity Commission expects us to lose at the WTO, and China is retaliating with spurious anti-dumping cases against Australian barley and wine and selected bans on beef imports.
The Morrison government is not proposing to increase taxes during the current recession but to reduce them. By bringing forward the second and third stages of the personal tax cuts, the government will achieve rates and thresholds very similar to those I recommended back in 2005 in my book, Vital Signs, Vibrant Society.
But my recommended flattening of the rate structure, including a cut in the top marginal rate, was to be funded by removing special tax breaks for the wealthy. Having campaigned in favour of these concessions, together with sending cheques to people as refunds of company tax they never paid, the government will ensure they remain. And since the tax cuts are directed to higher-income earners, most of them will be saved, not spent, stymying any stimulatory effects.
Errors in monetary, fiscal and investment policy threaten to prolong the coronarecession, just as policy errors prolonged the Great Depression. An obsession with slaying a long-deceased inflation dragon based on faithful adherence to economics textbooks of the 1980s will cost Australia’s young men and women dearly, not only in lost job opportunities and the accompanying human misery, but in the burden being placed upon them to repay the massive accumulation of government debt.
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.