The Prime Minister, the head of Treasury and the present or former chief medical officer may each be experts within their fields, but none of their guesses about when coronavirus will loosen its grip on the nation's economic throat are any better than yours or mine, or the throwing of a dice. This is not because such things cannot be modelled, or that their progress cannot be imagined, or because preventive measures do not work. It is, as the explosion of new cases in Victoria has demonstrated, because the shedding and spreading of the virus involves a lot of random factors, luck and human folly.
Governments have to make best guesses about when the pandemic will run out of puff, and about how the economy and, particularly, unemployment rates, will respond to the stimulation being given by spending measures. They are obviously aware that best guesses are somewhat less than reliable predictions, and that they will have to adjust the economic levers, or turn the economic steering wheel as events develop. Nonetheless, the figures, the estimates and the hints of where the players would like to end up are quite instructive, themselves able to have an impact on what happens.
And here's the problem. A real crisis forced a conservative government to throw its economic doctrine and dogma out the window. Its old ideas and ideals about balanced budgets, surpluses and winding down government debt have had to be abandoned as they have sought to sustain the population through lockdown, quarantine and closure of borders, through the closure of some industries, the slowing of others, and mass unemployment. Spending and borrowing measures make multi-billion dollar deficits inevitable over the next few years, involving major increases in government debt. All of this to coddle an economy in virtual coma -- made worse by the requirements imposed by regional outbreaks, closed borders and blockades -- to reintroduce rules having the effect of slowing any recovery.
Last week's economic statement announced that welfare benefits and payments for those thrown out of work would continue, if at reduced rates, beyond the date in September, set during the first decisions as the pandemic hit. It was obvious the pandemic was not going to behave as some originally expected -- with a short sharp hit, followed by a steady but deliberate revival of the economy, assisted, we all hoped, by the speedy development of a vaccine, or perhaps an effective treatment of the more serious symptoms. No criticism attaches to the misjudgements or wrong guesses, nor to those engaged in argument about when and whether controls should be lifted, and whether and to what extent risks had to be embraced.
One cannot expect that most of the ministers regret their original decisive action, whether in trying to deprive the virus of new hosts, or in attempting to help workers, families and businesses through the economic crisis. But it does seem clear that the measures are working hard on the political conscience, that ministers are determined that most of the assistance measures have definite use-by dates, and that the sooner the business of moving back to lower deficits, debt repayments and reduced government outlays the better. To the measures recently announced will be added September Budget decisions, including ones bringing forward tax cuts, not least for those on the wealthier end of the spectrum.
But the revival of the economy -- short of long term -- does not depend on any bottom lines of government spending, government revenue, the public sector balance sheet, or the size of public debt. It depends first on a revival of spending and investment, in part assisted by the signals sent out by government's pumping of money into the economy. It depends on this revival sucking up unemployment, both so that these have extra money to spend, but also so that they are adding to net supply and net demand. It depends on consumer and business confidence in a revival, in the worth of investing in new plant and equipment and taking on new employees -- starting with many of those let go when business conditions deteriorated. That need not, of course, be only a result of new private sector activity, because governments as consumers, at Commonwealth, state and local level, provide goods and services, directly or indirectly, and can take the opportunity to renew and refurbish existing as well as develop new infrastructure. Governments at all levels can also promote confidence as well as demand, by the measures they take to facilitate new adapted types of investment and growth suited for the post-COVID-19 economy.
All of these are part of what makes up that confidence that is necessary to get the engine of the economy humming again. The extra money funnelling into the economy is not being sucked out of the general economy, thereby running the risk of crowding the private sector out of the market for money to invest or spend. It is coming instead from debt, and that, as the Reserve Bank has been pointing out for years, in an environment of historically low interest rates.
No one is suggesting the new debt acquired can be of infinite proportions, nor that the size of the deficit can be as long as a piece of string. The greater the debt, the more that will ultimately have to be accounted for -- perhaps repaid. Yet there has been no magical incantation which has decreed that a deficit of more than $100 billion in the past financial year and $200 billion in the present financial year is as much as the economy can take. No one, certainly not the Reserve Bank, is suggesting that putting this extra amount of money into the economy -- or more than it -- presents a clear and present danger of an overheated economy, a substantial increase in the inflation rate, or of a wages break-out. To the contrary, the general fear in the community is that the stimulus so far planned and provided by government will not be enough. That is, it will be insufficient in the short and medium term to sop up unemployment, or to deal with the diminished capacity of more than a million Australians to buy goods and services, pay rents and plan their futures. It will not be enough to inspire entrepreneurs, new or already in the market to invest in their businesses and take on new employees. It will not be enough that ordinary Australians will respond by spending tax cuts, instead of putting the money in the bank or retiring some credit card debt. A wealthier subset of the market may increase their spending on consumer items, such as cars, to make up for their incapacity to travel abroad for some time, but others will continue to be deeply insecure, with already diminished savings, and a good deal more insecurity, whether for themselves, their families or the economy at large.
That's not a sentiment likely to be allayed by signals that the government is looking to wind back payments to individuals as soon as it can, perhaps so as to avoid allowing medium-term unemployed to become "welfare dependent" and difficult to flog back into work. Nor is a revival of optimism, innovation and risk-taking likely to be promoted by signs of anxiety to reimpose controls, to rein in or brake any new types of expenditure. With or without all the stimulus money, the economy will be on life support, needing as much medicine as possible.
It would be far better if the government were showing a general willingness to continue stimulus payments and fancy unemployment benefits as long as there was evidence it was oiling the economy and creating the conditions in which unemployment (and labour market participation rates) could be brought back to normal.
It's a matter of signals. A Treasurer cannily pulling the levers and responding on the hop to developments, including unexpected outbreaks of COVID-19, or the consequences of resumption of old containment measures or specialised ones for particular cases, can very slowly put on the brakes as the economy begins moving again. There is the world of difference between that -- particularly as far as the psychology of the market is concerned -- and meanly announcing, ahead of time that payments will be suspended, or halved, on particular arbitrary dates not really so far away.
It all comes back to a simple proposition, too long ignored by those who became obsessed by debt and deficit over recent years. We want balance, but in the economy generally. Governments should be spending or contracting according to the general health of the system, using the controls to slow down when excess spending is merely feeding into inflation, or to push things along when progress is stalling. It is the art of doing that effectively which labels a treasurer, or a party, as a good economic manager. Good economic managers do not engage in mindless and ideological cuts to spending when stimulus is called for, divert money away from activities which should be encouraged into the hands of those who neither spend nor invest, or set arbitrary cuts such as "efficiency dividends" to essential public services. The coalition government is not the author of the coronavirus. But on the records of the past two decades of government, or even the past year, the coalition claim to be a superior manager to the opposition has yet to be made out.
Corona-crisis calls for imagination, not panic, parsimony or power games
Everyone seems to agree that the world after the pandemic is over will be, and should be, a different place. Many businesses will have gone to the wall. Other businesses will want to reinvent themselves, initially perhaps to hit the ground running despite new social distancing rules or to take the opportunities of some of the new work and play technology showcased by isolation. An obvious example is with remote group meeting technology, and the gains shown in allowing working from home, studying from home, and even with social and cultural activities. Some industries have been more hurt than others, and some probably less than circumstances might deserve. Thus tertiary education, including universities, was badly hit (to complete government indifference, even delight.) The cultural sector was punished -- and a good deal more than sport. Lobbyists for pubs and clubs have had a field day with compliant governments. Airlines have done badly, and their recovery will be limited until international travel is able to be resumed, if ever it is in the old style. International tourism -- here and abroad -- has suffered greatly.
I have commented before that coalition concern about the "undeserved" loss of jobs compares with its general lack of concern for and punitive approach to welfare recipients, including the disabled, the aged, and indigenous Australians. Decisions to set up job retention schemes, more generous welfare payments and particular sectional schemes has not involved any letting up on cultural wars against perceived enemies of government, whether at the ABC, in arts and culture, or in the university sector, or anything to do with the environment or climate change. That general spirit of meanness has not prevented the routine rewarding of sectors regarded as rather more enthusiastic about the directions of the coalition government, or rather more amenable to being used by it, such as the national security industry (now singing loyally and on cue to the government's tune, under news.com choreography), defence, given promises of more and more toys of dubious value a long time from now, and the coal and gas sectors. No one has seen any opportunity to recognise that the coronavirus compounded many of the problems of residents of areas severely damaged by the December and January bushfires -- still suffering from slow services and a critical lack of imagination among those in charge of relief operations. All of this was probably to be expected in this hyper-partisan age -- perhaps the more so given that the Labor Party, no doubt for tactical reasons, is generally lying low -- almost supine.
Beyond making sure no enemy has been overlooked, it has seemed that a guiding part of the economic recovery strategy has been to ensure there was no let-up in the struggle to keep government as lean and as mean as possible. If government was subsidising or creating new schemes, such as for a while, in childcare, the basis of several political fortunes, then they were to be of short duration, or with services sub-contracted outside the public sector. The crisis was not to be an occasion for any real reversion to concepts of "big government", let alone government provided through an enhanced bureaucracy. Even less was it to be an occasion for winding back "reforms" which, often in bipartisan operations, had squeezed both the width and the depth of government activities. In all of this, the pandemic has seemed but an interlude, not leaving any lasting monuments. Or even new styles of administration. If the imagination of public servants has been engaged, it has not been in thinking of new programs or policies.
Conventional and traditional stimulus may not be as effective as more imaginative ones. People who feel uncertain about the future will tend to save more and delay big-ticket purchases. General fear of catching the virus and becoming sick, or uncertainty about whether pandemic conditions will return may also make people more reluctant to spend. The experience, particularly in Victoria, of having to resolve social distancing measures after a let-up may also increase caution.
Likewise, we are not sure yet how the public will respond to necessary changes in the composition of demand, such as that caused by closed borders, indefinitely suspended international travel, or new social distancing requirements in shops, restaurants and places of entertainment. Some of these changes may become virtually permanent.
In time, no doubt, government deficit spending will become more focused on increasing demand generally rather than on helping people and businesses that have been badly affected. People who feel uncertain about the future tend to save more and delay big-ticket purchases, and consumer fears of contracting the virus may also dampen demand. The uncertainty by consumers may have resulted in a surge in the savings rate to an unprecedented 33 per cent in April and may reflect pent-up demand that could be translated into more spending as restrictions ease, but much depends on how cautious consumers are.
We don't yet know how the pandemic will change the composition of demand. A particularly long period may be required before consumption of travel and leisure returns to its former levels (if it returns to those levels at all), which would have consequences for the restaurant, hotel, airline, and oil industries, among others. Social distancing rules that may persist for many months or longer would also require cost-increasing changes in the provisions of services that involve close contact, such as restaurants, airlines, and mass transportation. Victorian experience suggests that trying to move too quickly on a resumption can cause fresh rounds of shutdowns, which themselves can sap business confidence or willingness to re-engage.
Sooner or later we can expect that the focus of fiscal policy will shift away from helping affected people and businesses to more conventional methods traditionally used in a recession and aimed at increasing demand in general while allowing the composition of output to adjust to the new post-pandemic structure of the economy. This is the opportunity to be spending not on roads, or rail, or new airports for Sydney, but on health, education and systemic changes to aged care. And on childcare and programs to close the gap with Indigenous Australians. And on measures for mitigation and adaptation to climate change, to further improve the NDIS, and to catch up on our inferior national broadband network. We have long had a tendency to regard such spending as mere recurrent spending, intrinsically wasteful or non-productive. It is in fact an investment in a new Australia, and in the Australia that benefits the interests of younger Australians -- the ones who have suffered most economically from the pandemic.
We are in a moment when we need the imagination to go beyond old responses. The coronavirus has taught us much about ourselves and our society, including the fact that health is not just a social investment, but it also affects confidence and the economy.
We need more than a mediocre job from government -- just what one could expect from an administration which has shown again this week that it has only the most limited sense of propriety, prudence or concern for legality when it is splashing taxpayer money around. What a waste. Some inspiration and good economic and political management could make an opportunity of the crisis to reshape the economy and our society. We are fast getting to the point of missing our chance.
- Jack Waterford is a former editor of The Canberra Times. firstname.lastname@example.org