Coronavirus: Tax reform cure for virus fever

Philip Lowe urges the government to examine calls for an overhaul of the tax and industrial relations systems to lift Australia.

Governor of the Reserve Bank of Australia Dr Philip Lowe. Picture: Stephen Cooper

Reserve Bank governor Philip Lowe has urged the government to examine calls for an overhaul of the tax and industrial relations systems to lift Australia out of the “shadow” of the worst economic crisis since the 1930s.

Handing down a detailed assessment of the damage being wrought by the COVID-19 pandemic, Dr Lowe warned that the nation could not rely on a quick return to a pre-coronavirus economy and suggested long-ignored calls for income, consumption and land tax reform, as well as stripping regulations that stifle innovation, would need to be revived.

Dr Lowe said Australia faced a once-in-a-century “economic contraction” that would drive a 10 per cent drop in national output over the first half of the year.

In a speech in Sydney on Tuesday, Dr Lowe said the nation could look forward to the economy rebounding by September and growing “very strongly next year, with GDP growth of perhaps 6-7 per cent” if restrictions were eased by about the middle of the year.

But he also warned that, despite an expected rapid recovery, there would be no quick return to “business as usual” and that a range of reform options — detailed in a “multitude of reports” — could help reignite growth in Australians’ living standards.

“What those reports say is … we should be looking again at the way we tax income generation, consumption and land in this country,” Dr Lowe said.

“They say we should be looking at how we build and price infrastructure. They say we should be looking at how we train our students and our workforce so they’ve got the skills for the modern economy.

“They say we should be looking here at how various regulations promote, or perhaps hinder, innovation and they say we should be looking at the flexibility and complexity of our industrial relations system.”

Dr Lowe also detailed for the first time the bank’s outlook around the hit to growth and jobs from the COVID-19 crisis, warning that “the next few months are going to be difficult ones for the Australian economy”.

He sketched out the largest decline in hours worked since the 1930s and unemployment peaking at 10 per cent in coming months, although he said there was “quite a lot of uncertainty” around the numbers.

Dr Lowe said the profile of the economic recovery depended “not only upon when the restrictions are lifted” but also on the “resolution of the uncertainty that people feel about the future”.

The central bank boss said he was encouraged by Scott Morrison’s comments that Australia had reached a “turning point” in the fight against COVID-19.

He said it was “plausible” for restrictions to be progressively eased by around the middle of the year, before being totally lifted — aside from international border controls — by the end of 2020.

“If this is how things play out, the economy could be expected to grow very strongly next year, with GDP growth of perhaps 6-7 per cent, after a fall of around 6 per cent this year,” he said.

While Dr Lowe predicted a rapid, V-shaped recovery, he also warned that “the twin health and economic emergencies” would “cast a shadow over our economy for some time to come”.

Unemployment would remain above 6 per cent “over the next couple of years”, while those with jobs should expect wage growth of below 2 per cent. Inflation would not lift towards the bank’s 2-3 per cent target range for years, keeping the cash rate pinned to its floor of 0.25 per cent.

Dr Lowe said the “best way of dealing with these reverberations is to reinvigorate the country’s growth and productivity agenda”.

“As we look forward to the recovery, there is an opportunity to build on the co-operative spirit that is now serving us so well to push forward with reforms that would move us out of the shadow cast by the crisis.”

Despite the central bank’s forecast for unemployment to reach 10 per cent by the middle of the year, Dr Lowe said he was “hopeful that it might be lower than this if businesses are able to retain their employees on lower hours”.

Josh Frydenberg said the government’s $130bn JobKeeper wage subsidy would help “keep more Australians in jobs as we tackle the significant economic impact from the coronavirus”.

“In the words of the RBA governor, ‘the unemployment rate would have been much higher than this without the government’s JobKeeper wage subsidy’,” the Treasurer said.

While Dr Lowe pleaded with Australians to remember that “this period will pass”, he said people would work a “staggering” 20 per cent fewer hours over the first half of 2020 in what would be the steepest fall in work done since the 1930s.

His comments followed the release of data from the Australian Bureau of Statistics showing 780,000 Australians might have already lost their jobs over the three weeks to April 4.

Inflation will turn negative over the year to June as fuel prices plunge and childcare costs are -reduced to zero.

Dr Lowe said it would be the first annual deflation reading since the early 1960s, before inflation recovered to 1 per cent by the end of the year.

The forecast decline in GDP of 6 per cent for 2020 chimes with the International Monetary Fund’s forecasts for a similar decline and a recovery in Australia’s economic activity in this year and the next.

Despite the inevitable stream of dire economic news in coming days and weeks, Dr Lowe said: “I would ask that we keep in mind that this period will pass, and that a bridge has been built to get us to the other side”.

“With the help of that bridge, we will recover and the economy will grow strongly again.”

Dr Lowe provided an update on the bank’s extraordinary monetary policy measures, introduced at an emergency board meeting last month.

He noted that about $3bn of the $90bn in cheap funding committed by the RBA had been taken up by 35 lenders.