A fighting strategy for jobs growth in a tough arena

The Morrison government will step up to confront a new economic arena on budget day, October 6 — one shaped by the fallout of the coronavirus. Rather than relying on simplistic Band-Aid measures that eventually may or may not produce a slow, painful recovery, Scott Morrison and Josh Frydenberg have opted for “striving valiantly”, to paraphrase Theodore Roosevelt in 1910. They are opening up the arena, backing businesses, families and individuals who are prepared to invest and spend, to “have a go to get a go’’. As Simon Benson reports, responsible lending laws imposed during the global financial crisis will be jettisoned to inject an “adrenaline shot” into the economy by lifting onerous barriers for home buyers and small businesses.

The economic arena will not be a place for the faint-hearted. Nor will it be risk-free. That is not the nature of enterprising societies, which the important supply-side reforms will encourage. Scrapping most responsible lending obligations and throwing viable small businesses a lifeline to trade their way out of insolvency are designed to speed and strengthen activity. In tandem with the Treasurer’s willingness to put effective stimulus ahead of budget repair for now, they amount to a bold plan. As Mr Frydenberg told the Australian Chamber of Commerce and Industry on Thursday, “only through repairing the economy can we repair the budget”.

“Cold and timid souls”, to borrow another Roosevelt phrase, might decry the scrapping of RLOs. These were legislated in 2009 to prevent “unsuitable” credit lending by banks, credit unions and other financiers. But a decade of “regulatory creep” and hundreds of pages of guidelines have seen the pendulum swing too far from borrower beware to lender beware, as Mr Frydenberg writes on Friday. With interest rates at historic lows and likely to fall further, and plenty of liquidity available, onerous red tape blocking the provision of credit to productive businesses and households wanting to invest and spend is a brake on jobs.

Balance is important. So, as always, is responsibility on the part of borrowers and banks. As Reserve Bank governor Philip Lowe told the House of Representatives economics committee last month, the principles in the original RLO legislation were sound. “But the way we’ve translated those principles into reality, I think, needs looking at again.” Those principles, Dr Lowe said, “have turned into hundreds of pages of guidance”.

The move to throw struggling businesses a lifeline to trade their way out of insolvency is timely given the vast number of businesses facing imminent closure and job losses in the wake of lockdowns and closed borders. As Benson reported on Thursday, that initiative owes much to US-style Chapter 11 bankruptcy laws that will help such businesses avoid being wound up by “vulture” ­administrators. The reform will apply to small and family-run firms as well as to sole traders owing less than $1m to creditors. About 98 per cent of those affected employ 20 staff or fewer. From a taxpayer’s perspective, the reform will be revenue neutral.

Like most once-in-a-generation reforms, the plan has potential for unintended consequences. Regardless of trading conditions, dud businesses invariably fail, sooner or later. While some may seek or gain a temporary reprieve under this change, it is not about propping them up indefinitely. The plan mitigates the risk to creditors and to third parties investing in failing businesses. Businesses on the brink of insolvency would be given 20 days to devise a plan to trade their way out and to offer a deal to creditors. The creditors would then have 15 days to vote on accepting such a deal. As in all financial dealings, the “caveat emptor” principle remains applicable. But removing costly administrators and lawyers’ picnics from a fraught process will leave struggling businesses, their staff and creditors better off. As Robert Gottliebsen noted, the once-in-30-years change recognises that the nature of many of the jobs in our society is changing and that those who take a risk and generate work should not be bankrupted at their first failure.

It is a measure of Australia’s current economic reality that the Liberal Party had cast off its previous objectives of budget surpluses and debt repayment. Budget repair, while vital, has been postponed until unemployment is “comfortably” below 6 per cent. This is sensible. But the government is right to stick to its strategy of capping taxes as a percentage of GDP to under 23.9 per cent. But this will be 23.9 per cent of a much smaller GDP cake as a result of our worst recession since the 1930s. The economy also will lose a significant tailwind, with net overseas migration expected to be negative this and next financial year.

In confronting such circumstances, the government is prepared to provide temporary and targeted support. But as Mr Frydenberg says, while the government is prepared for years of climbing debt and large deficits, its fiscal strategy is “consistent with our core values”. Its focus, appropriately, will be on infrastructure spending, accelerating legislated income tax cuts and enacting reforms to encourage business investment, borrowing and activity. In an economic arena unlike any seen for 90 years, the endgame must be to boost economic confidence, which is the path to private sector job creation. The merits of the strategy can be assessed fully only after the budget. Its broad parameters, however, are sound. They are not about simplistic “big government” that would produce a faux recovery but combine supply-side reforms and targeted spending to help business activity and job creation.