Do no lasting harm must be stimulus first principle

Four years ago, then treasurer Scott Morrison argued that we had to take action to strengthen our economic resilience to deal with the shocks that would inevitably arrive. “To get debt under control by returning the budget to balance, through disciplined expenditure restraint, and a tax system that supports growth and provides sustainable revenues,” he said. It was a line he reprised in a speech on Tuesday, as the Prime Minister recounted how year by year — through spending control, and we would add fiscal drag — the Coalition has restored the budget to balance. We applaud the effort, to a point. The fiscal buffer should have been larger, debt levels and taxes a lot lower. It’s a collective failure by a short-run-focused political class over 15 years. Mr Morrison now says coronavirus, or something like it, is the disruption he was anticipating in 2016. COVID-19, you’re soaking in it Madge. What to do? First, don’t panic by shovelling precious funds out the door, willy nilly. Identify the problems you are trying to solve.

Mr Morrison and his colleagues have spent the past 11 years or so lambasting Labor’s stimulus overkill in the wake of the global financial crisis. “Go hard, go early, go households,” was the mantra for the Rudd government’s pre-Christmas 2008 $10.4bn stimulus package. The economy then bounded out of a single quarter of gross domestic product contraction. Labor quadrupled down with a $42bn splurge in February 2009, including spending on school halls, tax breaks and cash payments. It was too much juice, well after the danger had passed, with infrastructure projects meandering along for years. Like the Howard government before it, as export prices recovered Labor then built into the budget permanent social spending on temporary revenues.

When the Coalition returned to office in 2013, Tony Abbott instituted a commission of audit by Tony Shepherd to profile government spending over the medium term. The picture was not pretty. Joe Hockey’s 2014 budget tried to reboot fiscal policy — via spending cuts, tougher welfare tests, new taxes and a medical co-payment — but was rejected by surprised voters and spat out by the parliament. Restoring the budget’s “integrity”, and we use that term loosely, has been an ad hoc affair. Mr Hockey slapped a temporary levy on high-income earners; as treasurer in 2017, Mr Morrison whacked the big banks with a tax for the simple reason that “nobody likes you”. As well, despite the program of personal income tax cuts, Canberra has been filling its coffers for years through bracket creep.

We have argued consistently for a reduction in the size of Canberra’s footprint. Despite efforts to pull it back by this government, spending is rising ahead of population growth. In fact, take out the public sector more broadly — which includes spendthrift, indebted state administrations — and GDP would be going backwards. It’s true there is capital works catch-up at play, especially on long-neglected road and rail projects, but government spending on itself is rampant. State bureaucracies are bloated, and growing, particularly in health, education, welfare and disability services. Not the frontline workers, mind you, but people who “manage” them. In any economic revival project, the states must play their part. As in the US, there is talk of payroll tax relief for small and medium-sized businesses, as well as assistance for tourism and maintenance work on government buildings. Yet apart from NSW, the states are in various stages of fiscal stress, indebtedness and mendicancy.

Mr Morrison is vowing to not only deal with the challenge of weakening demand, disrupted supply chains and crunched cashflows, he wants us to “emerge stronger and more productive on the other side”. He would say that, but it won’t be easy to pursue reform when the focus is to stay above water. The Prime Minister is right to say COVID-19 is a biological contagion, not a financial one. He notes it’s a temporal not a structural problem. Yes and no. Our supply-side weaknesses, shown up by wage stagnation, ultra-low rate of business start-ups and sagging productivity growth will be a drag on a sustained recovery in living standards. We hope Josh Frydenberg reveals a bold reform program in his second budget, but realise there are bigger fish.

The Prime Minister set out guiding principles for the economic rescue effort. He’s right to flag a “clear fiscal exit strategy” and says the priority is to get the health response right. As we argued on Tuesday, co-ordinating government efforts, ramping up virus testing, maintaining medical services, minimising social disruption and clear messaging to the public are required. Yet it’s important not to lose sight of the idea government can’t do everything. We’re not China, for instance, where command and control of people and systems is the standard. Government sets the rules here and its taxing and spending at the federal level is about one-quarter of GDP. Individuals and businesses make the running. The fiscal stimulus will need to hit the sweet spot between broad community buy-in — to spend, invest and keep people in work — without a debilitating, overzealous splurge that holds us back for a decade.