Investment the key to recovery

Economists from the club of rich nations expect Australia to be best of breed in weathering the pandemic storm and a star in recovery next year. Certainly, the signs are encouraging from fresh surveys of business and consumer confidence. Our official forecasters may be tossing out worst-case scenarios for a contraction in national output and joblessness yet they are worried about tapering-off points for income support in September. In its latest outlook, the OECD warns that a second wave of COVID-19 infections would fillet another $25bn from the economy and flatten the anticipated revival next year. That would lead to “substantial and rising” bankruptcies and job losses in an economy $60bn smaller than would otherwise be the case.

The Morrison government is trying to engineer a smooth transition for companies and workers. The economy will be different post-coronavirus, so the harder it is for capital and labour to shift out of declining industries and into expanding ones, the more likely our performance will be sub-par — as it was leading into the crisis. Productivity was on the slide, per capita income was falling and consumers had tightened their spending. The most worrying part of our game was that business investment had slumped and our capital base had become shallow. The rate at which Australians were starting businesses, too, had fallen to a generational low. Where once there’d been a palpable dynamism in companies and among policymakers, a muddling-through complacency had descended.

Getting the economic party started, so to speak, will need more than the emergency stimulus approach, as helpful as that has been for those on financial life support. The government was right to reject a bailout for Virgin Australia. The HomeBuilder package for the construction sector may fit a “whatever it takes” political mindset right now but does not qualify as best-practice policy. At least the extension of the instant asset write-off has a better pedigree, given it has had several iterations and is delivered through existing channels. But will it get companies and sole traders to shell out for a lot more kit in the bleak midwinter of recession? Probably not. Had Josh Frydenberg delivered the budget last month, pre-pandemic signals were it would have contained an investment allowance. We would welcome one in the coming economic statement or the October budget at the latest.

Yet this, too, is ad hocery. The next policy phase requires bolder moves for the medium term. National cabinet must try to slash the red and green tape around major projects, including for new infrastructure. The states need some giddy-up to ditch their job-killing taxes and regulations. The government has facilitated a parley between unions and business to find common ground in five key areas. With a huge pool of unemployed likely once the welfare music stops, we’ll need workplace flexibility, less complex yet timely wage deals, and fewer awards. The magic of productivity growth comes out of the conditions prevailing at the enterprise level. Managers and workers are the key to higher living standards, not judges, with respect, your honours.

If the Treasurer is serious about a business-led recovery, as he avows, he’ll have to improve on the incentives for capital expansion and remove the disincentives. That requires a lower company tax rate, which is vital for attracting investment and necessary if our firms are to compete in a more rough-and-tumble post-corona league. Mr Frydenberg must use the crisis of a capital strike to take the shackles off business. As well, it’s a big work book on the supply side, one that Labor must also embrace if it wants to reclaim its once-cherished credentials as an outfit that seeks to build and create, not only spend and redistribute. Can the political class put down its weapons for the greater good, to get the nation off its knees? It’s almost a mantra: we can’t go back to politics or business as usual.