Levelling with Australians about hard reforms ahead

In normal times, which in the era of COVID-19 means “not now”, a mini-budget would see analysts scouring the assumptions behind forecasts for iron ore prices, economic growth, revenue and spending. Are they too optimistic? The pandemic makes forecasting more difficult, if not almost meaningless. Few readers will have forgotten Treasury’s wild miss in costing the initial phase of the JobKeeper wage subsidy at $130bn for six months, covering six million workers. The econocrats, chastened, revised it to $70bn after the take-up rate was just over half of what was expected. The Economic and Fiscal Update on Thursday by Josh Frydenberg and Finance Minister Mathias Cormann is based on Victoria’s lockdown lasting six weeks, success in suppressing the virus and adherence to the three-step reopening elsewhere, and a return of some international travel in January.

That may be a heroic call given the outbreak in Greater Melbourne and likely additional restrictions if case numbers don’t improve soon. What underpins hopes of steady reopening of the economy is that citizens will adhere to social distancing, practise good hygiene, get tested and self-isolate, and that contact tracing can cope with a spike in infections. In the presentation, the Treasurer highlighted Australia’s solid medical performance, compared with other nations, as well as our relative economic strength. It was a pep talk, for sure, to keep the faith and set off for a climb up the mountain in front of us. Yet things are going to get worse. The headline unemployment rate is expected to peak at 9.25 per cent in the December quarter; the budget deficit is set to rise from $85.8bn last financial year to $184.5bn this financial year.

It’s going to be a bumpy ride, as Reserve Bank governor Philip Lowe warned this week, with some driving in heavy fog. In calendar 2020, even with mammoth stimulus spending, Treasury is forecasting gross domestic product to plunge by 3.75 per cent, before rising by 2.5 per cent the year after. Of course, without the injection of $289bn, or 14.6 per cent of GDP, the economy would be cactus. Keeping people close to home has produced a rebound in household spending. But the battering of business confidence and continuing uncertain outlook are hurting investment and that will be a handbrake on how fast we can grow when the crisis passes.

The Morrison government has to walk a fine line in its messaging. While there’s probably no better place to be than Australia during the pandemic, as the Treasurer claimed, many families are hurting; when income supports are reduced and policy struts possibly taken away, there will be a brisk reckoning for companies, sole traders, breadwinners and the jobless. The strength of public finances, and the government’s willingness to spend, means it can keep running up a tab as long as it sticks to its principles of targeted, temporary and proportionate assistance. Giving is much easier than taking things away. Reducing Canberra’s footprint won’t be a popular selling point as we approach the runway to the next election.

The October 6 budget is the main event, a daunting task for the Treasurer. There are so many important moving parts beyond mere taxing and spending — reducing regulation, restructuring industries, cutting energy costs and making workplaces more flexible — that raise the degree of difficulty. As budget maven Chris Richardson noted after the update, the government not only has to “go hard” in doing whatever it takes to deal with the fallout, it has to “go smart” to implement reforms that get the economy fit and increase our growth rate. That’s where the politics of lowering tax or reducing union control are not only tough but, as the past decade shows, also toxic. For those alarmed by huge deficits and rising debt, expected to hit a gross $850bn, Mr Richardson says if we can get the economy right, the budget will follow.

That’s what the Treasurer’s policy marketing needs to focus on. By all means, let’s talk up our resilience and sacrifices, our solid fundamentals and wonderful endowments, but it’s time to break the news to Australians about reform priorities. There will be more disruption, not less, as the economy emerges from this induced calamity due to a viral shock. Mr Frydenberg must pursue policies that enhance how we use our precious capital, remove impediments to expansion, hiring and innovation, and level with Australians about how we earn our way. Revival has to be led by business, not the state’s heavy hand. Again, this won’t be easy to pull off with a defective, hyper-partisan national parliament and a flighty media animated by Twitter hit squads. The Treasurer will get pushback from within Coalition ranks, too, if he is serious about ending the grift, rent seeking and awful waste in Canberra.

The communications blitz also has to be carried by Scott Morrison and his frontline ministers of the pandemic response. Our vigilance on suppressing COVID-19, and living with it wisely until a vaccine emerges, waxes and wanes. Complacency can creep in, as can confusion, given states and territories are at different stages of social restrictions and activity. There can be no confidence, no sustained job creation and no meaningful recovery until the medical crisis subsides. We can win skirmishes against COVID-19, but not the war if we don’t stay smart on suppression and get momentum back into the economy. If we can achieve those rosy assumptions on reopening of workplaces and borders, and not get stuck in a stop-go-stop-go wash cycle, we’ll get Australia back on the fast track and, at some point this decade, the federal budget back in the black.