Never waste a crisis to get economic game in order

Treasurers can say the dopiest things. For sheer foolhardiness in the arena it would be hard to beat former Labor custodian Wayne Swan’s opening line on budget night 2012: “The four years of surpluses I announce tonight”. An ocean of red ink flowed for years. The porch light is still on for Swanny’s surplus to find its way home. Last April, Josh Frydenberg declared “the budget is back in the black and Australia is back on track”. We shall soon see whether the Treasurer got ahead of himself. Treasurers-in-waiting are not immune from sloppy talk either. Not long ago, Labor’s Jim Chalmers was claiming the economy was busted and the Morrison government needed to get over its surplus fixation and to spend. Now, after the bushfires and the coronavirus outbreak, Labor’s Treasury spokesman is a stickler for fiscal rectitude, surpluses and debt reduction.

Given the budget update’s cautious coal and iron ore price forecasts, a lower dollar, low interest rates and solid employment growth, a surplus may yet materialise. The budget is essentially in balance, a reasonable fiscal starting position if things turn for the worse. The virus outbreak is a shock to the real economy and confidence levels, from consumers to financial markets. The spending slump is being felt in tourism and education as the February 1 ban on travellers from China bites hard. With supply chains disrupted, construction, manufacturing, agriculture and retail are also experiencing difficulties. The ensuing uncertainty from the spread of COVID-19 has wiped $129bn off our stockmarket in the past three days.

The severe acute respiratory syndrome episode in 2003 can give us only a partial sense of the expected economic fallout. The good news is the rebound in China’s economy post-SARS meant we barely missed a beat after Beijing pumped up the fiscal stimulus. But China’s economy is four times larger now and enmeshed in the global trading system. The fallout is likely to be much worse, especially for us, given one-third of our exports go to China. Australia could experience negative GDP growth — that is, a fall in national output — this quarter, as well as a drop in the three months to December last year. International Monetary Fund economists pared back global GDP this year from 3.3 per cent to 3.2 per cent. Mr Frydenberg says the message from Treasury is the impact of COVID-19 will be more severe than the bushfires. Again, Scott Morrison is disinclined to panic. After all, the economy has solid foundations. “I can assure taxpayers,” the Prime Minister said, “that we’re not a government that engages in extreme fiscal responses.”

Is that bravado from a former treasurer? No and yes. Mr Morrison won last May promising to run a tight budget, with tax cuts and no new taxes, and to pay down debt over the medium term. But if he thinks the economy is hunky-dory, that’s also worrying. Old-school politicians and officials, though few are on the ground these days, know the adage “never let a good crisis go to waste”. The COVID-19 outbreak is an opportunity for Mr Morrison and his team to do some home renovations and explain to the public that reforms are necessary to ensure we are prepared to meet the next crisis. As we have often argued here, that involves fixing the supply side of our economy so we can get faster GDP growth, produce more for certain levels of labour and capital, make our businesses more competitive, and reduce the hurdles they must go over to invest, innovate or negotiate with their workers.

Governments should make less use of the pork barrel in target electorates and take the cost-benefit advice of the experts at bodies such as Infrastructure Australia to deliver the roads, rail, ports and water storage the nation needs. We must develop the skills base, especially in trades, if we are to be equipped to reap the benefits of mega projects such as Future Submarines. Key advisers keep arguing weak productivity growth is a drag on wages, living standards and asset values. As Mr Frydenberg frames the May budget, his advisers and message shapers will be seeking a rhetorical leap to reset the economic story. A good line or two won’t cut it. The test for the Morrison government is to look beyond this crisis, even the next election, and set out a game plan to improve the dynamism of the economy, to pare back the dead wood in the economy, including Canberra’s own footprint, and to go for growth.