Pandemic recession’s bill shock

If Josh Frydenberg stays as long in his current role as his Liberal forerunner Peter Costello, who was custodian for almost 12 years, the Treasurer may again be able to claim “the budget is back in black”. That’s the grim analysis by the Parliamentary Budget Office, foreshadowing another decade of fiscal red ink and an additional $500bn to $620bn of net debt because of the meteor strike of COVID-19. The jump in net debt is due to the Morrison government’s “whatever it takes” rescue measures and harsh shutdowns shrinking the economy, for years, leading to less revenue. Coming into the crisis, net debt stood at $375bn, so trillion dollars here we come! The message from the PBO study, Scott Morrison says, is “more than ever, we have to be careful” about spending, and that measures are well targeted.

We will get an update on the budget next month, and the full catastrophe in October. But we know this: every dollar of new spending is money borrowed from the future. There’s fierce lobbying to extend the stimulus to new areas, and to prolong beyond September the JobKeeper wage subsidy to business and temporary doubling of JobSeeker to the unemployed. The HomeBuilder program, a $688m cash splash to the construction industry, has raised concerns among Coalition MPs. They’re worried about leaving long-lasting heavy burdens on taxpayers. While the government is alive to the multiplier effects of assistance to builders and tradies, in the cold light of day the policy looks like a pandemic version of an election sop. The risk is every industry in distress will get a prize, with the policy virtue being in minimising the damage to taxpayers for these one-off deals. Everybody hurts.

So how to pay for all this largesse? Two months ago we described the cascading emergency responses as a Whitlamesque fiscal freak show. With revenue compromised for several years, the temptation will be to raise taxes, say on high-income earners or the banks. Three years ago Mr Morrison whacked the big five banks with a levy, telling them to “pony up” for budget repair and not hit their customers. “They already don’t like you very much,” chided the then treasurer. On Friday, the Prime Minister said the best way to raise revenue was to get people back into jobs and the economy moving again. We agree. Taking support away from business, however, may prove to be trickier than lifting restrictions on social life and commerce, although that is the duty of state and territory leaders. This week the Treasurer confirmed our economy is in recession, after negative growth in the March quarter, amid forecasts gross domestic product could slump by one-tenth this quarter with unemployment rising to 10 per cent.

Our three-decade golden age of growth is over — the cost of flattening the growth of COVID-19 cases and saving lives. In 1990, after a policy-induced crunch on runaway demand, debt and asset prices, Paul Keating said it was the “recession we had to have”. The silver lining out of that calamity was low inflation and what the former prime minister claimed was a “shift to a sophisticated, productivity-based wages system”. The first prize has endured, but the second is broken. We need some wins from the pain of this economic disaster. The nation will be left with a vast reserve army of labour if we don’t simplify the award system and make work more flexible. The government has brought capital and labour together to forge a new industrial compact over the next four months, with an emphasis on productivity and job creation.

The way forward, as Mr Morrison explained recently, is to prioritise policies that make the economy run faster. It will require the spirit, focus and decisiveness of the unified national cabinet to solve a range of entrenched problems on the supply side of our economy. Reducing the burden of taxation and regulation on business will revive investment. As the Productivity Commission has just advised, reform of vocational education and training can yield huge benefits, plugging skills gaps and raising national output. We can’t simply meander along and hope that something comes along to save us or provide a pay rise, like a boom in export prices. The “bill shock” from the PBO, for the pandemic recession we could not avoid, means a debt-laden nation can’t revert to business as usual.