Recovery needs more doing and less planning

Five-year plans don’t have a particularly encouraging history, from those in the old Soviet Union to modern-day China. They’ve often led to famine, civil unrest and, naturally, further encroachment of government. Bureaucracies, however well-meaning, struggle to allocate resources efficiently because they cannot know the needs and wants of households and businesses, let alone innovate with the same vigour. So perhaps promising a “five-year plan” to lift the economy out of the deep rut it has fallen into was an inauspicious choice for the Coalition government — a few quality reforms would suffice.

Whatever they call it, government will have to make changes. The second quarter national accounts revealed the scale of the economic damage caused by the pandemic and our response to it. In just three months almost $35bn of income evaporated, the total number of hours worked collapsed 10 per cent, and federal and state governments — on taxpayers’ behalf — burned through almost $83bn in savings. Those figures exclude the impact of Victoria’s even harsher second lockdown, which might be extended further. Many economists tip the economy will shrink in the third quarter, too.

The government’s first priority must be to reopen state borders, closure of which is crushing tourism and border communities, and riding roughshod over Australians’ right, perhaps constitutional, to travel freely within the country. Queensland and Western Australia fared relatively better in the national accounts because they didn’t shut down their economies as much as other states, not because they have closed their borders, as the WA and Queensland premiers have naively claimed. Six months into the pandemic and national cabinet still has not determined a definition for hot spots, clusters, and when and how they should trigger a response. That’s creating major uncertainty.

If the rest of the plan encompassed genuine tax and industrial relations reform, rather than platitudes and sound bites, we’d be doing well. The government must drop its trademark timidity. The modest tax cuts slated for 2024 — which reverse some of the bracket creep across the past decade — should be brought forward to begin early next year. It’s this so-called third tranche that packs the economic punch: lower marginal rates and a simplified tax schedule. The inevitable claim that bringing tax cuts forward is somehow “unfair” ignores the reality of what has occurred: perhaps the biggest transfer of wealth from top-rate taxpayers, who pay the bulk of income tax, to everyone else in the nation’s history. As the Australian Bureau of Statistics said this week, social security payments to households surged 42 per cent in the second quarter. It is higher-income earners, ultimately, who will have to service the surge in debt to fund JobKeeper, JobSeeker and the alphabet soup of other support payments.

Industrial relations reform, while politically more challenging, is equally if not more important given the surge in joblessness. When measured realistically, it is likely to exceed 10 per cent. However controversial the recommendations of the government’s five working groups tasked with simplifying the so-called modern award may be, it must prosecute them. The temptation to put off reforms and commission yet more reviews will be strong. The Grattan Institute’s outgoing director, John Daley, made a sobering finding this week, having trawled the OECD’s recommendations to Australia since 1972. Between 1984 and 2001, through the Hawke, Keating and early years of the Howard governments, these recommendations were broadly accepted. “But from roughly 2003 the record is a lot more patchy … policies that have run into the sand include reducing the gap between the company tax and top personal income tax rates, implementing a mining resource rent tax, reviewing negative gearing, creating competitive neutrality among Australian ports, and aligning the eligibility ages for super and the pension,” Mr Daley said. We may not agree with all those proposals but a culture of commissioning reports that gather dust cannot continue.

Households and businesses are best positioned to plan and generate prosperity; the government should focus on simplifying tax and workplace laws to make it easier for them to do so. Victoria may have copied China’s response to the coronavirus pandemic; we don’t want to copy China’s hands-on planning strategy too.