Rings of containment on a bumpy economic recovery

“We’re all Melburnians now,” Scott Morrison said on Wednesday, a nod to JFK, as three rings of containment looped the southern capital. Given the NSW-Victorian border had only closed at midnight, a touch of Melbourne elan slipped into Sydney. Collingwood’s Magpies trained at a chilly Henson Park, home to the Newtown Jets rugby league club, while Hawthorn’s stars had earlier frolicked in the surf at Coogee. The ripples from Victoria’s lockdown will become a second wave of economic pain, reaching far beyond our second most populous state. Victoria accounts for one quarter of national output; its ache will be everyone else’s as supply chains are disrupted, more jobs are lost, growth is curtailed and a sense of dread seeps back in among employers and, workers. Stop-go-stop-go is a destroyer.

So Canberra is coming to the rescue while Victoria gets its outbreak under control. Taxpayers will be on the hook to support demand. As Josh Frydenberg told Adam Creighton at an exclusive Q&A for this newspaper on Tuesday night, the new lockdown is set to cost the economy $6bn in the coming six weeks. The Morrison government will address that substantial slug in the next phase of income support, after the late September expiry of JobKeeper and JobKeeper supplement. Details will come in its mini-budget on July 23. A wage subsidy of $1100 a fortnight has been flagged. While the Treasurer has said payments will be targeted and temporary, the overall cost will be higher than thought only a week ago because of Victoria’s infections spike.

As Mr Frydenberg said at our event, consumer and business confidence had improved with manufacturing activity getting back to where it was before the pandemic. Mobility around cities was up and generating retail spending. The shutdown will stifle recovery, so the Treasurer has opened the door to fast-tracking personal income tax cuts. “We do want to boost aggregate demand, boost consumption, put more money in people’s pockets, and that’s one way to do it,” he said. The tax cuts, due in July 2022, would lift the 19 per cent rate’s application from $41,000 to $45,000 and the 32.5 per cent rate from $90,000 to $120,000. In a crisis era of “whatever it takes”, however, those cuts are priced at a modest $8.7bn in the first year.

It’s clear industries are running at different speeds, with most businesses rejigging operations to reduce the cost of labour, rents, travel and equipment. The latter is a bad omen, as business investment has long been weak and a key reason behind our productivity slump. Changes to the instant asset write-off have had a stimulatory effect, particularly on vehicle sales. But more tax breaks for business are needed. The Treasurer was preparing to introduce an investment allowance, first proposed by Labor and pushed by business, in his second budget, which has been pushed back from May to October. It would be odd if this element were missing from the economic statement in a fortnight.

We knew there would be outbreaks, but the sudden jump in Victorian cases has shaken confidence in the ability of Premier Daniel Andrews to manage it. Yet the Prime Minister has stressed for months we have the medical facilities, testing capacity and tracing expertise to meet the challenges. This underpins our ability to get people back to work, school and social events, and build momentum for the post-pandemic world, albeit without a vaccine. As Reserve Bank governor Philip Lowe said after holding the line on a 0.25 per cent cash rate, recovery will be bumpy and will depend on containing the virus. As Mr Morrison explained, Victoria’s success is the nation’s success.

Dr Lowe’s advice is that the nature and speed of recovery remains “highly uncertain”. He’s an unreconstructed optimist. So the stakes have been raised again for economic reform, to empower the private sector to expand, invest, innovate and hire people. Canberra has to get the fiscal basics right, which it has, Treasury’s spectacular forecasting error aside. But the harder task is to fashion a more dynamic economy to raise productivity, profits and wages. The Morrison government must work with the states and others to get better incentives, prices and processes for infrastructure, skills, workplace rules and innovation. Can the Prime Minister and Treasurer break a two-decade complacency on supply-side reform? Will Anthony Albanese and Labor, and a motley bunch of premiers and chief ministers, hinder or help them in a spirit of national revival?

The infections setback aside, a more positive national polity is possible. Witness the problem-solving, nimble forum of the national cabinet. Or the tax reform proposals coming out of NSW. There are five working groups on industrial relations, convened by the federal government, with employers and unions seeking more flexible workplaces, simpler awards and better wage setting. A bold new compact on skills may emerge via the revamped federalism framework. There is more going on to lift productivity, for sure, but it’s predicated on trust, political will, energy, imagination and resilience. It’s also largely dependent on keeping Australia open and safe, however we can, using the tools and knowledge we’ve accumulated, and building on the significant progress we’ve made.