Securing economic revival has become more difficult

In the early phase of pandemic-induced economic shutdown, the Morrison government adopted a “whatever it takes” approach to splashing taxpayer funds on welfare to save businesses and jobs. Income support measures, such as the JobKeeper wage subsidy and a coronavirus supplement, had the virtue of being temporary, targeted, seemingly proportionate and delivered through established payment channels. In late March, the number of COVID-19 cases was rising by more than 20 per cent a day; Treasury was contemplating a fall in gross domestic product of more than 20 per cent in the June quarter. In the urgency to act, size mattered, and so did simplicity; best practice or tried and tested policy took a back seat. At the time, the anticipated cost of tax breaks, income support, loan guarantees, free childcare and the like came to an eye-watering $320bn, or one-sixth the size of the entire economy. We argued this “neo-Whitlamist fiscal freak show” could not become the new normal.

In many respects that was a simpler time: putting businesses in hibernation, easing rules on welfare eligibility and anticipating an economic snapback. The idea was to get as much spending into the economy as possible in the shortest time. Four months on, the economy is better than anticipated, with a clawback of 210,000 jobs last month. The drop in GDP won’t be anywhere near the worst-case official forecasts. Yet the latest infection outbreaks in Victoria and NSW have dented confidence; borders are closed, our second-largest economy is in isolation and further restrictions loom. In any case, the Morrison government is reining in individual income support by $300 a fortnight at the end of September, as it promised it would, but also extending payments for another six months. There will be two tiers of JobKeeper based on hours worked, changes in eligibility for employers and a lowering of coronavirus supplement payments. This finetuning will cost the budget $20bn.

In its review of JobKeeper, Treasury found 875,000 part-time workers, or one-quarter of people covered by the $1500-a-fortnight scheme, will get an average fortnightly pay bump of $550. Some of this windfall replaces wages from second jobs or welfare payments. In any case, Treasury said the flat rate blunted incentives for workers to seek more hours as businesses reopened. These disincentives would become more pronounced across time and as the economy recovered, it said. In this vein, more will be asked of the unemployed to search for work. Many receiving payments will be able to earn up to $300 a fortnight without losing the reduced $250 coronavirus supplement. These changes apply until the end of the year, and Scott Morrison signalled higher dole payments would extend into next year, although not to the scale sought by welfare and business groups.

The government hopes by next March only one million will be on the revamped wage subsidy, from 3.5 million now. That puts employers under the pump, but improving work incentives, cutting the fiscal cost and getting businesses to stand on their own feet are higher priorities. The Business Council of Australia sees the creation of two million jobs as a “colossal task”. But it is not impossible. Reserve Bank governor Philip Lowe said on Tuesday the labour market had “turned the corner”. He said the crisis JobKeeper and JobSeeker payments were manageable and affordable, given solid public finances and low interest rates; the debt could be repaid across time. But Dr Lowe slammed the voguish Modern Monetary Theory push to simply “print money”. As we’ve said before, there is no free lunch and a day of reckoning awaits spendthrifts.

On Thursday Josh Frydenberg will give us a sense of the government’s running tab, the shape of the October budget and a short-term plan for recovery. It’s predicated on banking the gains from suppression of COVID-19 and continued reopening of commerce. Now that Labor has found its voice on debt and deficits, the Treasurer can no doubt count on opposition support for some of the hard choices he’ll make in the expenditure review committee. More important, however, is getting the price signals right for expansion, hiring and innovation, removing regulatory impediments to projects, making workplaces more flexible and using this moment to upskill workers for jobs of the future. Australia is being remade. The challenge for the government is to enact reforms to take full advantage of our post-pandemic opportunities.