Vaccines, open borders and business are keys to growth

Australia has no room for economic complacency, which is why states intent on leaving lockdowns or hard borders in place longer than necessary need to think again. In his annual address to the Anika Foundation on Tuesday, Reserve Bank governor Philip Lowe said many small businesses bearing the brunt of Delta lockdowns were in “wait, survive and see mode”. “There is a limit to how long they can wait” for restrictions to ease before they fold, he warned. Government assistance is helping, but the longer they have to wait, the harder things become. “So the sooner we can open safely the better,” he said. In a blunt message, Dr Lowe said the economy had contracted, probably by at least 2 per cent, in the three months to September. After unemployment fell to 4.6 per cent in July, it could reach the high fives for a short period. Vaccinations offered “a clear path out of the current difficulties”, he said, underlining the importance of reopening for business and travel when vaccination rates covered 70 and 80 per cent, according to the plan agreed by national cabinet. On the positive side, Patrick Commins reports, Dr Lowe expects that while Delta is delaying progress, “it is not expected to derail our resilient economy”. He expects the economy will return to growth in the December quarter and to continue recovering next year.

Despite Covid, property prices have soared by 18 per cent in the past year, putting home ownership further out of reach for many. But Dr Lowe ruled out cooling the market via higher interest rates. Doing so, he said, also would mean fewer jobs and lower wages growth – a poor trade-off in the current circumstances. His comments reflect the mixed performance of various economic sectors. Data from MYOB, based on transactions from thousands of the software provider’s clients across the week to September 6, shows small, customer-facing businesses in locked-down states suffering through the most severe cash crunch since last year’s ­national shutdown. Electronic fund deposits into NSW and Victorian small businesses are 30 per cent below pre-Covid levels. The National Australia Bank’s monthly business survey, released on Tuesday, shows business conditions and confidence improved slightly last month. But they are still in negative territory after plunging in July during lockdowns in NSW and Victoria.

In the agriculture sector, a welcome combination of good prices, good weather, good yields and poor harvests in Europe and North America has produced a bumper year. A new outlook report from the Australian Bureau of Agricultural and Resource Economics and Sciences, the government’s commodity forecaster, expects farmers will reap a record $73bn for their produce this year. The results put the sector on track to achieving the government’s goal of agriculture exceeding $100bn in value by 2030. But labour shortages must be filled. While the sector is going gangbusters, states and territories need to adopt more flexible quarantine measures, including allowing overseas workers to quarantine in homes and on farms. Groups such as AgForce, AusVeg and the National Farmers Federation are warning of a casual labour supply gap of more than 11,000 workers early next year if international borders remain shut. More than 10,000 workers from Vanuatu, Tonga, Samoa, Solomon Islands, Fiji, Kiribati, Papua New Guinea and East Timor have arrived in the past year, when overseas worker programs resumed after a pause at the height of the pandemic. The nation cannot afford to waste current optimal conditions. It is unacceptable, as AgForce chief executive Michael Guerin says, that crops are being ploughed into the ground or not being planted because of labour shortages.

The risks and uncertainties created by the pandemic are looming large. But the Paris-based OECD is forecasting a commendable 4 per cent in growth for this year and 3.3 per cent next year. In its first snapshot of the Australian economy for almost three years, the OECD agrees with the RBA that the economy will contract in the third quarter of this year, “before state-based restrictions can begin to be eased as higher vaccination rates are achieved”. Conversely, it warned, significant new virus outbreaks in other states might deepen the economic shock. A ratcheting up of tensions with China could weaken trade activity. And problems with the vaccine rollout or vaccine hesitancy could delay reopening. But as of Tuesday the rollout was advancing apace. More than 23 million vaccine doses have been administered. More than 43 per cent of Australians over 16 are fully vaccinated and 68.5 per cent have had one dose.

The OECD, now headed by former finance minister Mathias Cormann, is also looking beyond Covid to the need for long-term economic reform and managing our ageing population, Geoff Chambers reports. As The Australian has argued before, the nation is too reliant on personal income tax revenue. This was not sustainable with an ageing population, the OECD noted. And even with legislated tax cuts, “bracket creep is likely to result in the average personal tax rate of many workers rising over the period to 2030, especially those in the low-middle part of the income distribution”. Its proposals include increasing the GST or broadening the base. Compared with other OECD countries, Australia’s consumption tax is “relatively low”. Company tax rates should be reviewed, it said, because the two-rate system of 25 per cent for small and medium businesses and 30 per cent for larger companies risked distorting firms’ operations. However commendable economically, the OECD’s broad proposed reforms would be a difficult sell by a reform-shy political class to a suspicious electorate. But as Bob Hawke, Paul Keating, John Howard and Peter Costello recognised decades ago, Australia needed major reforms to pave the way for decades of prosperity. Post-pandemic, with higher public debt, a fresh round of major reform cannot be avoided indefinitely. It would help improve economic resilience and better prepare the economy for future shocks. In the coming months, however, opening up safely post Covid, and remaining open, will be our main economic challenge.