Coronavirus and its lethal politics chipping away at life as we knew it

As Victoria shows, the discipline of the ­majority is undone by the ­irresponsibility of a few. There will be no return to normal.

Illustration: Tom Jellett

The road to combating COVID-19 is getting longer and steeper. The strains on individual psychology and fortitude will intensify. Forecasts for the global economy were downgraded this week, while the outbreak in Victoria reminds Australians the risk from the virus lurks permanently in the shadows.

Australia is changing, perhaps less than many other nations, but the life we knew is being stripped back. That initial joy we felt a month ago that “things are opening up” is now tinged with harsh realism: short of a vaccine, there is no return to normal. For many people, any certainty about jobs, wages, retirement income and family prosperity is inexorably called into question.

Our ability to deny a second wave is now being tested in Melbourne’s suburbs. Josh Frydenberg says success in this battle is “absolutely critical”. Victorian Premier Dan Andrews, facing an erosion of confidence in his management, says the state is on a “knife edge” and is imposing 100,000 tests over the next 10 days, including many based on doorknocking.

Scott Morrison knows the stakes. Failure to contain the outbreak will shatter confidence and damage the economic recovery. The PM has warned the global situation is deteriorating, with a million new infections weekly, but he says the Victorian outbreak is being tackled and Australia remains “on track”. Health Minister Greg Hunt says Victoria is not seeing “a second wave” but warns it has “the potential to go bad”.

Outgoing Chief Medical Officer Brendan Murphy says COVID is “accelerating around the world” but has advised the national cabinet that Australia remains “ready to respond to outbreaks”. Earlier, Morrison had said there was no need for anxiety and that new outbreaks “should not come as a surprise” since they were expected.

This is the immediate test that Victoria and Australia must pass. “The Victorians are concerned and rightfully so,” Frydenberg tells Inquirer. “This also goes to the confidence of business and political leaders in other states to carry through with opening up the economy. We’re all in this together.”

The International Monetary Fund’s latest forecasts offer a chilling picture of a deeper global ­recession. The world economy is forecast to shrink by 4.9 per cent in 2020, the worst since the Great Depression and 1.9 percentage points worse than the April forecasts. Chief economist Gita Gopinath says: “No country has been spared. This crisis like no other will have a recovery like no other.”

Amid the gloom the IMF has offered an improved forecast for Australia, a 4.5 per cent contraction, compared with its earlier 6.7 per cent forecast — the only advanced nation to look better. Consider the shattering forecasts of shrinking economies in 2020: Italy contracting 12.8 per cent; France 12.5 per cent; the UK 10.2 per cent, the US 8 per cent; and, for the ­security hawks, China looking resilient with a 1 per cent expansion. These figures foretell profound ­geostrategic turbulence.

The US outlook is alarming. The Wall Street Journal found that 33 states including Arizona, South Carolina, Florida and Texas showed average increases in cases compounded by the fact that states are easing restrictions. The US has registered 2.3 million cases so far, with White House pandemic expert Anthony Fauci saying there is a “disturbing surge of infections”.

The economic hit to the US guarantees a blow to market con­fidence, let alone to the Trump presidency.

“The global economy is worse than many people think or understand,” Frydenberg says. “That’s because Australia has been more successful in preventing the spread of the coronavirus and in limiting the impact in terms of GDP and unemployment.”

But Australia’s recovery will be constrained by the world’s ­contraction. Relative performance is no compensation for hardship.

The Morrison government anticipates that the official unemployment rate will rise to 8 per cent or above in the September quarter. But effective unemployment now is about 13 per cent. Speaking in the teeth of the Qantas job-loss announcement, Morrison has ­endorsed the demand from many business leaders: there will be some form of targeted ­ongoing support when JobKeeper expires in September.

Qantas chief Alan Joyce warns the global aviation industry has shrunk by a third. He has sacked 6000 staff, or about 20 per cent of his workforce, and has signalled that some of the other 15,000 stood down will remain stood down through 2021.

For Qantas, reopening domestic borders is critical. But reopening international aviation remains forlorn. That depends to a large extent on a vaccine, and Hunt says there is “no certainty” a vaccine will eventuate.

Morrison says: “We know that there are sectors that will continue to be held down by the COVID recession because of the restrictions that are in place” and “we are just working through the best way to target and deliver that support”. He says decisions will come “soon” and the government is “closely connected” to these needs. Public funding beyond September is essential for a range of industries; its size and design loom as a critical test for the PM.

The economic and social upheaval from COVID-19 will change Australia in ways beyond the ­control of daily politics.

Drawing on his experience, former long-­serving treasurer Peter Costello tells Inquirer he anticipates that federal government debt will reach one trillion dollars when the final COVID balance sheet is drawn.

Costello says: “Now to reduce that debt, if you pay the debt off a budget surplus at about 1 or 2 per cent of GDP, that would take you about 25 years. But that’s 25 years of continuous surpluses. The only precedent in commonwealth history is the period between 1997 and 2007 when we had 10 continuous surpluses and paid off our debt.

“But given we haven’t balanced the budget since 2007 — that’s 13 ­deficits in a row — it is beyond ­belief we are going to snap out of this and do 20 surpluses in a row. It just won’t happen. We’re not going to pay off this debt. We’re not going to have 10 years of continuous surpluses, let alone 20 years. We will carry this debt for a long time — I would say for 20 years. That’s a generation.

“What flows from that is we will be a higher-spending country. We increased spending in 2009 in ­response to the GFC and we’ve never got it back to where it was. We have increased it again in 2020. That means we are going to be a higher-taxing country with higher deficits and higher debt. All of that adds to the fact we will be a lower productivity country and that’s the key point. We will be moving from what I regard as the Australian model to much more of a European model. The Australian paradigm is changing. It used to be that when we compared ourselves to Britain, France and Germany, sometimes even America, we were a low-tax, low-spend, low-deficit, low-debt, high-productivity, quite entrepreneurial nation. But now we’re moving much more into the middle league of debt countries.

“Now the public might like that. I’m not getting into the argument whether this is good or bad. A lot of people say this is good, that this is what people want. But this wasn’t my model. I don’t think it was the Keating model. My criticism is this is a low-productivity model and a low-productivity society.

“My point is the Australian model, by world standards, ever since we began opening up our economy, was a low-spend, lower-tax, lower-deficit and, in my time, lower-debt model, with a more open economy than Europe. We saw this as the key to higher productivity. But from 2009 onwards we moved another way — into a high-spend, higher-tax, higher-debt model, and the COVID crisis has amplified that move. If we want to go back that could take a generation. So the Australian model is changing.

“If the Liberal Party goes down this track, it will never run into ­opposition from Labor — because Labor will say we want more spending. That’s why it’s so easy to go down this path. If the Liberal Party isn’t pulling back on this path, nobody else is going to pull back. Labor will always position to the left.”

The Morrison/Frydenberg framework does not concede the Costello argument. It would be surprising if it did, since that would constitute a repudiation of the core Liberal Party principles. If Costello’s analysis is correct, the issue it raises is what does the Liberal Party stand for post-COVID? If the Morrison government presides over the shift to a different Australian model, what are the electoral implications?

It would be wrong to conclude more government intervention means Labor’s electoral success, since the story of recent years has been Labor’s victory in the cultural wars and its defeat in general ­elections.

Morrison has defined the reform agenda he wants — an open economy, competitive markets, low taxation, more skills, infrastructure investment, labour market reform, a better federation and higher productivity.

But the challenge Morrison faces is unprecedented in decades. It lies in the vast chasm between today’s damaged COVID economy and his declared aspiration. The PM has a five-year goal — two parliamentary terms — aiming to hike the economic growth rate by more than 1 percentage point above the pre-COVID trend so that by 2025, GDP is back where it otherwise would have been.

Many economists doubt whether this is feasible. It means a growth rate of about 3.5 per cent, and Australia hasn’t seen that vista for many years.

“This is the time to do real reform,” Frydenberg says. He argues the Liberals will remain true to their principles: “There is an inevitable debt burden in the light of the coronavirus. This has led to more spending and weaker revenues. Nobody is under any illusions about the years it will take to recover. But I think we can recover strongly given our position today.

“I believe there will be a global debate, and certainly a debate in Australia about the future role of government. We see government in recovery not as a spender but as an enabler. Of course, we need to target fiscal policy to those in need. But there must be limits. This goes to the heart of the recovery strategy and how we see the debt burden. We envisage paying back debt by growing the economy as opposed to relying upon higher taxation, more regulation and allowing indefinite spending.

“Interest rates around the world are very low and that’s going to be the story for a long time. This is a world where governments will have to do the work. I see the ­supply-side agenda as critical to building the productive capacity of the nation.

“Our emphasis will be on skills, infrastructure, tax reform, more flexible labour markets and cutting red tape. We’ve got the new national cabinet and the treasurers working together seeking to revitalise federal-state relations in a way that offers real hope. The fault line in politics will be about different views on the role of ­government. Ultimately, the private sector is at the heart of job ­creation, with government creating an environment for business to ­invest, grow, innovate and hire. Capital is mobile and business is not sentimental.

“It is always easier for government to say yes and spend — it’s a lot harder to show restraint and say no.”

But Frydenberg’s pledges, which also involve the re-election strategy, are daunting in terms of the sheer policy challenge.

A comparative international analysis of fiscal support measures during the crisis shows that of 22 nations, Australia is eighth in terms of the quantum. Totalling $134bn at 6.9 per cent of GDP, Australia’s stimulus put it at the bottom of the top third of stimulus nations. The seven nations that have spent bigger are New Zealand at 16 per cent of GDP, Singapore at 15 per cent, Japan at 14.9 per cent, the US at 10.2 per cent, ­Canada at 9.6 per cent, Germany at 7.6 per cent and Russia at 7 per cent. This analysis was done by the government.

“It’s not a straight linear comparison,” Frydenberg says. Fiscal stimulus in each country has been heavily shaped by the magnitude of the COVID crisis along with the intensity of the lockdown enforced. It is noticeable that New Zealand, with one of the toughest lockdowns, has the biggest stimulus. While the US has struggled with high rates of infection and ­ignited a substantial stimulus, other badly affected European nations such as France at 5.6 per cent and the UK at 5.7 per cent have had smaller fiscal commitments than that of Australia. “We were prepared to spend what was required,” Frydenberg says. “The key is our programs were demand-driven. If more money was required, it was going to be provided. Because we flattened the curve, the ultimate bill was smaller than expected. If we had gone into the lockdown the way that ­European nations did, our bill would have been a lot higher.” ­

Indeed, it was initially forecast to be much higher. Asked about the extent to which the health factors would constrain economic recovery, Greg Hunt is optimistic: “We think we can get most of the domestic economy back, on a staged basis that may vary from ­locality to locality.” He warns that the international border is not reopening this year, with any timetable for next year still uncertain.

“For the foreseeable future, Australians will have to change their physical distancing patterns,” Hunt says. “There is no certainty we will get a vaccine, though we are working hard to get one. Our task is to strike a balance between allowing economic recovery while at the same time controlling the virus.”

The problem is the ability of a minority or a policy mistake to trigger a breakout. The Victorian government blundered in its quarantine provisions and its weak stance against the Black Lives Matter protests. Hunt says the breakout came “two and a half weeks after the protests”, where four protesters were found to be infectious.

“There was a relaxation in parts of the community on social ­distancing,” Hunt tells Inquirer. “Many people thought and said, ‘If it’s OK for 10,000 to gather in close proximity then it’s OK for 10 to gather for family events.’

“There’s no question the protests contributed to a sense of double standards. That sense was real and widespread.”

This is the lethal politics of COVID. The discipline of the ­majority can be undone by the ­irresponsibility of the minority.