Road to coronavirus recovery: a working guide

The PM and his Treasurer need to use every policy lever to create jobs.

Illustration: Tom Jellett

Scott Morrison was out early in Canberra’s Fyshwick on a subzero morning to lay another brick in his JobMaker plan. At the dirty end of winter, he announced he was bringing forward $1bn in defence spending, including procurement, major projects and reservist pay, to underwrite 4000 jobs.

The Prime Minister told reporters on Wednesday, ahead of introducing into parliament a refresh to JobKeeper, that jobs were the “key focus of our government as we seek to grow out of the COVID-19 recession”. “Through any program my government is involved in, we are scanning and searching for every opportunity to keep people in jobs,” he said.

Job this, job that, will be the ear-splitting message from Morrison and his ministers until the next election, as it will be for Anthony Albanese’s Labor. The Business Council of Australia claims the task is to create as many as two million jobs in quick time. Employment is also the central bank’s “singular focus”.

“The first priority at the moment is to make sure people over the next couple of years have jobs,” Reserve Bank governor Philip Lowe told the House of Representatives economic committee this month. “If they don’t have jobs, it hurts the economy, it hurts society and it creates all sorts of problems.”

Morrison and Josh Frydenberg have the green light for a new deal, to spend whatever it takes under the cover of the pandemic and its policy-induced economic calam­ity. Oh, the irony and the insult: only the Coalition could get away with a Whitlamesque budget.

Spending too much is less of a political, social and economic risk than not spending enough on stimulating demand and job creation. Already the headline budget deficit for this financial year is $200bn, after sinking into the red by $100bn in the year to June. The Treasurer is set to deliver an ugly set of numbers on October 6: “Mr Speaker, the four years of deficits I announce tonight …”

Morrison and Frydenberg have raised expectations of supply-side reforms — including skills, workplace laws, energy costs and project approvals — to lift the economy’s speed limit and make it more dynamic. That won’t deliver immediately for the jobless and underemployed, although there has been some clawback of jobs lost.

Treasury estimates show nearly 700,000 people have gained effective employment since April, recovering more than half of the jobs lost or those who were stood down on zero hours. Yet the number of hours worked last month was 5.5 per cent below the pre-crisis level, suggesting more slack in the economy than the headline 7.5 per cent jobless rate reveals.

Uber-pragmatists Morrison and Frydenberg have instructed ministers to trawl their portfolios for job-making projects. Every policy lever at Canberra’s disposal, some such as industry and regional policy not used with vigour for decades, is about to be deployed under the umbrella of job creation. Even the business lobbies, habitually pushing for tax cuts, an investment allowance, red-tape reduction and infrastructure spending, have changed their tune on industry support and regional development.

“This is basically Labor’s ground,” former Keating government adviser and Reserve Bank board member John Edwards tells Inquirer of the emerging interventionist agenda. “More will need to be done on the fiscal front once the income support falls away.” Where does Labor go from here? Does it double down or can it find a credible alternative approach on jobs, Edwards asks.

What makes this big-spending grab bag, more Ronald Reagan than Margaret Thatcher, palatable for the Coalition’s base is that business will lead the recovery; the pumped-up public sector also will continue to grow.

Ensuring that can happen will be the independent RBA, joined at the hip with Canberra. Edwards says the Morrison government must sustain demand through spending, while the RBA needs to assist by keeping rates low — and both need to maintain this stance for long enough to bring unemployment down substantially.

In a new Lowy Institute research paper, The Costs of COVID: Australia’s Economic Prospects in a Wounded World, Edwards notes how the RBA’s role in the economy has “radically changed”.

Not long ago it was confined to pursuing inflation and employment targets. One possible way forward is a pact or understanding between the RBA and Canberra in which the bank undertakes to buy half of additional government debt, and the Australian government undertakes to work towards a return to surplus within a decade.

“Whether implicit or explicit, whether for half the additional debt or for a greater or smaller share, this is now the likely direction of the relationship between the fiscal and monetary arms of economic policy. Always close, they have become inseparable.”

Thus in Frydenberg’s delayed second budget not a dollar will be spared because the pandemic has obliterated the fiscal constraint: money is cheap, debt consolidation is a long game and the nation has built a reputation for budget discipline, despite a dozen Canberra deficits.

Right now the emphasis has been to keep workers attached to employers and money flowing into households to support consumer spending. But that won’t be enough to reduce an “effective unemployment rate” Treasury estimates will rebound from its current 9.9 per cent to above 13 per cent in coming months.

At last week’s national cabinet meeting, Lowe called on state government to double its direct support, which is running at $48bn or just above 2 per cent of gross domestic product. We need “all shoulders to the wheel”, he said a fortnight ago, with governments using their balance sheets to create jobs through capital works and education and health spending.

“Being prepared to borrow is exactly the right thing to do because we have a good starting position and we can afford to do it, and the government can borrow at record low interest rates,” he said.

“It obviously can’t do it forever, but for the next two years, absent this very positive upside scenario with the vaccine, I think it’s the thing to do. To date it’s been income support, and over time in the recovery phase there will need to be greater focus on direct creation of jobs through government spending and through improving the investment and hiring environment.”

But the post-budget phase of economic management of indirect and direct stimulus is going to be tricky. Edwards argues there will be a fiscal cliff when income support payments are due to expire in March. What the government and central bank have switched on, they will not be able to switch off easily. “For now, the real budget problem is not the size of deficits, not the sustainability of debt, nor its additional cost,” Edwards writes.

“If the JobKeeper program is not extended again, or an equivalent amount is not spent on alternative job support or job creation programs, government spending will drop abruptly by something over 5 per cent of GDP in 2021. This at a time when the economy will be fragile, with hesitant business and consumer spending, unemployment still over one million, and an election expected within a year. That is not a serious policy option.”

The Coalition eventually will be moving from what University of Melbourne labour economist Jeff Borland calls “job saver” to “job creator” mode, a transition that will be fraught because of the uncertainty around COVID-19’s subsequent waves of infection and restrictions. As well, the $100bn JobKeeper wage subsidy has been so successful, it has delayed the “creative destruction” that occurs in an economy, as capital and labour move to their most productive uses.

A range of targeted labour market programs will be needed, certainly in this budget and in coming years, as some workers become stuck in long-term unemployment. According to Borland, job creation can come in the simple form of more public servants, a quick-fire method but one that goes against the grain of supposed small-government conservatives. More jobs could be created in the not-for-profit sector, through direct funding or wage subsidies.

Bringing forward infrastructure spending, as the Morrison government and states have been doing, increases construction employment up to a point. Major projects are capital intensive, so small-scale, local government level works could be preferable in the short term. Getting significant productivity benefits across the economy requires substantial investments.

Cash payments to low-income households could boost retail and hospitality jobs, while reducing business costs to improve their profitability would nudge businesses to hire more people.

Borland says policymakers need to use a checklist approach, considering the relative merits and multipliers, and getting the biggest benefits per cost of program. “There are big differences in the extent to which a dollar spent creates employment, plus there are huge distributional effects as well as long-term productivity pay-offs with different measures,” he says.

Optimal policy is in the eye of the beholder, and then there is the electoral calculus. But it makes sense to target young workers, most prone to so-called “scarring” in a downturn, where pay rates and skills development suffer major hits. Many jobs will never come back, but there will be new ones. Australian Industry Group head of influence and policy Peter Burn tells Inquirer improving workforce skills is “absolutely necessary to help the disadvantaged and to reinvigorate our economy”. Before the onset of the virus crisis, labour productivity growth fell and was at its lowest level in 40 years.

Burn says if Australia is to rebuild after the pandemic and provide access to jobs in emerging and continuing industries, our education and training outcomes need to closely align with the opportunities as they re-emerge. All workers should get the training to help with renewal and innovation in the workplace.

The Morrison government has moved on the skills front, seeking to better match workers with industry needs, aided by a National Skills Commission. It also has combined with the states in a $2bn program to improve vocational education and training, including better information for students and parents and standardisation of learning. Down the track, well after the bottom of the recession, attention will turn to the long-term unemployed, who will have lost work skills and motivation. As the experience of the early 1990s recession shows, individual case management, retraining and wage subsidies are expensive. Pre-pandemic, despite strong employment growth and participation rates, there were a host of problems in the labour market, including stagnant wages, underemployment and regional hot spots.

Again, stronger GDP growth will lift many workers into the lifeboats, but some will be cast adrift. Borland argues a portfolio approach of employment programs is the most sensible path, including a “hiring credit program”. This is a subsidy payment attached to the hiring of a new worker for a fixed period, such as six months. Timing and design are everything in such schemes but they are aimed at private sector jobs and targeted at specific workers.

In the end, as Borland writes in a new analysis, wage subsidies are no “substitute for long-run sustainable increases in employment that derive from general macroeconomic recovery”. Morrison has stated his ambition for above-trend GDP growth of around 3.75 per cent for five years.

In a speech to the National Press Club in May, Morrison submitted his forward work book of how to hit that target: skills, industrial relations, energy and resources, higher education, research and science, open banking, the digital economy, trade, manufacturing, infrastructure and regional development, deregulation and federation reform, a tax system to support jobs and investment.

With the deadline for budget submissions expiring this week, lobbyists have tapped into the Prime Minister’s rhetoric about enabling “our businesses to earn Australia’s way out of this crisis”. The private sector wants growth, for sure, but it wouldn’t mind some medicine all the same, including tax incentives for investment, wage subsidies for apprentices and a reduction in company tax.

But it also has sniffed the wind on the Coalition’s hopes on reviving manufacturing, driven by supply chain issues, goods shortages and a preference for moving up the value ladder. Morrison’s COVID commission advisory council, chaired by Nev Power, has briefs to boost employment and manufacturing. We’ll hear more about “smart sovereignty” and “building resilience” in due course.

According to Ai Group’s Burn, there are plenty of existing measures to encourage innovation, including many run by state and local governments. They need better co-ordination and marketing to get traction. Programs to improve digital capability of business and accelerate high-growth industries could be more coherent, while co-operation with and between governments would lead to better results.

But “picking winners” in industry, abandoned after the previous recession, has made a return. In an extraordinary address a couple of weeks ago at a town-hall meeting hosted by industrial giant GE, BCA chief executive Jennifer Westacott asked: Why can’t countries think and act like smart businesses?

“First of all, we do have to pick what we are going to spend taxpayers’ money on,” she said, breaking the glass on the touchy topic of industry policy. “And this should be in the areas where we are trying to accelerate investment, incentivise, and drive creative collaboration between universities and businesses. We can’t choose 1000 things — we real­ly do have to narrow it down to about 10.

“Government just taking a holding position doesn’t cut the mustard any more,” Westacott said. “We do have to have more purposeful interventions by government. The challenge is making the right ones.”

Seasons change, there’s a budget in the spring, and the shackles are off. Morrison and Frydenberg are preparing the ground for a new deal.