The dos and don'ts of managing an economic recovery

Is it the job of government to shield its people from economic reality? Picture: Shutterstock
Is it the job of government to shield its people from economic reality? Picture: Shutterstock

It's a new financial year, and with it comes new opportunities as well as the eternal question: "what next?"

Governments have operated in crisis mode more or less continuously for six months, introducing flawed policies quickly in response to the bushfire crisis and then COVID-19.

Governments now must take stock and make smarter decisions about the direction of the economy and policy. While there are many options to take, here are three things the government should do, and three things they shouldn't.

Do: let JobKeeper end as scheduled

Whatever your perception of the merits of JobKeeper during the crisis, the government must not allow itself to get painted into a corner where it is forced to extend JobKeeper, possibly indefinitely.

The US doesn't have a JobKeeper-type payment, and its unemployment rate rose from nearly 2 per cent below Australia's to more than 6 per cent above. This implies there could be up to a million people on JobKeeper who would be unemployed.

For many of them, despite JobKeeper, their jobs are actually permanently gone. Once JobKeeper ends, these people will move onto JobSeeker. This capacity is effectively being wasted.

A recovering economy cannot afford to pay a million people a supercharged unemployment benefit not to look for work.

Don't: give in to special pleading

Everyone with a barrow to push is arguing why it's the "perfect" time to put taxpayers' money into their pet project.

We've heard it's time for a public-private partnership to reboot manufacturing. We've been promised more than a million jobs could be created by "investing in a low-carbon economy".

While there are many reasons these individual proposals are a bad idea, the question to ask is: if something isn't viable when times are good (like car manufacturing), how can it be better when things are bad?

The best thing government could do for economic transition is limit the disincentives for business to operate, employ people and return to profit.

Do: follow through with tax reform

Speaking of disincentives, the government should neither delay nor diminish the scope of its already-passed tax reform packages. Moreover, it should commit to cutting Australia's high company tax rate.

The disincentive effect of high tax rates is well known and pernicious. Previous research by the Centre for Independent Studies has shown the true cost of these reforms is far less than predicted, and the benefits far higher.

Tax reform will boost GDP by over 2 per cent in the medium term. Moreover, a commitment to making the economy more efficient is likely to boost business confidence.

Don't: abandon monetary policy in favour of fiscal stimulus

If the past 50 years have taught us anything, it is that monetary stimulus has been proven relatively effective in boosting growth potential, while fiscal stimulus has been proven to be costly and largely ineffective. Governments would do well to remember these lessons.

At the same time, it should publicly remind the Reserve Bank of its role in managing macroeconomic conditions.

As the Grattan Institute pointed out, inflation averaged 1.8 per cent in the five years to March, and is predicted to stay below target for some time.

This situation is unacceptable, as is the complacency with which this has been approached by the RBA. Excessively low inflation, or even deflation, is harmful to the economy; depressing growth even further.

Indeed, if anything, the government should pre-empt the RBA's hand by proactively ruling out broad fiscal stimulus measures in favour of a deregulation agenda, coupled with a very targeted program of investments aimed at boosting productivity.

The RBA is not out of tools or ammunition with which to fight deflation. It should be encouraged to use them.

Don't: waste taxpayers' money because it's 'cheap'

That the RBA is out of ammo is just one argument made by advocates of a return to fiscal policy. Another is that government debt being historically quite cheap makes it a great time to borrow.

While a permanently lower cost of capital does help marginal projects, it won't magically turn a loss-making project into a profitable one. A fantastic example is the "fast train" from Melbourne to Brisbane; a project that review after review has found is guaranteed to lose money hand over fist.

Governments are notorious for making objectively terrible "investments". Encouraging them to reach for even more marginal projects because debt is cheap is basically a licence for pork-barrelling.

Do: reschedule or abandon the increase in the super guarantee rate

Governments are generally inept at managing taxpayers' money, in good times and in bad. It's ironic that governments often act because of the perception that individuals also won't spend their money responsibly.

No better example than superannuation: a deeply paternalistic institution that acts on the premise that individuals won't save enough money for their retirement unless forced to by law.

While this assumption is generally contestable, there is no doubt that individuals who are currently in financial distress (due to COVID-19) should not be forced to divert their income to retirement savings.

Yet not only has there been significant opposition to letting people access their super during this time of crisis, some are still arguing that compulsory superannuation should be increased despite the looming recession.

The government should show confidence in individuals and allow them to make their own choices about superannuation - and defer (preferably permanently) scheduled increases in the compulsory super rate.

The next six months will be crucial in determining our path out of this crisis. Governments that attempt to stand athwart the economic flows, propping up failed businesses and policies, will be setting their countries up for a protracted downturn.

Those that focus on productivity and growth-oriented policies - accepting the downturn will occur, but aiming to make it temporary - will see their countries emerge in a stronger position than their rivals.

Which path Australia follows depends on whether the government trusts and empowers people, or tries to shield them from reality.

  • Simon Cowan is research director at the Centre for Independent Studies and a regular columnist.
This story The dos and don'ts of managing an economic recovery first appeared on The Canberra Times.


Discuss "The dos and don'ts of managing an economic recovery"

Please note: All comments made or shown here are bound by the Online Discussion Terms & Conditions.