This is not the time for austerity, but nor is it the time to bake in community expectations of unaffordable support.
Australia has managed the COVID-19 crisis and the recovery better than most countries in the world, and without spiralling into a prolonged recession. As the “lucky country” we have also been supported by high demand and increased prices for most of our resources.
The forthcoming federal budget is a challenge because we cannot afford to indefinitely spend more on recurring expenditure than the government receives in tax revenue.
Australia needs to lift productivity and participation as population growth slows down. Louie Douvis
Thank heavens we had our fiscal house in order when the crisis hit, allowing the government to comfortably borrow at very low interest rates. However, over time we must carefully rebuild our fiscal capacity. We should recognise that debt is still debt and must be repaid. We cannot afford to gamble on the lowest-ever interest rates continuing in perpetuity.
The best way to pay down debt is to grow the economy. If we grow at 4 percent a year until 2023/2024 we would generate an extra $170 billion in GDP and $40 billion more in government revenue. Our nation’s prosperity relies on business doing the heavy lifting, as it is business that creates prosperity and governments that redistribute wealth.
There are sectors of our economy that have not recovered and are still suffering, including tourism, hospitality, entertainment, airlines and international education. This is not the time for austerity. Fiscal repair must wait until the rate of unemployment comes down close to or under 5 per cent.
Another challenge to growth has been the shutting down of most immigration. This is an integral part of the government’s successful strategy to bring the pandemic under control, and it must be maintained until it is safe to relax the restrictions.
However zero immigration comes with a significant economic cost. Lower population growth is estimated to have cost the Australian economy some $40 billion in 2020/2021. Immigration also slows the economic impact of our ageing population. Put crudely, ageing means there are an increasing proportion of people not working and a decreasing proportion of people working to support them.
As we cannot open the gates to mass immigration then we must lift workforce participation to world’s best practice.
The conundrum for the government in this budget is not to shut down support too quickly or sharply. The challenge is to do that while not creating an ongoing community expectation of unaffordable long-term support.
We must also recognise we went into the pandemic with poor productivity performance, resulting in stubbornly flat real wages. This is a structural problem and must be addressed on the way out of the pandemic.
In this budget the government should focus on a workforce recovery strategy, pursuing those policies that will grow the economy through private investment and lifting workforce participation (as an antidote to low immigration), raising productivity and hence real wages, while continuing to provide life support to those sectors and people who are still struggling.
We should maintain our record investment in productive infrastructure and regional development, making up for years of neglect. Given the record low cost of money this is a no-brainer. However we should continue in this process to listen to the national infrastructure bodies and ensure investment decisions are soundly based and projects are executed efficiently.
Consumer confidence is high, and the private sector is awash with capital and eager for worthwhile investment opportunities. We have never seen such a high level of liquidity. Globally, Australia is regarded as a safe investment haven given its record in health, sovereign risk and opportunity.
What the private sector needs is the opportunity, incentive and confidence to invest long term. Government policy should be directed at encouraging this investment, and that also means getting the tax incentives right.
The government should continue to ramp up its anti-red tape agenda, loosen up the Foreign Investment Review Board process, and financially encourage the states to follow suit and cut red tape. The temptation of a Commonwealth grant to do the right thing is irresistible.
As we cannot open the gates to mass immigration then we must lift workforce participation to world’s best practice for females, young people and older people.
The Productivity Commission estimates that 92,000 people were out of the workforce due to the high cost of childcare – that’s nearly half of our normal annual migrant intake. Childcare subsidies and paid parental leave are obvious investments. KPMG estimates that the additional net expenditure would be $2.5 billion a year, but the annual GDP benefit from the extra days worked would be $4 billion to $5 billion.
Reducing youth unemployment to the national level is a social necessity with significant economic benefits. We must upskill our workforce and build basic literacy, numeracy and digital literacy through a foundation skills guarantee. Our TAFE system does not seem to be able to produce the skilled trades we require. Business must also lift the rate on engaging and developing apprentices and investing in skills enhancement for its workforce. Ongoing reform of JobSeeker is essential when we cannot source labour for the most basic tasks.
(Published in the Australian Financial Review, 26/4/21)