Finance Finance News The policies government must consider to rebuild employment Updated:

The policies government must consider to rebuild employment

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A discussion paper on how to most efficiently get Australia working again points to Scott Morrison’s suggested formula of corporate tax cuts, deregulation, and industrial relations reform to be precisely the wrong way to go about the next phase of pandemic recovery.

On Friday, the Prime Minister foreshadowed the October budget would pursue the usual big business wish list and major infrastructure projects as the means of lifting the Australian economy out of its coronavirus black hole.

But a paper by The Australia Institute on design principles for pandemic fiscal policy finds business tax cuts and freezing wages tick none of the boxes used to measure the best way to grow employment.

Those trying to use recovery spending as an excuse for a new coal-fired power plant also score very poorly.

The think tank’s authors explain that this recession is indeed very different – no government has ever tried to put the private sector into “hibernation” before – and thus traditional ideas for government stimulus aren’t best suited to “thawing”.

“Usually when parts of the economy are contracting, because of private sector decisions, governments do what they can to stimulate economic activity,” the paper says.

“In Australia today it is government decisions to shut down most of the tourism, retail and hospitalisation industries that are causing the economy to contract and, in turn, traditional government policy to ‘stimulate’ the economy is inherently less effective than ever before.

“As a result, the design of fiscal stimulus must be more creative than ever before.”

Urgency and creativity in high demand

There’s an urgency in being creative about the next phase of stimulus design, both because speed is of the essence in getting the biggest bang for the buck, but also because vested interests and doctrinaire barrow-pushers are already hard at work trying to use the crisis to further their agendas.

No, Virginia, trickle-down economics won’t help now – and neither will building a fast train between Sydney and Melbourne.

It’s positively scary that Mr Morrison implied the next phase of spending could wait for the October budget.

“In a crisis, time is the enemy,” warns the Australia Institute.

“The government could spend months planning a well thought through list of projects where the government maximises the amount of co-benefits for each dollar spent.

“But doing that will probably mean that the country enters a recession because the government did not act fast enough.

“The result is less demand and higher unemployment. All fiscal stimulus spending decisions should give the highest consideration to the primary goal of increasing demand and employment.

“The longer the government waits, the less effective the fiscal stimulus is going to be.”

The government showed with its first emergency spending effort, Stimulus 1.0, that it takes a while for policy makers to grasp the size of the challenge.

Even with three attempts totalling a couple of hundred billion dollars, the government is still (understandably) focusing on the immediate emergency of catching falling bodies.

Some of Australia’s ocean pools were built during the Great Depression – supporting jobs and providing community value. Photo: Getty

The next phase: How to rebuild employment

There has been very little about the necessary next stage of resuscitating the economy – employment growth.

“Pouring money into the economy is the appropriate first response to a crisis like that created by COVID-19, but pouring jobs into the economy is more important still,” warns the Australia Institute.

“The opportunity cost of millions of people producing nothing for a year or more will dwarf the budgetary cost of engaging those people in projects that do not just create jobs, but create lasting benefits to the economy, the community and the environment as well.

“Put simply, it’s not just the size of the fiscal stimulus that determines the short- and long-run economic effects; the shape of the deficit also matters greatly.

“There are many projects that can stimulate some economic activity, but not all of those projects simultaneously provide additional short- and long-term co-benefits.

“For example, a big increase in health spending or defence spending would both have some flow-on effects on economic activity in the short term, but health spending is both more labour intensive than defence spending (so would likely create more jobs per billion dollars spent), and health spending is likely to provide services which are more useful in a pandemic.

“While the government’s immediate priority should be to ‘buy’ a lower rate of unemployment as quickly as possible, the economic and non-economic co-benefits of stimulus projects, both in the short term and long term, should also be considered when deciding what stimulus projects to support.”

Australia Institute’s chief economist Richard Denniss points to the ocean swimming pools built during the Depression as a good example of efficient stimulus spending providing lasting value to the community.

It would tick all eight of the paper’s criteria for assessing how well various potential policies would assist recovery.

The fundamental checklist

To summarise, the paper suggests spending’s priorities should be speed, size, the impact on households’ purchasing power, the amount of domestic production involved, the degree of employment intensity, projects that deliver co-benefits, and spending that targets people and regions most affected by the crisis.

Using those criteria, the institute ran the ruler over 19 possible recovery projects, ranging from the quite small and finely targeted (paying scuba divers to kill Crown of Thorns starfish) to the large (public housing) and the duds (the big business tax cut and wages freeze).

Click to zoom in.

The full discussion paper goes into the reasoning behind each criterion – and the reasoning is compelling, unlike the idea that cutting company tax rates now will encourage investment when there simply isn’t the demand to justify investment.

To the extent that Treasury’s much-referenced modelling shows broader benefits for corporate tax rates, it is years down the track.

In contrast, for example, paying for immediate housing of the homeless in our many empty hotel and motel rooms would provide employment for staff, keep the businesses afloat while travel and tourism is dead and achieve the social benefits of housing particularly at-risk groups – the homeless and those escaping domestic violence.

Making the most of the recovery opportunity will require a different and very agile government mindset.

Key industries are not going to be coming back quickly.

The nation will be poorer for quite a while, thanks to so much lost production.

The population growth we have relied on for growth has been drastically altered.

The government will need to accept that it should take a more direct role in the economy.

“The first thing to realise is that economic growth doesn’t just ‘happen’, it is caused by the decisions made by individuals,” writes the Australia Institute.

“New products need to be invented, new factories need to be opened, new productivity-enhancing processes need to be implemented in workplaces, and consumers must feel like buying more things next year than they did the year before.

“But for the next three to six months, many of these things will not happen as consumers are compelled to stay home and firms have been put into ‘hibernation’.”

The impact of that will last much longer – hysteresis, in economic terms.

How much longer will depend on how quickly the government can cast off doctrinaire baggage.

It now has a more useful framework than anything on offer from the Business Council of Australia or the Institute of Public Affairs.