Let’s not forget that even before the COVID-19 crisis, the economy was languishing. Growth was sluggish, unemployment was too high, and the RBA was running out of policy room.
The biggest economic challenge was that productivity was falling. The growth that the economy managed to eke out in recent years was largely due to its rapidly increasing population, with much of this underpinned by strong inward migration.
With border controls now in place for COVID-19, and an unclear timetable about when they may be lifted, Australia’s weak productivity growth can be expected to present an even more pressing challenge.
Reform ought to follow a key principle. The government’s role should be to provide the groundwork and competitive economic environment to allow households and businesses to make choices that lead to stronger productivity growth, thereby supporting growth in national income.
As the Treasury has shown in its recent detailed assessments of the productivity challenge, the key problem is a loss of dynamism. In the latter years of Australia's 29-year long boom there has been less flow of workers from low-productivity to high-productivity firms. Much of this is likely to be due to increased barriers to labour mobility and competition.
The government’s reform agenda ought to focus on four elements: tax reform, competition policy, infrastructure investment, and climate and energy policy.
Tax reform is sorely needed. There has not been any major reform since the introduction of the goods and services tax (GST) in 2000. The system is heavily skewed towards inefficient taxes, such as personal income, corporate taxes and, at the state level, stamp duties. While the GST is more efficient, at its current rate and with its current base, it delivers comparably less revenue.
As policymakers begin to consider how some of the extraordinary COVID-19 fiscal support can be unwound, they should also think about how the tax system can be made more efficient. For example, it will be difficult to lower the recently boosted unemployment benefits at a time when the unemployment rate is high, but maintaining higher benefits could be treated as compensation for other necessary tax reforms, such as adjusting the GST.
A focus on competition policy would help to boost productivity. After all, if the heart of the productivity problem is a lack of dynamism, as the Treasury suggests, competition is the key. The Harper review of 2015 set out 44 recommendations, including cost-reflective road and water pricing, reform of the shipping industry, retail hours and the pharmacy industry, among other things.
What should not be on the agenda, and is likely to be hard to resist, is policy that seeks to directly subsidise particular industries. While it clearly makes sense to provide forbearance and support for large swathes of the economy during the COVID-19 shutdown, history teaches us that a strategy of using public funds to ‘pick winners’ has not worked well in the past. Australia's motor vehicle industry offers clear lessons in this respect.
Infrastructure investment should be in focus, including investment in health-related infrastructure. Adequate provision of infrastructure supports businesses’ ability to operate. In particular, Australia’s major cities have become congested, which is likely to be weighing on productivity. Poor urban infrastructure is a key reason for Australia’s high housing prices and high household debt.
Clearly, the COVID-19 shock may also shift the economy in ways that need to be taken into account for infrastructure investment plans. Will Australia need as much international airport capacity? Or train lines for daily transit to the cities? Will more virtual connectivity be needed?
Greater clarity on the outlook for climate and energy policy should also be a priority. A key lesson from the COVID-19 global emergency is that it pays to be prepared for forthcoming global challenges, and climate change is one of these.
This list is far from exhaustive. Education policy should be a priority. Industrial relations reform ought to be revived.
Finally, with the RBA out of room to use its conventional policy instrument to manage the cycle, policymakers ought to consider giving the central bank more tools. Perhaps this could be combined with tax system reform and adjustment of the GST. Perhaps varying the superannuation contribution rate, and access to that pool of funds, could be considered as a policy tool. After all, allowing households to access their superannuation has been used during the COVID-19 crisis.
The COVID-19 crisis presents an opportunity to reform the economy that had been much needed even before the shock. A well designed economic reform agenda could help underpin a 'V-shaped’ or 'U-shaped' economic recovery from the COVID-19 shock and mitigate the risk of an 'L-shaped' one.
This article first appeared in The Australian