26 April 2021

Pandemic shock a great opportunity for economic reform

A crisis is also an opportunity, as the old adage goes. With this in mind, for the Australian economy, the COVID-19 pandemic offers the government the chance to rethink public policy settings and businesses to reset their strategies.

The aim ought to be to help Australia take best advantage of the global growth opportunities that the 21st century presents and, ultimately, boost local productivity. Weak productivity growth in the lead up to the pandemic meant that the living standards of Australians were barely improving and that wage growth was sluggish.

Public policy has recently been focused on managing the health and economic effects of the pandemic, rather than economic reform. This has included border closures and large fiscal spending programs that have directly supported the economy using the public balance sheet.

These policies have been highly successful and, to the credit of local policymakers, Australia has essentially eliminated the virus onshore and protected most businesses and households from the worst effects of the pandemic. The economy has bounced back strongly, employment is already above its pre-pandemic level, and consumer sentiment and surveyed business conditions are back at high levels.

However, supporting the economy comes with a cost. The Australian government has more than doubled its public debt, albeit from a relatively low level. The next challenge will be to service and then eventually pay back this debt. Of course, this is best dealt with by lifting productivity in order to grow the economy. Growing our way out of the higher debt levels is a lot more pleasant that raising taxes.

We believe the reform agenda should span tax policy, competition policy, industrial relations, improving infrastructure and climate and energy policy. These are well worn topics of discussion and there is general consensus amongst the community of Australian economists about what needs to be done.

On tax reform, there are the 138 recommendations in the 2010 Henry review, for competition policy there is the 2015 Harper review and its 56 recommendations, for infrastructure there are 162 new projects that Infrastructure Australia sees as priorities, many of them in regional areas.

Greater clarity on climate and energy policy is needed to encourage further private sector investment in renewables and Federal moves to a clearer pathway to net zero carbon emissions by 2050 would be a step in the right direction. For broader productivity-related policies, the Productivity Commission provides much clear and sound advice.

However, despite the COVID-19 crisis, most of these ‘bigger picture’ ideas have been put aside by policymakers. Impetus to pursue a significant and broad-broad public policy reform agenda appears to be weak. The recent inability to legislate on industrial relations is an illustration of the political challenges involved, even after the shock of the pandemic.

When we look back in years to come, it would be unfortunate if little or none of the massive fiscal stimulus to support the economy through the pandemic was used to push through reforms to lift medium-term economic growth and productivity.

Despite the policy challenges, there is a more positive angle related to how businesses respond to the pandemic that is worth exploring.

A growing body of literature, led by work from the OECD, has shown that a key cause of weak productivity growth prior to the pandemic was a lack of economic dynamism. In particular, a slowdown in turnover in the jobs market and, particularly, a slowdown in the flow of workers from low-productivity to high-productivity firms. Increased barriers to labour mobility and competition are likely to have been key causes of these challenges.

In this area, the pandemic may have delivered a shock that spurs a lift in productivity growth. After all, COVID-19 has shaken up business models, led to significant job turnover, and, in most industries, speeded up digitalization.

More people working from home, less business travel, and the rise in online retail sales are just three examples of how productivity could improve. Not needing to commute as much gives workers more time to devote to work as well as leisure. Less business travel reduces costs and digital alternatives can achieve the same results. The shift to online retail sales represents an improvement in efficiency in the delivery of goods.

These changes are all disruptive, but digital disruption is also a key pathway to improving productivity. Of course, it is early days and not all of the pandemic-related adjustments may enhance productivity. But even if they do, this should not be used an excuse to stifle impetus for reform.

Ultimately, the May 2021 budget offers a great opportunity to focus on a broader public policy reform agenda – not just to ensure a pick-up in productivity growth but also to ready the budget for the challenge of dealing with much higher levels of government debt.

This article first appeared in The Australian on 26 April 2021