Covid 19 has hit the economy hard; But where is the Recovery going to come from?

Richard Denniss of The Australia Institute thinks the Economy will not simply 'snap back' after the Covid-19 Crisis. A long term government role is required.

Dr Tristan Ewins

Covid 19 has hit the Australian economy hard.   By some estimates the Australian economy will shrink by approximately 7 per cent in 2020.  Maybe more.   That’s a virtually unprecedented recession.

https://www.abc.net.au/news/2020-04-15/how-coronavirus-crisis-compares-to-1990s-recession-australia/12148020

Shutting down workplaces: hospitality and tourism, higher education and some manufacturing: comes at an enormous cost.

We can’t put a price on peoples’ lives and peoples’ health.  But many people will need to sacrifice to ‘spread the burden’ of funding recovery.

Some have suggested a ‘HECS-style loan’ for those unemployed as a consequence of this crisis.  

Because this discriminates, it is unfair.  Richard Denniss – speaking on ABC radio – is correct about this.  Though I think he is wrong about HECS more broadly.   Income contingent loans to pay for government  support of individuals during the crisis would mean a veritable ‘labour market lottery’ as to who was left with debt. Denniss agrees with this much.  But also ‘income contingent loans’ have a longer history of losing their progressivity as governments reduce thresholds to help pay for other endeavours – such as ubiquitous corporate welfare.

Also will the government temporarily increase corporate tax  during the recovery period to service debts incurred supporting the private sector during the crisis?

https://www.abc.net.au/radionational/programs/sundayextra/the-lasting-economic-damage-from-the-covid-19/12223194

The government’s stimulus has provided a lifeline for many.

But one rational assumption is that the economy won’t simply ‘snap back’ at the end of a six month period ; and as a consequence the government cannot afford to ‘step back’ and just let the private sector ‘fill the breach’.  The real economy doesn’t work like this.

In hospitality and tourism the structural effects on the economy could last quite some time. We don’t know whether there will be a ‘second wave’ or whether we will ‘break the back’ of the spread in this country.  But global travel will take years to ‘get back to normal’, and the US and the UK are still deep in crisis.  The ACT and Northern Territory also understandably want to reap the benefits of wiping out the virus, and don’t want it reintroduced from interstate.

On the other hand the crisis provides an opportunity to broaden and deepen the public sector to create the ‘economic infrastructure’ around which recovery will occur.  Make strategic infrastructure investments, as well as structural improvements in public services ; unemployment services ; in Health, Aged care and disability services ; in welfare, transport, communications, arts.  The NDIS needs to be more accessible, with 'consumers' interests protected more vigorously.  The CES (or 'Centrelink' these days) should be refunded as a 'one stop shop' for job-seekers - but without the usual harassment and humiliation.  Homelessness could be addressed 'head on' with a big investment in public housing. Fix the NBN with ‘fibre-to-the-home’.  A big public investment in renewables. And coming out of the crisis: Have an active industry policy which strategically supports and invests in high wage manufacturing.

This is also an ideal opportunity to progressively reform welfare across the board ; and lift job-seekers out of poverty.

On ABC radio high speed rail was inferred as perhaps a ‘dubious investment’.  But it could drive growth in the regions, with a flow on of jobs and affordable housing.  As well as containment of urban sprawl and the transport crises that ensue from that.

The simple truth is that the public sector might have to pick up the slack on the economy for some time to come if there is to be any chance of a recovery.  And if we navigate this in the right way it can present an opportunity.

Modern Monetary Theory (MMT) holds that as the issuer of the currency the government can create money at will to invest and ensure a ‘full employment guarantee’.   Though this is limited by real economic constraints concerning the scale and nature of goods and services actually produced in the economy at the end of the day.  In some instances there might also be inflation ; and you cannot ‘create money’ to fund an infinite influx of imports.

But full employment is in everyone’s interests: so long as there is an ‘efficiency dividend’ which provides benefits for all ; and so long as consultation with unions ensures there is no endless ‘wage-price spiral’.   Higher employment has a ‘multiplier effect’ on the broader economy that also makes debts easier to service. At the same time, the wage share of the economy has been falling for decades ; and long term there is a need for a structural correction which could also create extra demand in the economy.   

As part of this picture there should be reform of the labour market improving compensation in low-paid jobs – either with regulation, or through the social wage. (or both)

Modern Monetary Theory has been somewhat skeptical of the role of taxation, claiming it ‘takes money out of the economy’.  But this need not be the case if all that money is spent ; if indeed there is a stimulus.  Taxation also allows for a much more finely targeted redistribution of wealth: which should be desirable for progressives.

As MMT theorists also recognise, state governments in Australia cannot issue currency.

The current public health crisis is going to cause much more pain before it is overcome.  But the right kind of policies on investment, industry policy, welfare and stimulus can minimise that pain, and even help ensure in the end we come out of the crisis stronger.


(nb: I'm wanting to publish this article elsewhere as well ; but I'm interested in feedback from readers on how I can improve the piece before I do that ; looking forward to comments :)  )

Albanese: Take a Stand on Tax for our Supporters' Sakes

above:  Anthony Albanese must take a stand for Labor Constituents, opposing effectively flatter and lower tax which would end up with austerity and inequality down the track...

A letter to Anthony Albanese:

Albo! : Don't pass phases 2 and 3 of the Tory Tax Plan

Abbott blocked good policy ; Now Labor has a right to block sweeping tax cuts that will indirectly hurt millions of its constituents. And many will be very disillusioned or angry if you let phases 2 and 3 pass.

The Government's plans include the following for phases two and three:  (from Treasury)

"For 2022–23 and 2023–24, the top threshold of
the 19% tax bracket will increase from $37,000 to $41,000
the 32.5% bracket will increase from $90,000 to $120,000.

For 2024–25 income year onwards, the top threshold of the 32.5% tax bracket will increase from $120,000 to $200,000."

This represents an effective 'flattening' of the tax scales ; with higher income individuals on effectively lower rates of tax.

It will also cost the Budget $160 billion over 10 years. This when we're likely heading for a recession. It will fuel austerity.  Especially if the government prioritises the surplus even in time of economic downturn.

Finally: remember that the median wage in Australia is only approx $53,000/year. The Conservatives talk about people on $120,000/year as if they're 'battlers'. If we don't stand up and fight only the Conservatives will eventually win with their long term agenda of a flat income tax.

They also want to legislate ahead for the next term of government which is totally unreasonable.

The Conservatives claim a mandate. Yet they won through a fear campaign based on lies ; Clive Palmer's Money ; and preferences from Palmer and One Nation.  And in Opposition under Abbott they never respected Labor’s mandate.

Labor needs to restructure income tax for fairness ; and index the lower brackets to avoid a vicious cycle of bracket creep and regressive tax cuts which flatten the scales.  This must be a priority for Labor upon re-election.

We don't need to capitulate on progressive policy. Labor needs a strategy to nullify the fear and disinformation campaigns.  Capitulation is not a strategy.

Raise progressive taxes by somewhere in the vicinity of 1% to 1.5% of GDP upon retaking government. Exclude lower and middle income earners from higher taxes. Be thorough in this. Point out the moderate scale of the reform ; and explain where the money is going. (eg: Aged Care Social Insurance, Medicare Dental)  If Labor must tax a broader base then consider the Medicare Levy as well. It’s the closest thing in this country to “a popular tax” because of the clear connection with medical services, and the universal coverage most Australians value.

The Coalition is fond of arguing about "great big new  taxes" - even where there are no new taxes; Labor HAS to fight them on this.  Again: Insist on a figure in the vicinity of 1% to 1.5% of GDP in the first term of a new Labor Government.  Point to our low tax rates in Australia compared with the OECD average.    (approx. 27% of GDP compared with approx. 34% of GDP)  Australian tax overall is approximately seven percentage points lower in Australia compared with the OECD average.  That’s a difference of approximately $119 billion Australian dollars a year.

If we give in we get an Americanisation of the discourse which gradually flattens tax scales, and makes meaningful social democratic reform on social wage, social insurance, public infrastructure and welfare impossible.

Take a stand, Albo.  That’s what ordinary Labor members and voters want and expect from you.

Dr Tristan Ewins  (Labor member of over 25 years)