COVID-19: Scott Morrison yet to provide long-term economic strategy

Still no plan for nation's long-term economic recovery

The Morrison Government has been quick to boast about how well we have done in managing the virus, and in our economic management of the consequences of the pandemic.

Much of our success has been simply because we have been able to isolate ourselves by closing our international border.

In medical terms, we have been able to control the "source" of the virus, and with social distancing, lockdowns, and increasingly effective contract tracing we were able to gradually get on top of domestic transmission.

In economic terms, our governments were able to quickly, with the support of the Reserve Bank, pump about 15-17 per cent of GDP into our economy both to "cushion" the downturn, as a consequence of the medical response, and to stimulate a recovery, all within the last 12-14 months.

However, there is still considerable uncertainty about the timing and effectiveness of the vaccine rollout, and the sustainability of the recovery, and importantly about how long we will need to keep our international border closed.

In all this, our government doesn't talk much about the global economy, which has seen the worst fall in output in 300 years, with the poorest households and the young disproportionately hit.

The main "winners" have been Big Pharma, R&D, tech companies, delivery services, stock traders. The main losers have been the poor and low-income groups, and sectors like travel and hospitality services.

It is difficult to draw accurate conclusions, a main reason being that the pandemic has changed spending patterns, which has undermined confidence in economic statistics.

That said, there is agreement that inflation is probably now being underestimated - though there is no agreement on whether that is important, or whether we are facing a sharp and disruptive rise in prices.

The economics profession is divided on this between those who see a resurgence of inflation as a major risk, and those who discount there being any significant inflationary pressures, or believe that there are other, more important, things to worry about.

This debate is most conspicuous in the US with Biden's $1.9 trillion virus relief plan (recently passed by Congress) and his proposed Build Back Better $4 trillion infrastructure spending plan.

This spending is strongly supported by both the US Treasury (Janet Yellen) and The Federal Reserve (Jerome Powell), essentially believing that this could break the US out of what has been "secular stagnation" - the low-growth, low-inflation environment that has existed for the past 20 years.

US growth has averaged 2.1 per cent a year since 2000, compared with the longer-run average of closer to 4 per cent.

Some have argued that this has been the result of increasing debt, rising economic inequality, and declining investment, and are reversible - others put it down to an aging population and natural factors.

The Biden strategy is to deliberately heat up the economy by using fiscal policy, with spending across the board to those who will spend it - including on education, child care, low-income earners, and a broad spectrum - rather that concentrating on the rich hoping it will "trickle down".

It is argued that this will boost confidence to spend and invest. As people and business become more sure the economy is on a genuine path to recovery, short-term support or cushions become less important, and can be phased back.

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In turn, they hope that the government can pull back a bit to a "more normal" monetary policy and interest rates.

Hence, there is a sharp contrast between the Morrison and Biden strategies, in both substance and timing.

Having broadly now reversed the drop in GDP that occurred in the first two quarters of last year, Morrison is rapidly phasing back the budgetary support/cushions, but before the path of recovery has been accepted and secured.

Indeed, he has heavily restrained spending on low income earners, with the measly reset of JobSeeker, and still relies on the tax cuts, which are heavily skewed in favour of the wealthy, to trickle down to sustain recovery.

The Reserve Bank has committed to keep interest rates low for the next three to four years.

Morrison's objective is to hold things together until an early election. While he will undoubtedly commit to spend more in the May Budget - aged care, regenerative agriculture etc - he has failed to offer a genuine strategy to sustain our recovery in the longer-term.

Most likely, we will drift back to the pre-COVID economic malaise.

  • John Hewson is a professor at the Crawford School of Public Policy, ANU, and a former Liberal opposition leader