Australia should strive to build back better
Published in Money Magazine, March 2021
One year on and Australia has so far weathered the COVID storm relatively well. If the magic combination of good luck and good management continues, 2021 could see us bounce back to pre-COVID levels of economic activity by the second half of this year. But taking the next step towards a thriving economy – one with full employment and strong wages growth – will require a shift in policy thinking.
The COVID recession was like no other. It took hold fast – about 1.7 million Australians lost their jobs or moved to zero hours virtually overnight after the government ordered shutdowns in mid-March, and another 1 million lost at least some hours. The annual fall in economic output to the end of June was the largest since the Great Depression.
But governments took important actions that helped jobs and activity to bounce back faster than many of us expected. More than 90 per cent of the jobs lost have now been regained.
The strong and successful health response – getting to zero community transmission and jumping on outbreaks as they occur – has helped rebuild business and consumer confidence, bringing back much more activity in Australia than in countries with less success in containing the virus.
This activity has been underwritten by more than $300 billion pumped into the economy so far through Commonwealth and state government supports.
Because of these supports – particularly the JobKeeper program, JobSeeker supplement, and stimulus payments – the average Australian household increased their disposable income during the crisis. This helped avoid the vicious spiral of declining demand and job losses common in recessions. It has also allowed many households to build up a buffer of additional savings some of which will be spent down as the economy recovers.
So, with jobs and activity now picking up, what does 2021 hold?
If the health situation remains under control (and that is an important if), activity in many sectors could return to pre-COVID levels over the course of the year.
However, the recovery will be patchy; some sectors will take longer to get back to ‘business as usual’.
For sectors still constrained by social distancing requirements – such as hospitality and the arts – the speed of the vaccine rollout will be crucial to getting back to capacity. But it is the sectors most dependent on international arrivals – universities and parts of the tourism sector – that are likely to face the slowest recovery, given the signal from health authorities that borders will be ‘among the last things to re-open’.
House prices are returning to pre-COVID levels as record low interest rates underpin a strong increase in new lending. Forecasters expect prices will grow by about 5 per cent in 2021.
The return of spending, jobs, and house prices means 2021 could be see a return of (close to) normal programming. But an important question is whether this pre-COVID normal is good enough.
We may now see the 2019 economy with a rose-tinted hue, but in reality it was anything but spectacular. Unemployment bounced around the mid-5 per cent mark – well above the RBA’s estimate of ‘full employment’ – wages growth was insipid, consumption was weak, and businesses were reluctant to invest.
It would be a disappointing result if we were to bounce back from COVID only to get stuck again in a stagnation bog. There are things the Federal Government should do to ensure a stronger recovery for jobs, wages, and long-term living standards.
First is not withdrawing economic supports too soon. Under the plan, Federal Government stimulus will largely be gone by the end of June this year. It’s risky to pull the tablecloth out before the economy is fully recovered. Premature moves to austerity after the Great Depression, the 1990s recession in Japan, and in the UK and Europe after the GFC, slowed the economic recovery and in some cases created double-dip recessions. Stimulus in some form should continue in Australia until unemployment is below 5 per cent and wages are growing again.
Second is to direct additional stimulus into programs that boost jobs and improve longer-term living standards.
One of the most important things the Government could do to ensure Australia ‘builds back better’ is to make childcare more accessible and affordable. The ‘double dividend’ of better learning for children and higher workforce participation for women should be pursued.
Investment in aged care should be another priority – major reform (including more money and workers) is needed to deliver the high-quality care we want for older Australians.
And 2021 must be the year that Australia announces a set of climate policies to put us on the trajectory for net-zero emissions by 2050.
Overall, 2021 should be a better year than last for most Australians. We enter the new year with our economy in good shape by international standards. But keeping the momentum going requires governments to continue to get the health and economic policies right. In a (possible) federal election year, voters should ask whether parties are promising a return to the status quo or whether they genuinely want to build back better.