It’s been confirmed: Australia’s in a recession.
Getting the economy back on track will be a long, tough road, and won’t be straightforward either as debate rages over how workers will be supported after JobSeeker and JobKeeper taper off in September.
The government has brought out a fourth economic stimulus package, the $688 HomeBuilder scheme, but it has already come under fire for unfairly creating jobs for men but not for women and for being a “floatie” scheme rather than a life raft, leaving vulnerable Australians “out in the cold”.
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So what should the government prioritise in order to set the economy right? Here’s what some of Australia’s top economic experts said:
Fix up the tax system
According to AMP Capital chief economist Shane Oliver, Australia relies too much on taxes that “distort economic decisions”. “This includes the taxation of income and profits, along with the states’ reliance on stamp duty and payroll taxes,” he said.
The amount of tax revenue raised by taxes on income and profits is high when compared to other countries and this stifles work effort and investment.
Stamp duty worsens housing affordability, discourages downsizing and payroll tax potentially discourages employment, Oliver added.
“At the same time Australia’s most efficient and least distortionary tax, ie the GST, is levied on a declining portion of consumer spending which in turn is putting more pressure on other taxes to raise revenue.
“Ideally, personal and company tax rates should be cut, the GST should be broadened to cover all goods and services and its rate increased, stamp duty should be replaced with a land tax (to be phased in over several years) and payroll tax should be eliminated.”
But to do this, people would have to rely on savings for living expenses to make up for the loss of purchasing power that would result from a hike in the GST, Oliver said.
“But the cost would be small compared to the economic benefit of making the tax system simpler and less distortionary of Australians’ decisions.”
Echoing Oliver’s sentiments, BetaShares chief economist David Bassanese said income tax had to be “radically” reduced in order to encourage global talent which would in turn boost the economy.
“The government needs to radically slash income taxes so as to encourage more skilled migration,” he said.
“I think given the troubles in Kong Kong, Australia has a golden opportunity to position itself as an Asian financial capital, rivalling Singapore. But we need the tax and other financial incentives in place to make it happen.”
More stimulus needed
Getting cash into the bank accounts of householders and businesses will be critical to Australia’s recovery, said independent economist Stephen Koukoulas.
“Tax breaks have some place but by themselves are unlikely to spark a surge in investment if underlying demand is weak. This is where further cash transfers to low and middle income earners will be important,” he said.
“This cohort of the economy has a high tendency to spend additional income and with wages growth weak, the government should look to boosting incomes.
“For business, a ramp up of infrastructure spending remains an issue - this gives business a boost.”
2022’s tax cuts should be brought forward
Thanks to high levels of unemployment and economic uncertainty, consumer and business confidence is weak – and this will have to be turned around, CommSec senior economist Ryan Felsman told Yahoo Finance.
“To get consumers spending, the Government should bring forward personal tax cuts (legislated for July 2022), costing around $14 billion per year,” he said.
“It should also bring forward tax cuts for small and medium-sized enterprises (SMEs) with less than $50 million annual turnover (to 25 per cent, legislated from July 2021), costing around $3.2 billion per year.”
Bring back consumer and business confidence
Part of the reason why we’re in a recession, according to property expert Michael Yardney, is because of a lack of consumer spending – and even though restrictions are easing, people may be more inclined to stash their cash instead of spend it.
“There is still plenty of bad news to come and this will impact consumer sentiment,” he said.
“Business conditions remain poor and business confidence is deeply negative, putting a damper on employment growth.
“We can’t stimulate our economy any further … so now it’s up to the government to give incentives, relief and to boost confidence to grease the wheels of industry.”
After September, when JobKeeper and JobSeeker ends, further support will be needed, Yardney said.
Home owners and property investors will also need reassurance given that rental and mortgage relief packages are scheduled end in September, too.
“Then we need the type of stimulus that will encourage small and medium size businesses to take more risks, grow, employ more people and take on more inventory.
“A great starting point would be to lower corporate tax rates to give business the extra cash flow necessary to grow as well as offering incentives to employ more people or buy new equipment.”
Get everyone back to work
Australia’s downturn is because no one is able to work properly, realestate.com.au chief economist Nerida Conisbee told Yahoo Finance. This needs to be addressed first in order to see a spike in consumer and business confidence.
“While it was necessary, the most immediate impact was forcing people to stop working that were in industries such as hospitality, fitness and tourism. The second wave of impacts is now unemployment across a wider range of sectors.
“The sooner everyone can work properly again, the sooner consumer and business confidence will return and this will drive economic growth,” she said.
“The second thing to do is to open up all borders but for now, it does seem sensible to keep international borders shut.”
Become more family-friendly
According to Bell Direct market analyst Jessica Amir, Australia lags behind other OECD countries when it comes to family-friendly policies. A key first step to recovery would be addressing the accessibility of childcare, which will have a direct impact on employment and therefore the economy, she argued.
“If childcare was made permanently more affordable, it would lift the workforce participating rate, encouraging mums to get back to work and also help children from disadvantaged backgrounds develop.”
By incentivising Aussie mums to get back to work, the employment participation rate might rise and we might be closer to meeting the Reserve Bank’s unemployment target of 4.5 per cent.
According to Senate estimates, free childcare will cost the government $131 million a week, or $6.8 billion a year.
“If that was doubled to pay centres 100 per cent of their pre-coronvirus fees, it would cost the government $13.6 billion a year. This would see skilled workers return to part or full time work, lifting the employment and participating rate, and boosting productivity,” she said.
Paid parental leave should also be increased to boost financial security: research suggests there is a strong case for longer paid parental leave, as a means of retaining valued staff and keeping them engaged in returning to work, she added. It is also linked to increasing job satisfaction, employee productivity and loyalty.
“If Australia increased its parental leave payment, this would decrease the burden on childcare, help families bond, and also bolster spending on goods and services and would stimulate economic growth.”
Some families may feel the financial pinch by bringing children into the world.
“Once the mums and dads return to the workforce, after paid parental leave, and put their kiddies in childcare, innovation and productivity would increase and employees would likely feel more loyal to their employers, thus bolstering the employment rate and keeping the longer-term unemployment rate closer toward the economic target.”
Create a ‘National Reconstruction Plan’
The task of rebuilding Australia is so large it will require an “ambitious, sustained, multi-dimensional plan for national economic reconstruction”, said Australia Institute Centre for Future Work economist Jim Stanford, which should create jobs, incomes, and growth in the aftermath of the pandemic.
According to Stanford, Australia has had a huge “national reconstruction plan” before, in 1942 a few years before WWII ended, and we’ll need something similar in this “war” against the pandemic.
“The economy was already staggering long before the coronavirus landed on our shores,” Stanford said.
“Now private spending will be crippled by shocked confidence, lost incomes, and deep uncertainty about what lies ahead. Only [the] government possesses the economic and financial resources, the staying power, and the capacity to plan and act at a national level, to get the macroeconomic ball rolling again.”
This is what a post-Covid-19 reconstruction plan should look like:
Sustained and “massive” investments in public physical infrastructure;
Improvements and expansion of public services, including health facilities, aged care, education, disability services and more, to be ready for the next pandemic;
A suite of strategies to develop multiple sectors to build industries of tomorrow;
Rebuilding and expanding Australia's training system to prepare for new jobs and assist career transitions;
Outlining energy and climate transitions as fossil fuel developments can’t lead to economic growth, Stanford said.
“These are just some of the major elements required in a post-Covid-19 reconstruction plan for Australia. The common thread is a willingness to mobilise vast resources, under the active leadership of government, to undertake needed work and fill the economic void that will be left by a shattered private sector.”
There is much work to do to rebuild the nation, and there is no shortage of workers. This plan will cost “many tens of billions of dollars”, but it will be worth it.
“The cost of not doing this will be far higher. Until the economy gets back close to full potential, government has the responsibility to undertake these investments and expenditures, financed with large-scale borrowing,” he said.
“If we get sucked back into a knee-jerk austerity framework, where the top priority becomes balancing the budget and paying off debt, we will enter a multi-year Depression.”