A recession entirely of government making now requires a recovery plan of the same origin.
Tax cuts or vouchers?
Asked for their one “burning” policy recommendation, interestingly, both Wood and Eslake nominate the same big, bold idea: a voucher program, whereby Australians have to spend the money by a certain date and with a list of certain industries.
Eslake wants it instead of tax cuts; Wood in addition to pulling forward Stage 2 of the government’s already planned income tax cuts.
“Hospitality, tourism and the arts have been the sectors hardest hit,” says Wood. “Tax cuts help indirectly but there is so much leakage, both to savings and to overseas-made goods.”
“Voucher systems or discount schemes can be targeted at hard-hit sectors to provide some short-term momentum. And every dollar spent hits the economy,” she adds, pointing to Britain’s ‘Eat Out to Help Out’ scheme and tourism vouchers made available by the Tasmanian and Northern Territory governments.
Eslake wants the revenue which would be lost in a pull-forward of tax cuts to instead be spent on a program of vouchers which expire by a certain date.
“The great advantage of [vouchers] versus bringing forward tax cuts is that you guarantee the money will be spent. It will be spent when it is most helpful for it to be spent; and it will be spent in areas most in need of stimulus or in ways that are most likely to result in increased employment. Bringing forward tax cuts doesn’t do any of that.”
Eslake has thought it all through. The vouchers could be spent on any areas still affected by government restrictions, like tourism and the arts. Or areas that help people get back to work, such childcare or training. Or on essential bills like electricity, water and gas. They could be distributed by the Tax Office to taxpayers and through Centrelink to non-taxpayers.
Also arguing against tax cuts in this budget is Miranda Stewart, a fellow of the Tax and Transfer Policy Institute at the Australian National University’s Crawford School of Public Policy.
“There is little evidence that they will stimulate greater economic activity or consumption,” says Stewart.
However, supporting the case for tax cuts is Deloitte Access Economics’ Chris Richardson, along with PricewaterhouseCoopers chief economist Jeremy Thorpe and UNSW economist Gigi Foster.
JobSeeker and infrastructure
While divided on many things, the six economists are unanimous on two fronts: the need for greater infrastructure spending – although they differ on the format –and the need to permanently increase the rate of JobSeeker, currently scheduled to return to its old rate of $565 per fortnight come January.
Stewart is against any more one-off cash payments to households, such as the $750 coronavirus payment to pensioners. “As a general rule, I’d like to see our transfer/welfare system returning to a more normal systemic approach,” she says.
None of the economists supported an immediate extension to the JobKeeper scheme, currently set to expire on March 28 – although several said the option of extending should be kept open as required in the event of further lockdowns.
According to Stewart: “We should be moving towards JobSeeker as our main way of supporting those who are out of work, have lost jobs or reduced income due to the pandemic and lockdowns. It does not need to be as high as it was in July this year [boosted by a $550-per-fortnight supplement] but that inevitably means that it needs to be at a higher, liveable rate.”
And couples should be subject to individual income tests for JobSeeker, says Stewart, so that a high-income partner does not render a person ineligible for support. The work test should also be relaxed, so that the jobless can pick up more hours of casual or part-time work without being kicked off the payment.
Wood says JobSeeker should be permanently increased by at least $200 a fortnight for singles and rent assistance boosted 40 per cent; Foster wants “the bulk” of the $550 coronavirus supplement retained; and Eslake wants it set at 80 per cent of the age pension.
As for infrastructure spending, all six economists unanimously agree more spending is necessary.
PWC’s Thorpe wants “smart roads” investments to fit out roads and vehicles with the smart tags and meters needed to implement a system of road-user charging. Richardson wants similar forward thinking on congestion charging, along with smaller works projects in the bush. Eslake wants more money for repair, maintenance and upgrade of existing infrastructure, “even though that provides fewer opportunities for politicians to cut ribbons or unveil plaques with their own names on them”.
Social housing and childcare
Wood, Foster and Richardson all back more spending on social housing. Wood also suggests a program of sustainability retrofits of public buildings and cautions against simply plucking large projects from the existing transport wish-lists: “COVID will almost certainly lead to long-term changes to patterns of work and travel as well as lower population growth, so the existing pipeline of city-shaping transport infrastructure projects may no longer stack up.”
Unprompted, four of the six economists nominate childcare as an area where more government resources should be targeted in this budget.
Foster says the best way for the government to create jobs both in the short and long term would be to introduce universal childcare: “This would be a great source of employment, including in the regions, plus has huge benefits for young working families, distressed parents and of course future Australian productivity, as the period from 0 to 5 years of age is arguably the most important in human development.”
Getting back to business
As for stimulating business investment and activity, the economists are mixed on the best approach. Thorpe supports a further reduction in the company tax rate for small businesses, currently at 26 per cent.
“We need to shift from taxing people and business to taxing consumption,” he says. However boosting overall consumer confidence is the crucial missing ingredient to getting business to invest, he adds: “Incentives are good and necessary at the margin, but confidence that the market will be there is the key.”
As for Stewart: “I’d prefer a general tax cut for business to 25 per cent.”
Wood says the current instant asset write-off scheme for business could be extended or eligibility broadened for accelerated depreciation. But she too adds that confidence is key: “Priority needs to be boosting demand … certainly these are much bigger barriers to investment than tax in the current environment.”
Eslake proposes a cut in company tax for all new businesses to “say, 15 per cent for the first five years”. This would be far more effective in creating jobs and innovation than tax cuts targeted at small businesses, he says.
Richardson agrees the tax burden on business needs to fall, but says this can be achieved through a business investment allowance rather than a cut to the headline corporate rate.
Foster is against cutting company tax: “Thirty per cent compares favourably with the corporate tax rates in many other countries. Plus large companies will spend resources to find ways to evade tax, meaning fiddling at the margin is unlikely to make a meaningful impact.”
Foster’s bold idea is for a HECS-style loans scheme for small businesses to encourage risk-taking and investment. Such loans could be repaid once revenues hit a threshold: “Such a scheme would take the downside risk burden onto the shoulders of government, and thereby reduce the negative impact of the uncertainty of the present environment on business’ appetite for investment.”
If the economists agree on one main thing, it’s the need for the government to step in – and step in big – to support the economy with extra spending.
Says Foster: “Let’s not worry too much about the debt levels per se. Let’s worry instead about getting the expenditure programs right to transition Australia back into full employment and a healthy, productive private sector.”
Richardson agrees: “I think the budget has to aim at getting jobs back as fast as we can.”
And Thorpe concludes: “We should not get too caught up in specific individual reforms. As we cross the bridge to recovery we need to be running, not walking.”
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.