The Mandarin asked me to pontificate about the budget – along with some other ‘brains trusters’. I got a bit carried away with myself and wrote an op ed length piece. It’s not really about the budget as it’s likely to be, but about some larger questions about what fiscal policy should look like in a post-COVID world.
I was very impressed with the Government’s early handling of the economics of the COVID crisis right down to the Prime Minister explaining that, consistently with the nation’s unique welfare system, governments owe the same level of emergency financial support to every Australian, and not, as was common in other countries, some payment in proportion to their existing income.
It’s not always the case of course, but it is more often than we appreciate that the generous course is also the most prudent. That’s particularly true when economies are struggling. It was true of the Marshall Plan in the late 1940s which involved the US effectively gifting its recently defeated enemy, Germany around 2% of the US GDP. If the West had done the same with Russia after the fall of the Berlin Wall, how much healthier, happier and safer might our world be today?
The risk now is that governments turn towards austerity before we return to full employment. This happened with a vengeance in the northern hemisphere after the GFC with disastrous consequences both economic and political.
But it also happened here. The RBA consistently dragged the chain on returning vigorously to full employment even to the point of missing its inflation targets. And in that context, moving to balance the budget did more harm than good, helping to keep hundreds of thousands more Australians unemployed and underemployed than would have occurred otherwise.
We should learn our lesson and this time macro policy should err on the side of doing too much, not too little. In fact, in the spirit of not wasting a crisis we could initiate some really big reforms. Each would have their opponents, but each would be much easier than tax reform or tariff reform was.
Ross Garnaut and others have scoped out two bold reforms that combine long-term economic gains with large fiscal costs upfront. And that’s exactly what is needed in our circumstances.
The first involves transitioning to corporate cash flow taxation from the current loophole laden system. This gives business a cash flow boost up front but makes it much harder for the Amazons and Googles of the world to shift profits offshore, so it would generate more revenue over time.
The second implements Milton Friedman’s ideas for a universal basic income for all instead of the dole for some with the abolition of tax-free thresholds and other complexities of our welfare and tax systems. This costs the budget more while unemployment is high, but brings in more revenue closer to full employment. So not only is it well suited for our current circumstances, it leaves us with stronger automatic stabilisers. So they’ll be working more strongly against the next downturn when it inevitably occurs. It would also leave behind the shameful politics of humiliating those doing worst in our society. To invoke a cliché, rather than harass them, it gives them a go.
We can also improve the budget mightily by breaking the private banks’ monopoly on money creation. I’ve previously proposed everyone having an account at the RBA on competitive neutrality grounds. If Westpac is favoured with such an account why, in the age of the internet can’t we all have a suitably basic one for transactions and, I’ve argued super-collateralised loans (of up to 60 per cent of the value of our homes)? This too would intensify the automatic stabilisers in the system, increasing budget revenue by tens of billions of dollars as interest rates rose with recovery as well as improving the security and efficiency of our payments system.
Researchers at the Bank of England have suggested something with similar effects – the introduction of central bank digital currency – probably using distributed ledger technology. They argue it could expand GDP by a whopping three per cent. It would reduce transaction costs by creating a new, more efficient payments system, and generate a large fiscal dividend for government via seigniorage and lower borrowing costs.
For the precise measures of the stimulus, I’d mostly be throwing away the hard hats and ‘high vis’ jackets. Where it’s not already ‘shovel ready’, heavy infrastructure investment takes many years to get going.
- Continue protecting jobs that might otherwise disappear. If we don’t, it will slow recovery as demand returns in tourism, the arts and tertiary education (there were some innovative expansions of university research infrastructure funding in the last stimulus).
- Launch a big social housing building program – which would generate more jobs per dollar in outlays than building private houses.
- Further, expand funding to green innovation and investment.
- Generate new jobs particularly where they help build human capital and employ people with low skills while supporting them to improve them. A three-year federal teachers aid scheme would tick both boxes, while a nurses aid scheme in aged care ticks one and a half if we could develop training to allow aids to build their skills towards better jobs in the future. But there’s plenty more one could do.
But, as we watch on horrified by the rate at which our democratic world is falling apart, we should understand that there are times in history when generosity is its own reward. We reap what we sow.