05/05/2020
Mr Smith began the discussion by outlining the unique problems the COVID-19 crisis presents for the economy.
“We have been fighting a war and it has completely dominated our attention. However, every war has unintended consequences as all the best historians say and the unintended consequences can eventually become more important than the original purpose of the war.
“In our case, the unintended consequences of our response to the pandemic crisis are building up around us very rapidly. We need to shift our attention to addressing these very much because they will have long lasting impacts, particularly on our young people but across the entire community.
“That’s why we need to make the extra effort of putting our economic processes back in play and ensuring we pay attention. There are three big things that we need to get the official view on
“Firstly, the basic profile of this crisis. I believe the profile of this crisis is very unusual, it is nothing like the GFC. We need to have an official understanding that explains what this profile is and will be.
“Secondly, there is a mismatch in the timing in front of us. The budget is set down for October, but the economic crisis response is set down to expire in September. This is to say that everything that we have set down expires before the budget. We have a gap, which is why I called for an economic statement to start the process of being prepared for that gap. If we respond to the gap we are effectively having a budget before the budget. It is really important to realise that we have to get on to this job because we are getting some timing mismatches.
“The final one is that uncertainty itself has a very high potential economic cost. We really need the government to do everything it can to reduce uncertainty.
Weighing in on the topic of an economic statement, Miranda Stewart detailed what she would like to see such a statement address.
“Moving the budget to facilitate an emergency response was the right move but that emergency response is mostly being done by dramatically increasing executive power – the power of the Treasurer and Minister for Social Security to make those changes. This will possibly extend to the end of the year.
“Of course we don’t’ want to govern by executive fiat so I would like to see us get back on track and see those regular stable statements and policies. We need the economic indicators and assumptions that are going to underpin the fiscal estimates. It would be good to see information about the government’s risk assessments…and to also see some details about the next step in the fiscal policy response.”
When the discussion turned to the future of the crisis, Mr Smith offered a caution.
“What we have to understand is that we can’t predict entirely what is going on. We face what various writers have been referring to as radical uncertainty. The challenge in this situation is not to predict what will happen or when, but to anticipate the possibilities, work out what you know and establish a set of rules that let people know how you are going to behave as these things unfold.”
Speaking further on the prospects for recovery, Professor Stewart highlighted Australia’s relative good fortune.
“A healthy economy really depends on healthy people…We need to think about how we can leverage the health of our population due to our handling of the crisis for our future economic response.”
Reflecting on how the crisis will affect our attitudes towards economic policy, Mr Smith highlighted the significance of the changes we have already seen
“We have basically spent about $200 billion transferring net wealth from the public sector to the business community and the household sector. I suspect that wont be the end of it by any means…I am not saying that aims such as a quick return to budget surplus have to be removed (from the budget statement) but I am saying we have to be a bit more realistic if we are going to say anything useful for the next two, three, four or five years. Because I do not think we can return to those concepts of debt and deficit in that timeframe. What was a medium term framework is now a long-term framework and we need to know whether the government agrees with that or whether they are going to revert to that old framework quickly.
“My view is that we are going to have to focus on macroeconomic repair before we focus on budget repair.”
Professor Stewart reflected on how the crisis was likely to play out from a tax perspective.
“We need so shore up our tax bases with some incremental reform. The states are going to see a big hit to their fiscal statements and perhaps there is room there to see some economic stimulus but the Federal Government has to lead that reform. Maybe in future we are going to see that level of leadership on fiscal policy decision making but we haven’t really seen that to date.”