Ending the pandemic-induced economic slump and achieving a strong and durable recovery is one of the biggest challenges faced by governments since the Second World War.
Hopefully Treasurer Josh Frydenberg's much anticipated economic and fiscal update on July 23 will tell us more about how his government plans to meet this challenge.
The pandemic and associated lockdowns and shutdowns have already taken a terrible economic toll - and there is more to come. Deep recessions do long-lasting damage, and the unique nature of this recession ensures the damage will be even more enduring than usual.
The Prime Minister has said the government will aim to lift the economic growth rate to an average of 3.75 per cent for five years in order to get back to the trend growth path. This would be a major achievement, given that the average growth rate in the five years before the pandemic was only 2.5 per cent. We have not had a five-year average as high as 3.75 per cent since 2004.
But even if it were to be achieved, we would still have forgone $500 billion of economic output in total over this year and the next five as a result of GDP being below trend. That's 25 per cent of a year's pre-pandemic output; or put another way, it's around $20,000 per head of population.
Australia's economic performance will always depend on global economic conditions; that's a given. If there are misguided policies in the major countries or further adverse shocks from abroad, we will suffer. But what we can control are our own policies, which ultimately determine how well our economy does.
What we know so far about economic policies here does not inspire confidence that the PM's goal will be achieved. Even before the pandemic, the Australian economy was underperforming and in need of reinvigoration. Growth had been mediocre for some time, business investment and productivity growth were depressed, and average living standards were going nowhere.
A return to the business-as-usual policies that contributed to those outcomes would likely produce the same mediocre results, not the strong and durable recovery that's needed.
Economic security blanket policies such as JobKeeper certainly won't produce a strong and durable recovery either. JobKeeper served its essentially short-term emergency purpose of preserving employer-employee attachment during the shutdown, so that it would be easier for workers to pick up where they left off.
But in the longer term, JobKeeper becomes JobKiller because it stifles incentives and keeps resources bottled up in unproductive activities or in businesses that have no future. The longer such schemes remain in place, the greater the distortions they impose. We must move on from JobKeeper and the COVID-19 restrictions that led to it in the first place.
There has also been a large Keynesian fiscal stimulus. This approach also has its limits, and repeated doses of stimulus would produce diminishing returns while adding to the mountain of government debt. It may help get a recovery started but it won't produce a vigorous, durable recovery.
Any new budget announcements to replace the current emergency measures should be consistent with an economic reform agenda to encourage the creation of lasting, productive jobs in the private sector and longer term productivity growth.
This points to the most sustainable way out of the COVID-19 recession: growth in business investment, productivity and real wages.
Right now, business and consumer confidence is depressed and there is an abundance of uncertainty. But once the crisis mentality recedes, the private sector will respond to incentives for enterprise and innovation, and to the removal of regulatory obstacles.
It is often said that COVID-19 has changed the world - and if it has, businesses must have the flexibility to adjust.
There is a long list of needed reforms.
There is a long list of needed reforms, which can't all be implemented at once. The priorities should be the ones that can support job creation in the short term while contributing to higher productivity growth in the longer term.
These include reductions in company and personal income tax and rebuilding an effective enterprise bargaining system.
It is to be hoped that the Treasurer's statement on July 23, makes a start on this journey.
- Robert Carling is a Senior Fellow at the Centre for Independent Studies and a former economist at the IMF and federal and state treasuries.