Opinion

Richard Denniss
How Australia can avoid economic collapse in the wake of Covid-19

For decades, Australians have been sold an imagined poverty. We have been told we need to “rein in” government spending – that if we want to spend more on health or education, we will need to spend less on the age pension or childcare. The Coalition even has an arbitrary cap on the size of the public sector – 23.9 per cent of gross domestic product. Such bizarre targets, which have nothing to do with economic theory, have proved a powerful rhetorical tool.

But the reality is that if we had a bigger public sector today, we would be better prepared to weather the health and economic crises triggered by the coronavirus. Hopefully, by the time we come through this, we will have learnt that lesson once and for all. Because nobody thinks “the market” is best placed to tackle the coronavirus. Nobody thinks governments should step back and let the private sector step in. One of the first casualties of Covid-19 in Australia is the neoliberal rhetoric about government spending being a “cost” to the economy.

As China has shown, if you are interventionist enough, and crush economic activity hard enough, you can stop the spread of Covid-19. As Italy has shown, if you are laissez-faire, you will overwhelm your hospitals. There is no avoiding this choice. Delay and dissembling will deliver the worst health and worst economic outcomes.

But neoliberalism is all about delay and dissembling. For decades, we have been told that if we cut spending on health and welfare today, we can grow the pie and all be better off in the future. Of course, in reality, if we had spent a lot more on the health system, we would be better off today and in the future.

Promising the world in the future and blaming your opponents for the present has worked a treat for successive Australian governments – but the government can’t spin its way out of recession or a pandemic. Blaming Labor, the unions or the states won’t work, and in Covid-19 the Coalition has finally encountered a group of victims whom it can’t blame either.

There are two ways forward. The Morrison government can either wield the enormous power of the state to regulate behaviour, spend an enormous amount of money and provide clear guidance to the public – or it can let the markets, and the virus, do as they wish. There’s no point aiming for “balance” or a “middle ground”.

The choice is clear: we can make the public sector a lot bigger or the population a lot smaller.

There is nothing in the economics textbooks that suggests we need to cap the public sector at 23.9 per cent of GDP. Sweden’s public sector, for example, accounts for 44 per cent of its national income. The public sector should be just big enough to solve the problems we want the public sector to solve, and right now it seems that even conservatives want a much bigger health system and a lot more public support for private economic activity. The task the government has is in making choices about where and how to spend money. I have some suggestions.

We need more front-line health workers. Hospitals and universities should be training, and retraining, as many people as they can to prepare for the peak of coronavirus hospitalisation, which is still months away. We know that Centrelink’s call centres couldn’t keep up with demand before this crisis, so it’s clear the government needs to employ a lot more people to service the growing demand on our welfare services and the public’s clear need for accurate information.

The government also needs to think big and outside the box. Airline crews – already skilled in first aid and managing emergencies – would be great candidates for fever clinic training. Airports – large and secure spaces that will be mostly empty – could be easily bent to public health needs. Broadband internet, a vital resource in this time of social distancing, should be provided free to all households. Spending on welfare remains the quickest and fairest way to pump money into the economy, through the pockets of people who need it the most.

To the issue of scale, the $17.6 billion stimulus package announced last week doesn’t even touch the sides of what’s now needed. It may have signalled the end of a decade of neoliberal posturing about the importance of budget surpluses, but the actual result will need to be closer to $170 billion.

We don’t just need a cash splash, though; we need new public projects to fill the void left by private investment. Big projects – roads and tunnels – take years to plan and require specialised equipment that is in short supply. No coal-fired power stations will be designed, let alone built, by the time the Covid-19 health crisis has passed.

But, luckily, with idle labour and record-low interest rates, there has never been a better time for governments and community groups – with public funding – to do all the maintenance and repairs they have been putting off for years. Just think of all the schools, halls, train stations and public toilets that need tiling and painting. We can finally put airconditioning in all classrooms in public schools and solar panels on their roofs. Likewise, large solar arrays can be installed in regional areas, along with new electricity distribution and transmission lines.

If the prime minister acts fast, and spends fast, we can have more jobs today and better amenities for years to come.

No doubt some in government and business will soon start to caution us about racking up debts for future generations. Leaving aside the need to save tens of thousands of lives, and hundreds of thousands of jobs, it’s important to think through what governments borrowing money at near-zero interest really means. The fact is that of all the times for governments to spend big, now is as good as it will ever get. The interest burden on the borrowings for the stimulus, like the interest burden on the average mortgage, will be trivial compared with the long-term benefits of making good investments today.

And while everyone wants to repay their home loan before they retire, it’s important to remember that nation-states, hopefully, never retire.

The neoliberal fairytale – the smaller the government, the richer the country – is about to do enormous damage to the health and wealth of nations, not least the United States. The past decisions of governments will play a role in how countries cope with the coronavirus, as much as the decisions they make in the coming weeks. Those with well-funded public health systems and spare capacity will save a lot more lives and incur smaller economic costs.

Just as the bushfires changed Australians’ views on climate change and the importance of investing in emergency services, Covid-19 will change Australians’ attitudes towards spending on the public health system and, almost inevitably, public spending in general.

Australia is one of the richest countries in the world. While the value of our investments and the size of our economy will likely be smaller in six months’ time, we will still be one of the richest countries in the world when this crisis is over. No good will come of Covid-19, in terms of our health or our wealth, but with luck, the virus will kill off the bizarre idea that Australian governments can’t afford to solve the problems we face.

This article was first published in the print edition of The Saturday Paper on Mar 21, 2020 as "Spending the right message".

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Richard Denniss is The Australia Institute’s chief economist.