ANDREW PODGER. New Normals: Likely, Unlikely and to aim for. Part 1

May 8, 2020

As governments transition out of the current restrictions to slow the spread of COVID-19 and help the economy towards recovery, it is worth exploring what the future might or should look like.

Much of this is necessarily conjecture given the uncertainties about how long the restrictions must be kept in place and how they might be lifted over time. The modelling so far released does not reveal the likely pathways for adequate control of the pandemic nor the likely longer-term death rates however successful we are at ‘flattening the curve’.

The following is also selective, focusing on a few of the public policy and administration fields that might or should experience a ‘new normal’.

Economic Policy

The pandemic has drawn attention to the need for better risk management, including the importance of some redundancy and protection against supply chain disruption given modern just-in-time processes.

Suggestions of a more fundamental shift to constrain globalisation and re-introduce protectionist measures are both unlikely and undesirable. Globalisation has been a key driver of productivity growth and improved standards of living in both developing and developed countries. If anything, we need renewed effort to strengthen the international rules-based order.

There is also a strong case for a renewed effort to address obstacles to economic growth which offers the best way to reduce unemployment and, over time, to address increased public debt. No doubt there will be political debates about what the obstacles to economic growth are and what measures should be taken. Sluggish economic and wages growth since the GFC suggests, as Michael Keating has argued, there are structural problems as well as cyclical ones and incentive ones. Continuing technological change requires increased public investment in skills training and retraining. Demand also needs to increase if business is to invest; this would be helped by measures to halt the growth in inequality.

There are other obstacles to investment and productivity improvement, but they require more careful study than the mantra of lower corporate taxes and reduced marginal tax rates. Colleagues at the ANU’s Tax and Transfers Policy Institute are suggesting broader changes to the tax system including a re-think of the design of corporate taxes (without necessarily reducing them), more consistent taxing of income from savings, and increased reliance on the GST and property taxes. Ken Henry last month went further suggesting a new tax on business cash flow to replace the GST, payroll taxes and insurance duties.

Consistent with fostering demand, any tax reform agenda should enhance fairness and include adjustments to social security and personal income tax (see further below). Potential economic benefits include more productive allocation of national savings (eg away from housing), reduced costs of market transactions and fewer opportunities for avoidance (eg international profit shifting); tax collection could be more certain and less costly to business and government.

Whether workforce regulations are still imposing major obstacles is debatable. Indeed, the current crisis has highlighted the vulnerability of casual labour. Any changes will need to be nuanced, allowing more flexibility where regulation is significantly constraining employment but not where the main impact would be to increase job insecurity.

Social Policies

The Jobkeeper package may be suited to this crisis where the government has disrupted employment; assistance via employees should aid quick recovery as health restrictions are lifted. But it is not a better model for future social security than the safety net Australia has relied upon since the Second World War.

Some suggestions have been made that we should modify the Jobseeker approach to introduce a ‘basic income’ scheme, giving everyone a minimum income and providing protection particularly to those in casual and part-time work.

This idea previously termed ‘guaranteed minimum income’ (GMI), is not new though some ANU researchers have recently presented new options as to how it might work. Fundamentally, however, Australia already has a reasonably effective if not always adequate GMI, at least for those unable or not expected to work (the aged, disabled, unemployed, sole parents with young children etc.) This categorical approach is supplemented by assistance for low and middle-income families with children. The approach allows more generous assistance for those it covers than a universal GMI could. It would be possible to complement it with a less generous basic income for those not in the disadvantage categories, but would the community be willing to fund support for people with no dependent children and no particular reason for not supporting themselves?

More important is to make our existing system better. During this crisis, everyone is recognising that people have lost jobs through no fault of their own. In addition to Jobkeeper, Newstart (now Jobseeker) has been doubled on a temporary basis and the language of ‘lifters and leaners’ has been suspended. But even when the economy is humming people must move in and out of employment (frictional unemployment) and some lose jobs as the economy shifts (structural unemployment); these people often have limited skills and/or health and social disadvantages. It is not fair to treat them as undeserving by giving them much less support than others unable to work by reason of age or major disability.

Frankly, Newstart should guarantee the same minimum income as that available to other social security categories. Concerns that this would cause financial disincentives to work ignore Newstart’s tight eligibility conditions and the role training and retraining programs should play. At the very least, an ongoing substantial increase in Newstart is needed and, as Henry recommended a decade ago, indexation on the same basis as for other payments. Rental assistance for all welfare recipients in private rental housing also needs to be increased.

The ’basic income’ model does highlight one of the other weaknesses of the current tax and transfers system. That model involves a hefty increase in the tax threshold – when tax first exceeds the basic payment. While the community is unlikely to be willing to pay people regardless of personal capacity, it has long favoured progressivity in the tax system; and it is the tax threshold that does most to achieve this. The Henry Review recognised this and recommended a significant increase. Sadly, that is not how the Government’s legislated tax changes are designed. A more appropriate income tax scale would have a big increase in the threshold with a slightly higher standard marginal rate than the 30% proposed by the Government.

A final aspect of the social policy new normal we might aim for concerns inter-generational equity. This is important, but the problem should not be exaggerated. It is true that repayment of the public debt will fall primarily on current and future workers, but the scale of existing tax relief for superannuants is often exaggerated, and little recognition is given to the fact that most current superannuants have not benefited from lifetime membership of a mature system (public service retirees like me are the exception). Payments from taxed superannuation schemes are exempt from tax but, unlike most overseas schemes (and the old public service schemes), contributions have been taxed in the past as have fund earnings. The upfront tax is, post-Turnbull, progressive and there are limits on contributions.

Rather than focus on increasing tax on superannuation, we should place more effort on ensuring retirees translate their superannuation savings into secure retirement income streams and penalise them if they instead leave excessive money in their estates. And we should look to phase in the inclusion of the home (above some threshold) in the age pension means test.

Originally published in the Canberra Times, 5 May, re-posted with permission of author

Share and Enjoy !

Subscribe to John Menadue's Newsletter
Subscribe to John Menadue's Newsletter


Thank you for subscribing!