MARION TERRILL AND TONY WOOD. The dos and don’ts of fiscal stimulus

Long lines at Centrelink are a sobering sight. The fear of sustained mass unemployment has led to a renewed push for fiscal stimulus, including for governments to fast-track road and rail projects, re-establish a serious manufacturing sector in this country, invest directly in gas supply projects, and increase subsidies for big renewal energy projects.

But this recession is different. It has a specific identifiable cause – a cause that may be with us for a long time. Even with sufficient testing and tracing to deal with our rational fears of infection, we may still have social distancing restrictions that limit commerce even when consumers are keen, and our borders may remain largely closed to students, tourists and temporary workers.

So what should governments do? In highly uncertain times, it’s prudent to keep options open and invest only where there’s a reasonable basis for believing it’s worthwhile. There will be many interests, both commercial and ideological, seeking to align governments’ post-pandemic investment priority with their vested interest.

One long-term commitment that isn’t going away is to reduce CO2 emissions, to meet the Federal Government’s Paris targets and to achieve net zero by 2050, which is the common target of Australia’s states and territories. We’ve just had a small silver lining: power use has dropped a little with the shutdown, and electricity emissions have continued on a consistent downward trend. If governments want to seize this momentum, they should consider initiatives and investments consistent with a low-emissions future. They should avoid public funding or policies to invest in things that assume the opposite.

The list of things to consider should include accelerating transmission connections and renewable energy zones, and supporting projects to drive down the cost of producing renewable hydrogen. Governments should rule out subsidies or direct investment in renewable energy supply, coal-fired power plants, or new gas pipelines.

Australia may be pretty good at managing natural disasters, but this pandemic has exposed shortcomings in the availability of essential supplies such as personal protective equipment, virus tests, and ventilators – and no doubt others would emerge if we faced a pandemic of a different type. Governments’ response should be to ensure the resilience of essential supplies. But resilience doesn’t necessarily mean manufacturing on-shore; particularly if key inputs come from overseas, on-shore manufacturing may not help, and would probably be more expensive.

Australia can no longer be confident about future population growth. The Prime Minister says to expect a 30 per cent fall in overseas migration this year, and 85 per cent next year. After next year, who knows? Yet the existing infrastructure pipeline is predicated on the population growth we used to have.

Rather than putting the pedal to the metal, as the Prime Minister urges, state governments should thoroughly overhaul their infrastructure programs, and review the business cases of all major infrastructure projects to see whether they are still a priority or indeed whether they are needed at all. Work should start only on those projects that are robust to a range of possible futures.

It’s not only uncertainty about population growth that makes it a good idea to review major projects. There’s also great uncertainty about people’s future travel and work patterns.

For as long as the virus lurks in the community, or is believed likely to revisit us from overseas, many people are likely to avoid public transport unless they’re confident carriages won’t be crowded and fellow passengers will keep their distance. If working from home continues at scale, it may mean delaying new freeways designed to deal with traffic peaks. If people feel safest getting around by car, governments may need to consider congestion charging to ensure that the inner cities don’t get gridlocked in peak periods. If commuters take to cycling and e-scooters in any great numbers, maybe road space should be repurposed to accommodate them safely.

Of course, fiscal stimulus has its own logic, and plenty of people will be happy enough to see new infrastructure that might help us get ahead of demand for new roads, rail, power generation and storage.

But if governments are going to add to the growing debt mountain, they should do so in a way that sets us up for the future we’ll actually have, not the one we imagined before COVID-19. There’s so much we cannot foresee, but we do know that Australia has committed to reduce carbon emissions, that pandemic resilience will always be prudent, and that population growth is unlikely to bounce back any time soon.

print

Marion Terrill is a leading policy analyst with experience that ranges from authoring parts of the 2010 Henry Tax Review to leading the design and development of the MyGov account. She has provided expert analysis and advice on labour market policy for the Commonwealth Government, the Business Council of Australia and at the Australian National University. She joined the Grattan Institute in April 2015 to establish the Transport Program, and has published on investment in transport infrastructure, cost overruns, value capture, discount rates, urban economics and congestion charging.

Tony Wood has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies. In 2008, he was seconded to provide an industry perspective to the first Garnaut climate change review.

This entry was posted in Economy. Bookmark the permalink.

1 Response to MARION TERRILL AND TONY WOOD. The dos and don’ts of fiscal stimulus

  1. Avatar Mark Skinner says:

    I would suggest, without disagreeing with the overall argument, that Australia has something of an infrastructure deficit in some areas. Urban transport infrastructure is overstressed in Sydney, Melbourne and Brisbane. Thus addressing specific areas of need is feasible.

    However, as evidenced by the Sydney Light Rail debacle, just throwing money at infrastructure isn’t a good idea either. At $1bn, and 40% better travel times it might have been economic. At $3bn and slower than 1950? Hmm.

    So, it’s not just infrastructure, but the capability of designing and building it economically, that needs to be re-established. Then combining that capability with realistic economics. At the moment we do neither. Further, a Federal system dividing infrastructure jurisdictions doesnt help.

    So lack of design and build capability leading to unrealistic costs, leading to unrealistic economic analysis plus population increase leading to a poorly performing infrastructure system.

Comments are closed.