Scott Morrison needs to target his spending at significant problems or he will only be remembered for debt

Richard Denniss
Photograph: Mike Bowers/The Guardian

The Coalition just announced a $130bn wage subsidy when the budget is already in deficit. As that sinks in, try to absorb the fact that the $130bn wasn’t targeted at any vulnerable group and had absolutely no “mutual obligations” attached to it. It was not “funded” by spending cuts elsewhere or new forms of revenue.

Everything you thought the Coalition believed about economic management was thrown overboard on Monday, and it’s not before time. The silly rhetoric and rules of “neoliberalism” were never based on economic theory or evidence. Fortunately, in the face of a genuine crisis the Morrison government has embraced the reality that the one thing the economy needs most, right now, is an enormous budget deficit.

In the last 20 days Scott Morrison has spent about $200bn. A month ago, most people thought a country with an annual income of $2,000bn a year spending $10bn was a lot. But when Morrison spent $130bn subsidising businesses to (hopefully) keep employing people he wasn’t asked a single question about “where the money would come from” or “how he would fund his new policy”. It’s not just the politicians that have become crisis Keynesians.

Australia is on track for a budget deficit of $300bn. In addition to the enormous cost of the wage subsidies and welfare payments, there will be huge increases in spending on health and community services. Once the health crisis begins to clear, there will be hundreds of billions of dollars’ worth of further stimulus to bring some, but not all, of our “hibernating” economy back from the dead. And then there’s the inevitable decline in tax revenue from business, individuals and the GST. At the end of this crisis commonwealth debt/GDP is likely to hit 100%. The budget deficit will, rightly, be as unprecedented in size as the shock to the economy Covid-19 has delivered.

But it’s not just the rhetoric about the “evils” of debt and deficit that now lie abandoned by the Coalition. For decades we have been told by conservatives that the best way for government to boost economic activity is to cut the tax rates paid by high income earners and businesses. But in all the $200bn worth of stimulus spending announced this month, there’s not been a whisper about cutting taxes. Even the Business Council of Australia has been strategically silent.

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According to last year’s budget papers, the commonwealth expected to collect less than $100bn this year in company tax. But it has announced a so-called “jobkeeper” package of $130bn over six months. If the government really believed that cutting taxes would make firms invest and create jobs, they could have simply abolished company tax, but they now admit that only public spending can be relied on to boost economic activity in times of crisis.

Which brings me to the role of the public sector more generally. Last Christmas Eve, the former deputy prime minister Barnaby Joyce released a remarkable video in which he concluded: “Look, I just don’t want the government any more in my life, I’m sick of the government being in my life.”

Plenty of people are sick right now, but I don’t hear many Coalition MPs saying that they are sick of pesky governments interfering in our lives. Just as firefighters and police risked, and gave, their lives to save others fighting the fires that raged over summer; nurses, teachers, paramedics and police are risking their lives to keep our essential services functioning, as a deadly new threat invades our society and their workplaces.

Australia is one of the richest countries in the world, yet we came into a summer of fires and this winter’s deadly virus poorly prepared and poorly resourced to protect ourselves or each other. Decades of funding cuts have stretched our health, welfare and crisis housing services to breaking point. Just as our firefighters lacked essential equipment to deal with summer’s fires, Australian hospitals – that can barely cope with Friday night workloads during the regular winter flu season – are working around the clock to prepare for the flood of expected Covid-19 patients. If we had as little time to prepare as Italy, our hospitals would already be overwhelmed.

There is no doubt that the Coalition has embraced big spending, but it is still fighting tooth and nail to keep government as small as possible. The vast majority of the stimulus spending has gone to employers – who now get to decide which staff will be eligible for a $750 a week wage subsidy and which will have to line up for the less generous dole. Hundreds of thousands of Australians will soon be thanking their boss for “keeping them on” instead of thanking the government for paying 100% of their wage. Well played, Scott Morrison. Well played.

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There is a big difference between pumping money into the economy and creating jobs. When governments pour hundreds of billions of dollars into existing businesses it’s literally impossible to use that money to encourage new things to happen. Targeted wage subsidies have an important role to play in keeping people working through this crisis, but subsidising the wages of 6 million workers to prevent 1 million of them losing their jobs isn’t targeting, it’s an enormous transfer of wealth to the owners of profitable businesses.

The economic crisis isn’t over and neither is the announcement of enormous new spending policies. Rounds four and five of new spending are likely to arrive as quickly as the first three. But unless the government shifts its thinking to recognise the need for bigger government, as opposed to just bigger spending by government, the welfare of the economy and the population will be harmed for years to come.

While creating jobs is important, so too is creating the goods and services that the Australian public will need both to get through this crisis and to thrive after it has passed. During the Great Depression, governments built beautiful art deco ocean baths that created jobs at the time and, importantly, still create joy for hundreds of thousands of Australians 90 years later. Good decisions now will deliver benefits for decades to come.

The Coalition was obsessed with pointing out during the global financial crisis that pumping money into the economy is the easy bit. Targeting it at things that deliver benefits to citizens is a much, much harder task.

In 20 years’ time, kids around Australia will still be benefiting from the school halls Wayne Swan and Kevin Rudd rolled out, as fast as they could, during the GFC.

Unless Morrison starts targeting significant spending at significant problems, it’s possible that all we will remember him for will be the record level of debt.

  • Richard Denniss is the chief economist at the independent thinktank the Australia Institute