There’s an old saying which goes “desperate times call for desperate measures”.
It means actions which may seem extreme in normal times are appropriate during adversity.
It could be fairly argued now is such a time.
Imagine the pressure on Federal Treasurer Josh Frydenberg as he prepares to release the horror year Budget next Tuesday.
There is little or no doubt he is preparing to unleash an unprecedented amount of spending.
He has no choice. Revenue raising would further crush a debilitated economy. He must spend to stimulate the economy.
The outlook is bleak. We have an expected deficit of more than $200 billion (unprecedented) and unemployment is at 6.8 per cent as of August. It’s incumbent upon the Treasurer to come up with a clear and sustainable recovery plan. It comes with risks, but they’re calculated.
To appreciate the fragility of the balance look first at the stark contrast with circumstances around the 2019 Budget. Growth is lower, unemployment is higher, and we have more than 1.5 million Australians receiving JobSeeker payments.
To combat the economic devastation of COVID-19, policymakers are providing unprecedented support to households, firms, and financial markets. While this is crucial for a strong recovery, there is considerable uncertainty about what the economic landscape will look like when we emerge from this lockdown.
As the expression goes, those who do not learn from history are doomed to repeat it.
The COVID-19 recovery pathway is still largely an unknown. A policy road map to an expeditious and efficient economic recovery is a well-travelled one. You need not look any further than the Reagan and Thatcher administrations who tackled different, but similar issues.
Both Reagan and Thatcher dealt very successfully with proportionate economic challenges for their time, particularly stagflation, high unemployment and rampant inflation.
We have a historical and empirical precedent to guide our fortunes.
Reducing red tape, cutting taxes and creating strong incentives to work were the pillars of their success – and this year’s Budget response to the COVID-19 pandemic should be no different.
Margaret Thatcher was elected in 1979 at a time of sclerotic growth, inflation topping 25 per cent and mass strike action. ‘Thatcherism’ represented a bold reformist agenda, emphasising free markets, restrained government spending and tax cuts to drive economic growth.
The one exception to the restrained government philosophy was the National Health Service, in which Thatcher famously promised the NHS was “safe in our hands”.
Thatcher’s prolific economic record shows the administration was able to craft a Budget of hard heads and soft hearts. Advancing productivity gains whilst bringing our most vulnerable on the journey.
In the wake of COVID-19 there will invariably be a strong demand for mental health services through agencies like the National Disability Insurance Scheme. These agencies will require more funding, not less, in order to fully maximise our nation’s economic potential through workforce participation. This point cannot be overstated.
From a similar school of thought, Ronald Reagan inherited an economy beset by sluggish growth and high inflation when he entered the Oval Office.
Reagan’s policy platform, known as “Reaganomics”, was built on lower taxes, deregulation and reduced government spending on government services.
The top marginal tax rate was slashed from 70 per cent to 28 per cent, and the corporate tax rate was reduced from 48 per cent to 34 per cent. Despite the decrease in statutory tax rates, Reagan increased public revenues by 57 per cent between 1980 to 1988. In the same period, unemployment fell to below 6 per cent.
Although economists and politicians continue to argue over the effects of Reaganomics, it created one of the longest and strongest periods of prosperity in American history. Between 1982 and 2000, the Dow Jones Industrial Average grew nearly 14-fold, adding more than 40 million new jobs to the economy.
While Treasurer Frydenberg warms up his sales pitch for this years’ budget, his recent reference to Thatcher and Reagan for inspiration has been met with a mixed response. The nay-sayers are reheating the same arguments levelled against a Reagan/Thatcher economic reform agenda.
But with our nation now saddled in debt and nearly a million people out of work – Frydenberg is right to pursue a Budget that is bold enough to regain the ground we have lost to COVID-19.
Nay-sayers be damned. Now is the time for more jobs, lower taxes and a stronger health care system for our most vulnerable. Who could argue with a Budget which delivers on that?
It may well be a Budget unilateral in nature because we can’t rely on the usual economic predictability of the region — or the world for that matter.
As they say, desperate times call for desperate measures.
Bradley McHugh is an economist and policy wonk. The views expressed here are his own.
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