Australia’s recession: Tax cuts, tough decisions needed
Australia is officially in a recession.
The June quarter National Accounts, released today, confirm that action taken by Federal and State Governments to deal with the COVID-19 pandemic have had a significant impact on revenue, expenditure and GDP.
In particular, they reveal a major decrease in household consumption and business investment, a 7.6 per cent fall in real GDP and sharp increases in unemployment and underemployment.
The figures, described by Federal Treasurer Josh Frydenberg as “devastating”, also showed continuing uncertainty over the length of the pandemic has impacted personal spending. Nervous households are retaining more of their savings, as reflected in the savings ratio – the proportion of national income saved for a rainy day – which has increased from 6 per cent to 19.8 per cent.
The hope is that as most States continue to return to somewhat normal conditions, the economic clouds will part as growth is stimulated by stronger household consumption.
However, business and dwelling investment is not expected to recover as quickly until there is more certainty and will continue to rely on government support.
While the spread of the virus in Australia has been controlled far more successfully than in many other countries, we have nonetheless been critically impacted by the global ramifications of the pandemic as a trade-exposed, open economy.
Even if Australia manages to keep the virus under control, or a vaccine is found in 2021, the hard truth is that our national outlook is still dependent on our international trading partners.
The continued international border closure will have a negative impact on major industry sectors, including aviation and those dependent on seasonal workers, such as agriculture, horticulture, logistics and delivery.
Unemployment will continue to be a challenge. Without a sustained improvement in business confidence, the labour market is likely to take a few years to recover.
Other factors, including consumer confidence, the easing of government restrictions and the influence of monetary and fiscal responses, will all affect the rate of our economic recovery.
The Government’s monetary and fiscal policy has so far focused on measures to stimulate economic growth and employment. Tough political decisions will need to be made to re-establish consumer and investor confidence.
More than ever, we must focus on what we as a country do well.
The ABS data shows show Western Australia’s domestic economy was the only State to experience growth for the 2019-20 year, growing 1.1 per cent.
This growth was underpinned by strong business investment, which grew by 9.3 per cent, in part driven by the mining sector which was able to continue operating throughout the pandemic.
Continued support for domestic resource companies to ramp up existing operations to pre-COVID-19 levels will be crucial. Recommencing exploration and evaluation studies for shovel-ready projects that provide a medium-term pipeline for further growth; equally vital.
It is essential for Australia to remain internationally competitive if we are to recover quickly from the current recession.
Tax reform – while less sexy – should be a cornerstone of the stimulus considerations.
Personal income tax cuts have been flagged for immediate stimulus, but businesses complain they remain hamstrung by uncompetitive company tax rates and inefficient state taxes such as stamp duty and payroll tax.
It’s an area in need of reform, but reforms of this scale will not come easy. They will require significant political capital to be implemented, and such action will come at equal political risk – but the consequences of inaction and continued economic turmoil are far more catastrophic.
If good leaders emerge in times of crisis, great leaders will be crowned in the wake of the pandemic.