Treasurer Josh Frydenberg hates it when it’s pointed out, but Australia’s economy was in poor health well before COVID-19 hit our shores.
A former federal Treasury secretary, Martin Parkinson, said it himself last week.
“Going into COVID, we’d had very weak productivity growth, very weak income growth, economic growth was quite anaemic,” he said.
“If you look at our productivity performance over the last decade, it has been running at about a quarter of its long-run average.
“This is all pre-COVID,” he repeated for those in the back.
Parkinson made those observations on the No Limitations podcast with Gregory Robinson, in a wide-ranging discussion about Australia’s economic situation.
Why would he draw attention to the prevailing weakness in the economy?
Because we need to understand the nature of the challenge we’ll be facing.
Dealing with long-term unemployment after COVID-19 restrictions ease
There’s a big difference between trying to rebuild an economy that has been weak for years, and one that was healthy before COVID-19 ruined everything (as Frydenberg wants the electorate to believe).
Parkinson said the rebuilding task would require exceptional leadership.
“[It] is going to require all sides of politics to basically put aside some of their ideological shibboleths and try and come together in the national interest,” he said.
“This is going to require us to mobilise our community in a way that we have not done, you know, and didn’t even do in the 80s and 90s, [that] we have not done outside of a war-time footing.”
He said Australia already had a “permanent underclass” and he didn’t want it to get larger.
His biggest concern was how to deal with long-term unemployment after the lockdowns ended, and we’d need a strong rate of economic growth to reduce unemployment over time, he said.
“The last time we got to a 10 per cent unemployment rate was after the ’91 recession and it took a decade to get it back to about 5 per cent,” he said.
“[And] in that period, after the 90s recession, we actually grew quite strongly.
“Going into COVID, [growth was] bouncing around about 2 per cent per annum for a number of years.”
At one time last year, Australia’s economy posted its equal slowest annual growth rate in two decades.
The podcast on which Parkinson was a guest was released on Thursday.
On Friday, the Reserve Bank released new official forecasts for the unemployment rate, saying it would likely hit 10 per cent by December and take until December 2022 to fall back to 7 per cent.
Parkinson said robust growth would be vital in coming years to get the unemployment rate down.
But where would the growth come from?
He said according to a framework proposed in 2002 by then-Treasury secretary Ken Henry, economic growth comes from three key factors: population, participation and productivity.
It’s known as the 3Ps.
“They basically, together, determine your potential growth rate,” he said.
Where will the growth come from?
But here’s where things get depressing.
A large part of Australia’s growth in the last 20 years has come from population growth.
The Howard government started sharply increasing the immigration intake in the early 2000s and the practice was continued by subsequent governments.
It’s seen the population swell by 30 per cent since 2000 (from 19 million to roughly 25 million).
With international borders closed, that stream of growth has shut. Perhaps for years.
“Population growth is going to be very sluggish. This year, it’ll be negative because of all the temporary migrants who have left,” Parkinson warned.
Participation is next. That’s also taken a hit.
Since January, the size of the official labour force has declined by 374,000 people.
The participation rate has dropped from 66.1 per cent to 64 per cent. The number of people classified as “not in the labour force” has grown by 533,500.
It wouldn’t be surprising if those numbers get worse.
Parkinson said the trend was for female participation to keep rising in coming years, but it would have a smaller positive impact overall.
“So those two things together [population and participation] — labour utilisation — we’ve known for a long time will not contribute much, if at all, to growth over the next decade,” he said.
“So it really comes down to a productivity story.
“But if you look at our productivity performance over the last decade, it has been running at about a quarter of its long-run average.
“Now, if we want the same standard of living [as pre-COVID] … we would have to almost double our productivity growth rate.”
It’s a sobering analysis.
Can Australia’s leaders manage workforce participation?
But think about the assumption embedded in that 3Ps framework — it takes for granted that we can’t do much directly about participation.
Parkinson laments how it took a decade for the unemployment rate, after the 90s recession, to fall from 10 per cent to 5 per cent naturally.
He fears the same thing or worse could happen this time around, with the associated social destruction.
But it begs the question: why is participation out of the hands of policymakers?
There’s a growing number of people who say it isn’t.
Professor Bill Mitchell of Newcastle University, who’s a leading proponent of an economic movement called Modern Monetary Theory, says the Federal Government ought to introduce a federally funded program that provided a job for everyone who is willing and able to work.
He says a “Job Guarantee” program would boost participation by providing genuine full employment, deliberately eradicating the social and economic wastage of unemployment.
Noel Pearson, aboriginal lawyer and founder of the Cape York Institute, has become a proud supporter of the idea.
The idea has its critics, of course.
Peter Davidson, an adjunct senior lecturer at UNSW, has cautioned that Paul Keating’s old “Job Compact” program from 1994, a smaller job guarantee scheme limited to the long-term unemployed, didn’t fare so well.
But the vital policy problems of unemployment and economic growth aren’t going anywhere.
On Tuesday, NAB releases its business confidence survey (for July).
On Wednesday, the Westpac-Melbourne Institute releases its August consumer confidence figures.
On Thursday, the Bureau of Statistics releases its latest labour force data (for July).
And on Friday morning, Reserve Bank governor Philip Lowe is appearing before a federal parliamentary economics committee.