It is not enough to get back to where we were, we need to catch up the production that would have happened while we were recovering
When you hear the economy has shrunk by 7% or that GDP per capita has dropped 7.2% it can be tough to grasp exactly what it means. So instead of percentages, think of years. The Covid recession has in effect wiped away nine years of growth in three months.
In the June quarter, Australia’s GDP per capita was $17,371. The last time it was that low was in June 2011.
For some context, the early 1980s recession took us back four years, the 1990s recession lost three and half years of growth, and the GFC a year and half.
Imagine what you have achieved over the past nine years and then think of having to start over to reclaim that income and production.
What you immediately grasp is that it is going to take a while – losing production is easy; recovery is harder.
Past recessions tell us it takes roughly the same time to get back the years that are lost. If the economy loses five years of growth it takes around five years to get back to the pre-recession peak.
But that only gets us back to where it was before disaster struck – we are still not fully recovered.
Think of it like a family holiday.
Imagine you have packed the car, got the kids in the back seat with their iPads to pass time on the long journey, and off you go.
Then after half an hour you realise you left your wallet on the kitchen bench. You turn around, drive for half an hour to get the wallet, and then drive another half hour to get back to where you were when you realised you didn’t have it.
At this point you are not thinking you have not lost any time, rather you know you should be an hour further along the road.
And so it is with an economy – it is not enough to get back to where we were, we need to catch up the production that would have happened while we were recovering. To do that we need to have the economy running much faster than it was before everything went kaput.
That is hard, because an economy doesn’t go fast all the time (if it was easy we’d always do it). And as with the car trip, regaining that lost hour will take a lot more than an hour of driving, even if all things go well.
It actually took until the end of the 1980s to catch up after the 1982-83 recession, and then another eight years to catch up from the 1990s recession.
The key to recovery is to first stop the fall – and there is every likelihood we have not hit the bottom yet.
But then you need to acknowledge the task ahead.
The task at the moment is about getting production going.
Crucially in the latest GDP figures, private investment collapsed, but public-sector infrastructure spending barely grew. The government’s contribution to growth was all through increased spending measures such as jobseeker and jobkeeper.
We need much more public investment – as Paul Keating said on Radio National this week we should be “building public housing till the cows come home”.
The other crucial aspect is that we have all begun saving a lot more of our money.
The savings ratio rose to its highest level since 1975. Partly this was because there is less ability to actually spend money on things, and also because when you are afraid you might lose your job, you don’t buy those things you can do without.
It’s why the government hinting at bringing forward the tax cuts is ludicrous. Those tax cuts don’t help those without a job, and they massively benefit those earning above $120,000 – hardly the ones “doing it tough” right now (or ever).
But what makes it worse is such tax cuts would arrive at a time when people are less able to spend the extra money they would have (and thus grow the economy) than ever before. All they will do is let wealthy people save more money.
And they would occur at the same moment the government is cutting the jobkeeper and jobseeker rates.
It would be like thinking the way to recover the lost hour of your car journey is to take the iPad from one of the kids and give it to the other so she has a second iPad to keep her more entertained for the rest of the journey.
We have a long journey ahead of us and this government needs to realise tax cuts are no quick fix and that without massive public investment we will never recover the lost ground.
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