Published: 29 July 2020

If there’s one policy that’s kept the wolf from the door for millions of Australians, it’s the JobKeeper payment.

While imperfect, it was timely and worked because it was a relatively direct payment to those in need.

One of the federal government’s first responses to the pandemic in March was a tax deduction for spending on plant and equipment up to $150,000 to stop the economy collapsing. Who was going to borrow to install plant with unemployment set to soar and demand about to fall off a cliff?

Thankfully, government was persuaded to adopt more direct assistance for the economy with JobKeeper.

It never takes long for interest groups to trot out their wishlists. The business lobby wants industrial relations reform — lower wages by another name. Lower wages may work for individual employers but surely if everyone did it, lower wages across the economy would lower demand, paradoxically leading to job losses, leading to further economic decline, when the opposite was the aim. Even without these outcomes, the indirect nature of the policy makes it less than ideal for the current crisis. As is bringing forward lower personal income tax with benefits skewed to higher earners who either save the money or use it to speculate in higher asset prices, especially housing, rather than spending in the real economy. We need programs with immediate impacts. Government’s problem is that so many direct programs are provided by state and local governments, whose finances are shaky.

Fiscal difficulties have prompted inevitable calls for amalgamations. Any savings pale into insignificance alongside fiscal challenges facing both levels of government. The states have strong balance sheets. Treasurer Frydenberg says they should use them. Collectively local government balance sheets are even stronger. The suggestion however misses the crucial point. Cash flows are inadequate for the services they’re expected to deliver.

The federal government is a currency issuer. The rest of us, state and local governments included, are currency users. Every time governments spend, private assets increase. That’s what we need. Direct federal spending, via state and local governments where most services are delivered, creating more private assets when it ends in recipients’ pockets.

Everyone in public policy should read Stephanie Kelton’s The Deficit Myth, for a lucid explanation of how government spending works. All federal spending creates bank reserves which she calls green dollars. Whether some are swapped for yellow dollars, in our case interest-paying government bonds, is a matter of interest rate policy, not as a requirement for funding further spending.

A more enlightened view of government spending is a prerequisite for reform of our federation. We should set aside, dare I say, more trivial questions like the size of parliament and councils, and address the structure of our federation and how best to deliver services.

We shouldn’t rely on large infrastructure projects to rescue us. Delays are legendary and flow-on effects tardier than proponents claim. Projects where direct funding will have lasting impacts include housing, free childcare and a better health system.

We are on the cusp of a new era. If we fail to grasp the opportunities, we will burden future generations. We have a pragmatic premier with a better understanding of the challenges than most. We need to be prepared to set aside past practices. The major criticism of Professor Kelton’s view of how the world actually works is that it gives politicians a blank cheque enabling recklessly spending on pet projects, benefiting themselves and supporters.

It is up to all of us to stay informed and design a system across all levels of government with checks and balances to ensure this does not occur.

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