Getting Australia safely back to work

A year has passed since the MRC published the Ergas report with its level-headed proposals on a managed recovery from the pandemic. Those recommendations remain as pertinent as ever.

The following is an extract of the July 2020 report “Covid-19: Getting Australia Safely Back to Work” by Henry Ergas and Joe Branigan.

Only a handful of events in the last 75 years can be defined as an identifiable break in the social, cultural and economic life of our country. The SARS-CoV-2 (coronavirus) global pandemic that causes the coronavirus disease (COVID-19) has changed Australia and the world.

From the perspective of the expected economic shock of the coronavirus pandemic in 2020, previous Australian recessions in 1981-82 (-2.2% annual growth) and 1990-91 (-0.4%) now appear mild. Australia’s GDP declined by 0.3 percent in the March quarter 2020 and the consensus of the recent economic modelling points to a dramatic decline in June quarter Australian GDP of up to 30 percent (or 7.5% in annual terms), even accounting for government measures such as the JobSeeker and JobKeeper payments and cash boosts for small and medium businesses. Employment decreased by almost 600,000 workers in April and a further 228,000 in May as thousands of businesses were forced to shut down as a result of the social distancing measures introduced. Australia’s unemployment rate stands at 7.1 percent in May 2020 although the true rate of underemployment is almost double that at 13.1 percent. Everyone’s lives have been changed dramatically in 2020, and perhaps to an extent permanently.

The global pandemic has immediately followed one of Australia’s worst summer bushfire seasons. The 2019-20 ‘Black Summer’ bushfire season destroyed 18.6 million hectares of bushland and almost 6,000 homes, and directly killed 34 people. In early January, there were concerns for the regional tourism sector and talk of delaying the 2020 Australian Tennis Open. Charities raised many tens of millions of dollars for regional centres to get back on their feet and the federal and state governments announced major infrastructure investments in regional centres to support economic recovery.

However, the economic and social consequences of the national response to this global pandemic have been far greater in scale and impact than any response to any natural disaster in Australia’s modern history. Australia has not experienced widespread food and grocery hoarding, shortages and rationing since the lifting of the restrictions imposed in the Second World War. And never since the flu pandemic which followed the end of World War I have citizens’ movements been so limited by government, with state borders closed and movements limited to half a dozen reasons within a few kilometres of home. Moreover, never has an Australian Government wilfully shut down large and significant parts of the economy, throwing tens of thousands of Australians out of work, in order to meet a health policy objective.

At the time of publication 108 deaths had been attributed to COVID-19, which amounts to approximately five deaths a week since the first positive case was reported on 24 January. However, measures introduced by the Australian Government at an early stage have ensured that the direct health impact on the Australian population is negligible. And the impact might have been even less with better public health management, the handling of cruise ships being an obvious example.

When the crisis struck, policy-makers faced a situation that economists often describe as ‘radical uncertainty’ in which decisions had to be made with little guidance as to underlying probabilities. Moreover, at that time, epidemiological modelling (some of which has been recently called into question), pointed to the possibility of catastrophic outcomes, including the swamping of hospital capacity. Prudence demanded that governments respond resolutely despite the very high costs involved.

At this point, however, the characteristics of the disease and the effectiveness of alternative policy interventions are better understood. Moreover, the capacity of the health system to rapidly identify and manage outbreaks has been increased, providing a greater assurance that the health risks can be controlled, so long as any relaxation of restrictions is progressive, well sequenced and rigorously monitored. Last but not least, it is important to chart a way back toward normality so as to maintain the legitimacy of the public interventions which remain in place.

In short, the progress made to date allows us to place greater focus on both protecting the health of the Australian population and beginning (and then accelerating) the economic recovery.

In considering the strategy to be pursued, there is an undeniable trade-off between maintaining the highest possible levels of public health and living standards concurrently - as there always is. Compromise and risk management are required. The dual objectives of a healthy population and strong economy are inseparable. A strong and responsive health system relies on a strong economy which in turn relies on healthy and productive citizens. And recognising the economic costs of poor health outcomes, governments have an enduring responsibility to protect their citizens from epidemics, which threaten citizens’ ability to plan their life and seek to achieve their aspirations.

That said, we must not be blind to the choices involved in public policy, especially in relation to health policy. Productivity gains are at risk from the millions of temporary home offices to the factory floors that are still operating. For example, it has been widely reported that parents are having difficulty working from home concurrently with the added responsibility to home-school their children. Social distancing measures are preventing the most efficient capital-labour ratios in thousands of factories and workshops where there are now limits to the number of workers per square metre at any one time. The substantial physical and human capital stock of our tourism and hospitality sector remains poorly used or idle.

Given these examples and many other economic and social consequences of the social distancing measures, we can predict with some confidence that Australia’s productivity levels and output will have declined substantially during the June quarter. It is clear that the longer the restrictions remain in place, the higher the costs in terms of long-term productivity growth, as existing plant depreciates, new investment is deferred and skills atrophy.

More than this, social bonds are being stretched. Family members have been prevented from seeing elderly relatives; family relationships are being tested; loneliness and isolation abound; the incidence of domestic violence, self-harm and suicide may have increased. Additionally, and significantly, limits on access to health services that were imposed so as to free up capacity that might be needed to cope with COVID-19 will aggravate the poor health of many Australians who suffer from chronic and acute conditions. The longer tight restrictions persist, the greater these harms will be.

Adding to the problems, future governments will have less wealth and tax revenue to address the myriad of economic and social problems the current crisis will cause, making its legacy all the costlier. At the same time, with the high costs of the stimulus package reversing much of the good work of fiscal repair Coalition governments have undertaken since 2013, there will be less room for discretionary fiscal policy in the years ahead, limiting our ability to cope with exogenous shocks, such as severe downturns in the terms of trade. And yet the more time it takes before the economy can fully restart, the weaker and more fragile will the Australian economy be, which makes it all the more important that government can, when necessary, support economic activity.

Perhaps most importantly, returning to business as usual not only involves growing the level of our economy out of the 2020 collapse. We also need to re-focus our efforts on making our economy more efficient, adaptable and resilient to health, social, environmental and economic and supply chain shocks.

In sum, the sooner Australia gets back to normal the better for the current generation and future generations. Given the imperative that creates, this paper sets out a number of guiding principles and specific policy recommendations to achieve the widely accepted policy objective of exiting from our self-imposed lockdown in a least costly way.

Guiding Principles

Principle 1

The worst having been avoided, normal policy evaluation rules should apply

Every National Cabinet, state-based and local government decision must now be considered as an incremental weighing up of the costs and benefits of removing (or reinstating) a single restriction on a case-by-case and, where appropriate, region by region bases.

Only by returning to the tried and tested good governance processes developed over many decades in Australia can we achieve the objective of the prudent use of taxpayer money.

Given the significantly reduced health risk from COVID-19, the use of ‘Ministerial Direction’ should cease immediately.

Previous orders should be re-assessed and revoked within a specified timeframe. At the same time, any restrictions that remain in place should be fully subject to the regulation review process, including, where appropriate, through Post-Implementation Reviews.

Principle 2

We must absorb the valuable lessons of the pandemic for the future

Once-in-a-lifetime events offer once-in-a-lifetime lessons. COVID-19 has provided the Australia of 2020 with valuable guidance to a future Australia across many areas of public policy, including health care, technology, privacy, working arrangements, network and supply chain vulnerabilities, international and interstate trade, industry policy, and budgetary policy. There are strategic lessons to be learned for international relations, national self-sufficiency, strategic vulnerability, pandemic as well as hazard and peril preparedness.

In order to properly comprehend and appreciate all of these many lessons, we need to better understand how and why the outcomes developed in Australia as they did. Moreover, we need to understand the impact of individual social distancing measures and, more generally, what caused the successes and failures.

It is also important that we understand whether the initial epidemiological forecasts (of infections, hospitalisations and deaths) were reasonable and whether or not they were properly revised as new information became available.

Further, a review should evaluate Australia’s performance against the policies and procedures developed to deal with a novel pandemic, such as set out for example in the very recent Australian Health Management Plan for Pandemic Influenza published by the Department of Health (Australian Government, August 2019).

Without such a comprehensive review, it will be difficult to learn from the 2020 pandemic and, therefore, highlights the urgency of doing a systematic review of effectiveness similar to that done in 2012-13 in relation to the H1N1 pandemic.

While the measures adopted in the H1N1 pandemic were largely oriented to public health, the COVID-19 crisis triggered major economic and social policy interventions. Perhaps understandably, those measures were not scrutinised carefully at the time; now, however, it is possible and desirable to undertake careful policy evaluation. That should not only apply to the restrictions; where regulations were lifted or relaxed, the consequences of doing so ought also to be evaluated, all the more so as those evaluations might find that the changes that were made could help support the recovery and should be kept in place.

Principle 3

Long-term economic costs must be audited

The long-term economic costs of the social distancing measures and related budgetary stimulus packages must be factored into the policy calculus as much as the short-term economic costs. That is, as we climb our way out of 2020, we must bear in mind the costs to ourselves in future years and our children in the next generation (from less public and private infrastructure investment, higher taxes and/or fewer public services, and greater debt servicing costs).

The economic costs of this pandemic response are unprecedented and, thus, require careful review. The economic and social costs of the government measures are much higher this time than in the H1N1 pandemic, when few restrictions were imposed. A key lesson from the 2009 H1N1 (‘swine flu’) pandemic was that responses must be scalable by country, particularly when there is a lack of information about the potential threat of the novel virus in its early stages. It is important to determine whether the government response in this instance was contemporaneously scaled to the threat as new information was available.

Principles 2 and 3, which examine the health effectiveness and economic and social cost of the 2020 pandemic, should then be used as inputs into a new pandemic preparedness plan (see Recommendation 1 below).

Principle 4

The principle of subsidiarity must apply to all decisions

Apart from national interests such as international and interstate border policy, decision-making related to lifting the social distancing and other restrictions should be regionally-based, not national. Australia is a large country geographically and highly urbanised. Our major capital cities are several hundred kilometres apart. The threat of the coronavirus is very different in Sydney compared to regional Queensland or the Northern Territory for example. Therefore, it makes more sense for the relaxation of measures to be considered on a region-by-region basis. The National Cabinet has allowed for individual states to make their own decisions on the pathway out. State Cabinets should similarly consider whether their own plans should be regionally based, especially for the larger and less populated states.

Recommendations

Recommendation 1

The National Cabinet should commission a Report on National Preparedness and develop a Strategy of National Preparedness

The National Cabinet should commission an inaugural Report on National Preparedness (RNP) to be updated every five years. The Report should be coordinated by the Productivity Commission with input from all stakeholders (private and public) and include public hearings, which are a core part of the Productivity Commission’s transparent investigative processes. It should examine civil preparedness across the board, including in terms of the capacity to respond to, recover from and fund the costs of natural disasters and to health emergencies of national significance.

Following the tabling of the Report in Parliament, the Federal Government, via the National Cabinet, should develop a Strategy of National Preparedness following the release of the Report on National Preparedness. The Strategy would be updated as needed based on the RNP updates.

Recommendation 2

Post-implementation Reviews (PIR) should be undertaken

In the understandable rush of the unprecedented policy response, normal processes of regulatory review were bypassed. While the major health and economic policy reviews proposed above will act as a form of ‘overall PIR’, it is important that any individual measures which remain in place be subject to proper process in terms of ex-post RISs (i.e. PIRs) and that the quality of those RISs be carefully monitored.

Recommendation 3

The Productivity Commission should be asked to evaluate the economic consequences of easing regulatory restrictions

In a number of cases, states and the Commonwealth relaxed regulations as a way of easing the impacts on business. Those measures (which in some instances followed easing undertaken so as to facilitate recovery from the bushfires, such as removal of some building code constraints) effectively acted as tax reductions (activities in which output expansions was previously constrained were constrained less tightly) and resulted, anecdotal evidence suggests, in significant increases in output. The PC should be tasked with:

a. Producing an inventory of the regulatory easings carried out as part of the bushfire recovery and in the pandemic;

b. Evaluate the economic consequences; and

c. Draw lessons for renewing the process of regulatory reform.

Recommendation 4

The Term 2 online learning experience should be evaluated

At the same time, the experience of online school learning to support Term 2 homeschooling should be evaluated. Additionally, the materials developed to support online learning should not be discarded. All children learn differently and quality online learning materials are likely to help those children who learn better by themselves (or in smaller groups) than in a classroom of 25-30 students. Education departments should review the experience of Term 2 homeschooling to determine whether some of the approaches to learning are worth keeping and integrating into the classroom.

Recommendation 5

State borders must be immediately reopened

In the Australian Federation the closing down of state borders is one of the most dramatic policy measures imaginable. Its economic and social costs are extremely high, and in some cases, are made even higher by the existence of towns and even cities that span state borders. While reopening will need to be sensitive to local conditions, a national set of criteria should be defined, so that the process of reopening borders that are now shut can be transparent and predictable.

From a health policy perspective at this stage of the pandemic, as the Deputy Chief Medical Officer Paul Kelly has said: “From a medical point of view I can’t see why the borders are still closed.”

Recommendation 6

Targeted protection of our most vulnerable

Clearly, for so long as the threat from COVID-19 persists, state and territory health authorities should focus on targeted protection for those most at risk, such as the elderly living in homecare or aged care facilities, those with chronic health issues (especially with co-morbidities related to the heart and lungs), and the vulnerable. Measures must also balance the risks to well-being associated with isolation, imposed sedentary lifestyles, lack of sunshine and outdoor activities, particularly for the elderly and those with disabilities (such as NDIS clients). The fact that Australia has a strong residential aged care sector with less variability in quality than many other OECD countries should help in ensuring strong, targeted protection for the most vulnerable while preserving their quality of life, as will effective testing and tracing measures.

A step-down approach to lifting social distancing measures will benefit the most vulnerable. By incrementally stepping down, the impact of lifting each individual social distancing measure can be evaluated in terms of its health and economic impacts, particularly in relation to the risk to vulnerable groups such as the elderly.

As Australia moves out of the more ‘mandated’ stage of the COVID-19 response and towards a more ‘voluntary’ phase, citizens should be encouraged to exercise caution around the most vulnerable (such as the elderly living in nursing homes) by protecting themselves (e.g., wearing a facemask, proper hand hygiene and avoiding mass gatherings).

Recommendation 7

Ministerial Directions should expire on 30 September 2020

All Ministerial Directions and state-based CMO Directives related to the COVID-19 response, as far as practicable, should expire (i.e. contain a sunset clause) on 30 September 2020.

In their place, from 1 October 2020, any new COVID-19 measures should be both specific to an industry and its regulation, and also incremental to that regulation such that it can be easily reversed at the appropriate time.

Recommendation 8

Testing, tracing and quarantine should be the national health priority

There should be a significantly increased investment in testing for the virus and antibodies, by region, to better understand the true population infection mortality rate. To win this battle, the proportion of asymptomatic people in the population must be clearly understood, by region.

The Australian and state governments are now in a position to better flag their next moves, the criteria defining when those moves would be enacted and the details around contact tracing, tracking and quarantine. Australians have demonstrated a willingness to get onboard, with almost 6 million downloads of the COVID-19 tracking App (to 25th May 2020), and the government needs to be more forthcoming with its plans to find a path out of the middle of this year. The most important unresolved questions relate to the number of people in the community who have the coronavirus but have not been tested, because these people show no symptoms (asymptomatic) or only mild symptoms.

This is an extract from the July 2020 report “COVID-19: Getting Australia Safely Back to Work” by Henry Ergas and Joe Branigan. Download the report here

Nick Cater talks to Chris Kenny on Sky News about the exaggerated response from some governments to the Covid-19 pandemic.