Australian economy survived Covid better than most but recovery could slow, OECD says

Australia should consider lifting unemployment benefits and greater cuts to emissions, 2021 economic survey says

Australia has weathered the economic downturn from Covid-19 better than most developed countries but could face a slower recovery when community transmission is higher, the OECD has warned.

That is the conclusion of the Organisation for Economic Co-operation and Development’s 2021 economic survey of Australia, the first since the former finance minister Mathias Cormann took the helm in June.

The OECD report also warned Australia remained vulnerable to shocks including escalation of its trade disputes with China, decline in fossil fuel demand, and carbon tariffs that might be imposed by trading partners.

It called for Australia to consider less conventional monetary policy, raising unemployment benefits and greater cuts to greenhouse gas emissions as means to turbocharge recovery.

The treasurer, Josh Frydenberg, has seized on the report’s findings that Australia had a “well-coordinated” response to the pandemic including “macroeconomic policy support [that] was delivered swiftly and with appropriate force at the onset”.

But the shadow treasurer, Jim Chalmers, said the report was “yet another credible contribution pointing out that Australia’s economic weaknesses predated the pandemic, and that the recovery is hostage to the government’s failures on vaccines”.

The OECD noted Australia’s vaccine rollout “started slowly but has picked up pace in recent months” and that parts of the country remain in lockdown despite a shift from a virus elimination to suppression approach.

“OECD projections envisage annual output growth of 4% in 2021 and 3.3% in 2022,” it said, despite a certain contraction in the third quarter of 2021.

It said risks and uncertainties “remain large”, with the potential for rapid recovery due to household savings being unleashed but the downside of Covid outbreaks in currently virus-free states.

The OECD noted that Australia had shown “signs of structural headwinds when the pandemic hit” including that “productivity and wages growth had slowed notably”.

“Over the longer-term, fiscal spending pressures will grow,” it said.

“Under current policy settings, ageing related costs will cause public debt to rise to 2060.

“In addition, further investment in the social safety net is needed, not least to complement reforms that promote business and labour market dynamism. For example, the unemployment benefit rate should be raised further.”

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The OECD noted the Morrison government had raised jobseeker by $50 a fortnight, but said at 29% of the average wage the benefit for a single person “is still very low by OECD standards”. The government should consider indexing jobseeker to wage inflation, it said.

The OECD said Australia showed a “decline in environmental innovation over the past decade” and called for “stronger incentives for innovation and adoption of new low emission technologies”.

It said a national carbon price “would be the most efficient means of achieving this” but due to “political considerations” Australia may need to scale up other market-based instruments, including the safeguard mechanism, a carbon offset system for large emitters.

“This should be accompanied by policies that support the transition of workers out of fossil fuel generating industries.”

The OECD report noted that imposition of carbon border adjustments – which are being considered by the European Union – could place “a carbon price on imports from less climate-ambitious countries” and have “significant impacts” on Australia’s trade-exposed sectors.

It listed a decline in fossil fuel demand as a shock that would have “a large impact on the mining sector and related industries” particularly thermal coal exports to China, Japan and South Korea, which are all aiming for net zero emissions.

Cormann was elected head of the OECD in March despite grave concerns voiced by environmental groups over his record on climate change.

In campaigning for the job, Cormann talked up the importance of a “collective green recovery” despite being part of the Abbott government that abolished Australia’s carbon price – incorrectly characterised as a tax – in 2014.

Scott Morrison wants to achieve net zero emissions by 2050 or sooner if possible, but is yet to persuade the junior Coalition partner, the Nationals, to make this government policy and allow him to take it to Cop26 climate talks in Glasgow in November.

Chalmers said Australia’s economy would “be much stronger if it wasn’t shedding billions of dollars a week as a consequence of the Morrison government’s inability to get vaccines and quarantine right”. “That’s the price Australians are paying for Scott Morrison’s mistakes.”

Frydenberg noted the OECD survey found a “substantial quickening in the pace of the vaccine rollout”.

“With more than 43% of Australians fully vaccinated, progress towards our nationally agreed targets of 70 to 80% is accelerating,” Frydenberg said in a statement.

As the survey notes, once we reach these targets, “the reopening of international borders will support the economic recovery through enabling foreign student arrivals, bilateral tourism and population growth stemming from net immigration”.

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