State Government Carries ‘Old Economy’ Risk into the Post COVID World

23 June 2020
Sven Stenvers

We may have done well on COVID cases, but going into the second half of 2020, close to the end of the current State Government’s four year term, we have now had a massive COVID economic impact; We’ve had climate impacts and fires; Destruction of cultural heritage and continued environmental degradation. All the while the economy has stagnated and is now going backwards with the highest rate of job losses in the country.

Trying to get back to business as usual without investing in the transition to an inclusive economic model creates a substantial risk to the WA economy. To be clear, nothing should go back to normal.  Normal wasn’t working.

“For the first time since we started tracking ABS data (1978), the number of young people outside the labour market is over 40%. This is not normal fluctuations or seasonal adjustments – it is an absolute crisis” (source: Shirley Jackson, Senior Economist, Per Capita https://percapita.org.au/ 

As WA emerges largely unscathed by the health crisis, a much darker social and economic crisis is looming with the approaching financial cliff in September.

Between now and September millions of recipients of JobSeeker, JobKeeper, HomeBuilder, mortgage deferrals will progressively fall through the social security safety nets erected by Federal, State governments and regulators. An abyss of job losses, thousands of business and mortgage foreclosures, long term unemployment and social upheaval awaits.

The problem: As mortgage stress skyrockets in the late stages of a housing bubble, consumer spending dives impacting tax revenues (and governments holy grail of GDP).  At the same time, the forecast upcoming wave of business collapses relegates staff to the dole queues or casual work, simultaneously eating a large chunk of the government tax revenues from these sources just as demand for social services spending spikes.

The outdated solution (to date): The answer has so far been to perpetuate an economic stimulus and tax cuts model that was unsustainable and extractive long before COVID. The fiscal measures governments at all levels typically go to during economic crises have not served us well in the past and are proving increasingly ineffective in an economy that doesn’t serve all stakeholders.  These include:

• Company tax cuts are often argued as a way to ensure company tax revenues stay in Australia along with jobs.  This is a race to the bottom. These cuts have not been evidenced to create jobs and they don’t prevent offshoring of entire industries.  Instead they give rise to share buybacks and higher shareholder returns.
• Payroll tax cuts may provide a limited cost saving for businesses, stalling lay-offs, but are unlikely to create new jobs in the long term.
• Personal income tax cuts and cash splashes have a limited impact on increasing consumer spending in aggregate (except in the case of low income earners such as the case for raising Newstart/Jobseeker).  When consumers are overburdened with household debt and under/unemployment tax cuts typically go to service debt
• Stimulus and removing development approval processes for ‘job creation’ in legacy industries  such as fossil fuels add nothing but risk in terms of future stranded assets and environmental catastrophes.

Companies in the old economy prioritise shareholder profit, so thinking that they might now do otherwise when public money is being thrown at them is an absurd distortion of reality by governments who are either out of original ideas, or beholden to donors, or both.

We are staring down an effective 15-20% unemployment rate in WA with myriad long-term social consequences for families and communities. These are challenges which traditional government, economic and business models are ill equipped to address.

What Does ‘De-risking’ Look like for our State?

The above from Griffith University’s recent report exemplifies the key elements of building a new economy post-COVID *Source: ‘Seven Domains of Action’ – Griffith University Yunus Centre, Roadmap to Recovery & Regeneration – Opportunities for a post-pandemic recovery that creates better futures for all.

As a new economic reality emerges from this COVID crisis, impact investment and social enterprise sectors stand ready with the capacity to address some of our most intractable social and economic challenges, through the power of impact-driven business models, eventually easing the burden on dwindling government coffers.

When a business has job creation that addresses social disadvantage as its primary reason for being, you get jobs and new industries as a concrete outcome, and government social spending upsides in the long term.  This is what employment-based social enterprises are all about.

Creation of a State Impact Investment and Social Enterprise Strategy is an opportunity for the State Government to take a ‘best-practice’ policy leadership approach, already implemented in other Australian states, and countries like the UK and Canada a decade ago, and  actively participate in the development of the social enterprise sector in our state.

Let’s consider what the Western Australian Government could achieve for communities by supporting this kind of social innovation*: 

1. Social procurement – targeting procurement from WA’s social enterprises – creates jobs, incentivises economic diversification from the private sector and  leverages corporate purchasing power for social good
2. Social enterprise support – catalyses new WA businesses and industries that exist primarily for the communities they support, and creating value
3. Impact Investment – catalyses WA business investment that builds a new economy which places community, employee and environmental impact outcomes on an equal footing with sustainable financial returns.

We may have done well on COVID cases, but going into the second half of 2020, close to the end of the current State Government’s four year term, we have now had a massive COVID economic impact; We’ve had climate impacts and fires; Destruction of cultural heritage and continued environmental degradation. All the while the economy has stagnated and is now going backwards with the highest rate of job losses in the country. Trying to get back to business as usual without investing in the transition to a new, inclusive economic model creates a substantial risk to the WA economy.

The economic value and social impact of local manufacturing and jobs through employment based social enterprises in particular cannot be underestimated at this time, or at any time in the future. COVID19 is showing us that. These businesses create resilience in the system. The Government must move forward onto long term funding in this sector that builds capacity within our communities and industries for regeneration and economic diversification.

• A diversified economic system with re-localised production of value add goods
• Investment in inclusive social change through employment based social enterprises;
• Developing resilient, regenerative, social, circular, local economies;
• Supporting local and social procurement and business.

Social enterprise, social innovation and impact investment was made for our time.

We have had a WA Impact Fund, the WA Impact Investment Alliance, and the WA Social Enterprise Council comprising some of the greatest leaders across private, philanthropic, finance, business and social sectors in WA making the case to State Government for impact investment policy.

The time has run out for the State Government to talk about it.  It must now act.

(*Source data and policy recommendations available here)

READ MORE:

The West Business (23 June 2020) – Impact Investment WA Alliance urges McGowan Government to support the emerging sector amid coronavirus crisis

View The West article online here.