Dr Steven Kennedy is Australia’s nineteenth Secretary to the Treasury and the first to have worked as a registered nurse, later beginning professional training in psychiatric nursing. Shane Wright, the senior economics correspondent for The Age and The Sydney Morning Herald, spoke with Dr Kennedy about his intriguing workplace background in the context of the public service, economics, the pandemic’s impact on mental health and more.
STEVEN: I grew up in Murwillumbah on the north coast of New South Wales, and when it came time to leave school I was really interested in moving to a large city. Brisbane was a bit close; Sydney looked more interesting. I wasn’t sure at all what I wanted to do – I think my mother suggested nursing because in those days you got paid as you trained. I started in February 1984, trained for three years and became a registered general nurse. It was an opportunity for me to be the first person in my immediate family to go to university.
SHANE: How long did you practise?
STEVEN: I trained from 1984 to ’87, then I travelled. Then I began training as a psychiatric nurse. I didn’t complete my training – which I really enjoyed – because while I was training, I decided to go to university: I was interested in economics, politics and psychology.
SHANE: It’s an unusual mix.
STEVEN: The psychology of causes is a key part of economics. I did the normal thing that a lot of young Australians do: went overseas, travelled through India, worked in London as a nurse. Came back and then went to Sydney University, where I did an honours degree in economics. I worked as a nurse all the way through; my last shift would have been in 1992, and then I started in the public service in 1993.
SHANE: From there you went to the Australian Bureau of Statistics?
STEVEN: I won a cadetship. So, very fortunately, the ABS supported my honours year at Sydney University. Then there’s an obligation… Like many people who come to Canberra, I came with my partner; later we married – with the intention of working for a year at the ABS, and then continuing to study; I was still interested in psychology. Of course, we never went back.
SHANE: How do you think your nursing background affected your economic thinking over the years? And does it affect the way you run the department?
STEVEN: I definitely think nursing affects the way you interact with people: you learn to interact with people from a wide variety of backgrounds, including when they’re in distress or in difficult circumstances. That’s very true in psychiatry but also in other parts of nursing. So it has to have an influence on how you deal with people and on the level of empathy you develop. The situations people face; the capacity to talk to people and ask questions and understand their concerns –
SHANE: You have to get a diagnosis –
STEVEN: That’s right. On the economic thinking, it’s left me with some scepticism about the sense that people – ‘economic agents’, you’d be calling them as an economist – are purely rational. [Through nursing,] you’ve got good insight into what’s now very well known as behavioural economics; people make decisions based on heuristics or rules of thumb, or just based on their past behaviour or habit. You see that very powerfully in a health setting.
SHANE: You’ve seen people engage in new pursuits during the pandemic. Like people starting to make sourdough bread. The cost of second-hand cars has gone through the roof. And then we’ve got toilet paper hoarding. What has surprised you most this past year?
STEVEN: I was surprised by the toilet paper hoarding. When it started my wife said, ‘Do you think we should go and get some?’ And I said, ‘Oh no, I think this will calm down pretty quickly.’ Of course, I was completely wrong. It went on and on and our own stock was very low. She was looking at me, kind of saying, ‘You know, you’re an economist and you have no idea how people behave…’ So I was a little surprised by the initial reaction but more in [its persistence], day after day. I think it showed people were very fearful.
SHANE: Does that mean you’ve had to rethink some economic truisms?
STEVEN: I have – the whole way through [the pandemic] – as have my colleagues at Treasury. The way people might behave in certain situations: the design of some of our policies – even large policies like JobKeeper – reflects that. When people are in a completely unfamiliar situation they may make very rapid decisions, or they may not – you have no real guide. So you have to be really open-minded about how they will respond. One shorthand way is through confidence, the way a government gives people – call it psychological comfort, whatever you like – confidence that things are well managed. We all would know that that’s important, but it’s incredibly important in a crisis. It gives people a sense of control.
SHANE: One of the more unusual things in all this is that in 2006 you wrote a paper called ‘A primer on the macroeconomic effects of an influenza pandemic’. Did you re-read that? Did it help?
STEVEN: I did and it was partly relevant. The paper didn’t talk about wide-scale government-mandated shutdowns; it spoke more about confidence and people’s withdrawal from activity. We [Steven Kennedy, Jim Thomson and Petar Vujanovic] wrote it because we wanted to think about what a pandemic would look like in-country. Australia’s experience was observing SARS pandemics in other countries and understanding that impact. In short, it was helpful. But in the end, the main reason it’s called a primer is because it was not trying to be especially sophisticated, just give a framework to think about how the effects of a pandemic flow through an economy. It didn’t explore policy responses in great detail – other than to point to the fact that monetary and fiscal policy would be used. So it wasn’t a particular guide on the shape of responses, but it was a good guide to thinking: how is this going to flow through the economy?
SHANE: Did you have to go out and start searching around for other research in the economic space or even beyond economics?
STEVEN: Certainly, because there’s only a small literature around the impact of these types of crises. We definitely had a look at those, and other economists started to publish as [the pandemic] took off, exploring what the impacts will be. There is a sense in which you tend to think that the previous recessions are also a guide – and that’s somewhat helpful. But as we’re seeing even in this phase of the pandemic, it’s quite a distinct shock, quite different to the GFC or the early ’90s, early ’80s shocks.
SHANE: Did you bring health experts into Treasury?
STEVEN: Mostly we just worked with [other departments] and Brendan Murphy [Australia’s former Chief Medical Officer] and we had really good access to the people from the Peter Doherty Institute [in Melbourne]. In the early days, our modellers would work with people who were looking at studies of what the transmission of the virus would look like. And remember, the early conversations were about flattening the curve and not putting too much pressure on the health system. They were useful; they were a very useful guide. The OECD published research early on about the impact of shutdowns – that was the first part of that literature – and just prior to that we’d done our own estimates. Very fortunately, they looked pretty similar in terms of how to build up [to] the impact of government-mandated shutdowns. I suppose one of the defining features of the response has been how effectively the federal and state public service have shared information and worked together. It’s been really helpful.
SHANE: You seem almost surprised.
STEVEN: Look, I’m not surprised. The common refrain is that the public service is often at its best in a crisis because that’s when it really switches on and when the purpose of the public service is so apparent to people. The reason it can sound like a bit of a surprise is sometimes – outside of that unifying purpose – people can run in their own channels a little bit.
SHANE: Just going back to your paper from 2006: that drew a parallel between the operation of economics and the operation of infectious diseases around notions of equilibrium and adaption. The idea that with some shock to a system, or a particular organism, there’s a process of adaptation that results in the system regaining its equilibrium state. What have been some of the unexpected adaptations you’ve observed during the past twelve months, and how far away from equilibrium are we today?
STEVEN: It’s really hard to observe all the micro-modifications that people have made. But from those early costings of government-mandated closures that we did, I have been surprised at how quickly the costs of shutdowns and mandated restrictions appear to be coming down.
There are still some very substantial impacts and costs. The shock of the impact on the Victorian economy was quite substantial from the Victorian second wave. But it was less than we anticipated, because people do appear to be adjusting their businesses’ ability to work, their ability to do things, relatively rapidly. So people are finding equilibrium.
One of the key insights in economics is that people will often think, oh, some resources will be exhausted, or something will happen because of the current state of things, [and that will] just go on into the future. The key insight in economics is that prices and other things will make a change and people will adapt to a new equilibrium – [they’ll] pick up a new product or they’ll do something else. They will adapt, we are all adapting in the face of the pandemic. It’s hard to know exactly what’s going on out there but it appears – at least from the reductions in activity – that people are finding ways of going about their lives, even in the face of mandated shutdowns, more rapidly than I anticipated.
SHANE: You’ve been surprised at the speed of adapting?
STEVEN: Not that people are adapting, but at how quickly the adaptation is going on. Normally, what you’ll observe in booms and busts – and we’ve seen this in terms of trade booms – you’ll see something that looks like it’s in disequilibrium. Economists have often been a little early to say, ‘all this will correct itself’. Then it goes on for at least another few years before it corrects itself. Economists are always looking for that equilibrium and often we’re a bit early in calling it – in saying, all that’ll come off – when there’s a boom that’s bigger than you thought.
And then there are the busts in this case; the change to people’s circumstances means [this bust] may come quite rapidly to an end – even in those countries where the pandemic is having a much larger impact than here. The losses of economic activity are still substantial, but they’re less than what most economists thought.
SHANE: Some of those early estimates were frighteningly large.
STEVEN: Twenty to 25 per cent [falls]. And in the very early parts of the shock that’s what some countries saw for short periods. Some countries’ falls were huge. In the case of New Zealand, 60 per cent of their labour force went to a wage subsidy program – double what happened in Australia. In the case of France, their loss of output in a month was in the order of what the OECD was talking about: very, very large. Now, as restrictions are in place, the losses in outputs are not nearly as large.
SHANE: New Zealand’s results are stunning. [In February] their unemployment rate went under 5 per cent.
STEVEN: Yes, that’s after 60 per cent of the labour force being on government support. Their [wage subsidy] program finished at the end of September . And in some ways, they’re not benefiting from the terms of trade or the iron ore boom that Western Australia is – but there are some similarities in that they just got back to their previous activity inside a couple of months. That was also the case in Western Australia. I mean, [WA], until very recently, looked a lot like New Zealand – no [pandemic] cases apart from returning [travellers in] quarantine, and everyone pretty much going about their businesses [as they had] prior to the pandemic. Then with government stimulus programs such as HomeBuilder, you see the start of a booming economy.
SHANE: What’s economic normal now for you? Do you think this has had an impact on what is considered normal?
STEVEN: I think [we’re] going to have to be humble in understanding how this will unfold. Our regions have done very well through the pandemic. [But] I think that the effects will linger for a number of years. How much this disturbs the big trajectories that were going on beforehand, [we don’t know]: the emergence of very large cities, for example; the primacy of cities in economic development. Whether it really does accelerate this work-from-home trend. How digital technology will be used – prior to this, we talked a lot about the trends of people coming together and clustering, about the value of being together and working together. That’s one side of it. I think it’s very hard to predict.
I guess in the broad sense, normally, you would look for trends that were pre-existing that were then accelerated. The question is, does any sort of new trend emerge? Probably the most significant one is [around] investment in responding to such crises: I’d be very surprised if that didn’t remain high.
SHANE: What sort of investment?
STEVEN: Presumably vaccine research. The whole world has gone through responding to a pandemic. We haven’t had a worldwide [pandemic] like this since the Spanish flu. So, it will leave us better prepared to respond in the future. And the memory won’t go away – I wouldn’t have thought – for generations, given the impact.
SHANE: In early February 2021, we wrote about the proportion of people moving out of Sydney, Melbourne, into regional areas. Is Steven Kennedy headed back to Murwillumbah? Or are more people going to head to a city the size of, say, Geelong or Canberra – or even some of the larger country centres, like Albury or Wagga?
STEVEN: Possibly: there may be not a reversal of a trend, but an acceleration of a pre-existing trend. There were already strong migration flows out of Sydney and Melbourne to those places. It’s partly the amenity of those places, you know. There are beautiful coastal locations and inland cities; they also have really strong amenity and had been growing – at least consistently – with what was pretty strong population growth. Of course, a lot of international migrants tended to [go to] Sydney and Melbourne.
The thing that I really expect has been turned up – I don’t know to what extent – is how much people will work maybe a few days in the city and then work from home for a couple of days. It’s hard to know, but it does appear a lot of people are enjoying this.
SHANE: There’s been a lot of discussion in the scientific community about the mental health impacts of the past year. Do you think there’s going to be a need for Treasury to do more economic policy work on mental health and its impacts?
STEVEN: I think so. I’m not a professional in this area, but I’ve been able to talk to professionals about these things. I am aware that psychologists’ services have been highly sought after through this period. And [psychologists’] online services – I think it’s been fantastic in that innovation. This partly goes back to earlier issues [we were discussing]: [the pandemic] puts a baseline of anxiety into the community that comes on top of the normal things that affect us in life – the normal anxieties, the normal events that should make us anxious or concern us; [anxieties] about life transitions, those types of things.
My sense is, for many people, they feel the underlying anxiety that comes with the pandemic over and above other things they might be experiencing. These may not have affected them as badly, but with this sort of baseline of anxiety that comes through, I think you naturally see more [impacts]. For example, mental health issues arise.
It is good to see and hear about how many people are seeking assistance. And there’s obviously a very big spectrum of mental health – from very serious psychiatric illnesses through to anxiety around daily life and other sorts of things that are also still very serious and discomforting.
Treasury has to understand these things; we have to. I’ll use the word ‘humble’ again: this is never going to be a place where Treasury is expert, but we have to at least understand the context and understand what other experts think are the prevailing issues.
One last area we’ve been thinking about is if there is a loss of job opportunity for young people. Economists use the word ‘scarring’: they often talk about people not getting onto the job ladder or not getting engagement in jobs early on. That would be an issue around employment programs and other areas. And we would have to watch very closely to make sure that people – if they didn’t get anything [from] the job pool – that there were appropriate services to support [them].
SHANE: This is that difficulty similar to the last recession in 1990–91. You could see the scarring of young people then – but also of men in their late fifties and early sixties. I wonder now, was it because there was a greater proportion of men of that age in manufacturing that the economy has changed a great deal from that last recession?
STEVEN: We were talking about this with the Covid Senate Committee recently: older age groups have recovered their pre-Covid levels of employment. That type of structural change doesn’t appear to [have created] the same sort of shock at this stage.
There is a coming together of issues, though, with young people trying to get their first job. Often they’ve been in areas where they might have had part-time work or had their first job in hospitality or other areas that were so affected. So those two things are probably piling up a little bit. We can’t see that kind of effect on old or experienced workers at the moment.
But you asked about pre-existing trends. If there had been an area where the labour market hadn’t performed as well as it could, you could easily say it’s been [that way] for young people for the last few years. So there was a pre-existing weakness in the labour market.
SHANE: We’ve seen public [servants] like Chief Health Officers front and centre all through this, and Treasury Secretaries often get dragged in. Do you think the perceptions of public servants may have changed over the last year?
STEVEN: I definitely think there’s been a shift in perception. I gave a speech pre-Covid where I talked about trust and public services. Nurses and police are always highly rated. They are public servants, of course; they always score really well. I think in part [for nurses] that’s because of people’s daily interaction – maybe through personal interaction, through family, through some means, [people] interact with the health system, and they see the commitment to service that comes from the nurses that they deal with.
They won’t have that experience with public servants sitting in Treasury, or health departments or agriculture, so they have no sense of the same commitment to public service that those people have. Even if they’re dealing with Human Services, with its complexity around their financial circumstances and what they’re claiming for, it’s sort of a more vexed interaction.
The reason I spoke about that to other public servants was my own view that there is that same commitment to service more broadly – but the public need to see it. They need to see in practice how [public servants] are empathetic to their concerns. If people engaged honestly and frankly with them about what they were delivering, then trust would rise – and I think that in [this] crisis, it has risen.
I suspect it won’t fall, not in a big way – and at least not quickly – because people have seen that level of commitment. Take the Tax Office, for example, the capacity of the Tax Office to deliver our largest fiscal program and deliver it so professionally and effectively: that should give people a better sense of that institution.
SHANE: I think that’s a big ask for people to think more kindly towards the Tax Office…
STEVEN: Perhaps…maybe that’s, you know, being a little too optimistic.
SHANE: How do you relax, how do you maintain your own mental health? One of the first times you fronted a [Senate] Committee, you said you try to switch off when you go home.
STEVEN: That was the experience of nursing, not to carry work home. Looking at that now, that would be a pretty optimistic assessment of my own experience through last year. Partly because phones don’t give you the opportunity to switch off compared with many, many years ago when I was nursing. And secondly, this has been a very large event: the sheer scale of it captures your mind and you find yourself thinking about it constantly.
Now my strategies are very familiar to most people. And that is exercise, regularly going for a jog. I really like hiking and I find being out in nature extraordinarily beneficial.
Finding something to read in a completely different area – about things that are completely different to the issues that you’re sort of engaging with in the day – has been helpful. I have my broader network of friends that is very much outside of work: they will obviously ask me questions about work, but it helps in that [sense of] sort of leaving things behind. And then the family of course, too.
It was a good question [from ALP Senator] Katy [Gallagher]. I went through the GFC working in the Prime Minister’s office and others, and I thought that I’d really been in the middle of some of the most pressured situations I’d ever see – that was a period in which the government effectively guaranteed the banking system. The response to the GFC was a highly, highly rewarding time for me in my professional career, but this has definitely topped that.
SHANE: This time of pandemic is of a different quantum: I reported on the GFC and I didn’t think I’d see anything quite like that. This is something even bigger.
STEVEN: I think the speed at which we’ve had to adapt is much different. Then there’s the sheer scale of the response. I’ve thought a lot about this. As you’ve been writing about very recently, it’s not something that most [professional] strands have had to think about on a day-to-day basis, but the size of the fiscal response [to the pandemic] has been very large and that has consequences for the future.
SHANE: The front of the Treasury building says the department is focused on ‘promoting fiscal sustainability’ –
STEVEN: – and we still are. This is where nursing helped what I thought about early on. I mean, early on, the strategy was to ensure that we were never in a position where the health system was overwhelmed. And, of course, some thousands of health professionals will have died around the world as part of the Covid pandemic. This sort of signal, this very significant human element of a pandemic, this is where you’re making trade-offs about closing people’s jobs and [them] losing their money. I’m not making [these decisions], of course: I’m advising on them. The government’s having to make the calls: the state governments; the federal government. They’re very serious decisions that impact the mental health of those people dramatically, and you’re trading that off against the risk of what you’re exposing health professionals – let alone the broader community – to. The probability of death and disease weigh a lot more heavily than in the GFC, I have to say.
SHANE: Those amazing stories out of New York last year, where they followed people serving in ICUs. I still remember the pressure of face protection leaving these huge marks on their faces. It’s physical scarring and mental scarring –
STEVEN: That’s right, and there have been stories out of the UK of the pressure that the health system has been under with its caseloads. The very difficult trade-offs that would have been made inside those health systems with limited resources, when caseloads were very, very high and they had thousands and thousands of sick people – we’ve observed it globally, but we have not experienced that. Understanding what the costs of those trade-offs are – we don’t; we haven’t always fully understood them – but [these decisions have] been kind of crucial. And that’s what weighs particularly on the decision-makers, the Prime Minister and premiers.
SHANE: Do you remember where you were when you first heard about this coronavirus?
STEVEN: I’m pretty sure I read about it before I heard about it in a meeting. But my first recognition of it being discussed in detail was at one of the cabinet committees in the bushfire period. [In 2020] I had some leave planned in January but cancelled it to come back to work on 2 January with the Treasurer, who also cancelled some leave. We went through all of January into February on a bushfire response as a whole-government response – there was a $2 billion response from the Commonwealth Government. And I remember people raising the issue [of the virus]; I think the first time I saw Brendan Murphy was when he came into one of those meetings to give us a briefing on the situation in China. And that’s when I really began to engage in it. But as I think I’ve mentioned in the past – mostly as an issue of other crises in an Asian country – people were possibly being careful not to say ‘this will be like SARS’ because they just didn’t know. But I think people were thinking of it like SARS.
SHANE: And then you get to 1 February and the border closure to Chinese nationals. Was that a key point when you started thinking, this is real?
STEVEN: Yes. I was asked about that 2006 paper early on, by a parliamentarian, and I made a joke. They asked was [the paper] a good guide to whatever might be coming – and I made a joke saying I hope it’s not a good guide because it was about a pandemic. That was still a little ahead of people becoming really worried. That was before we had the Ruby Princess and those sorts of outbreaks. Well before 15 March [when the government announced key elements of its pandemic support program]. So yes, back in February, that’s when I began… I just began to think about what people were writing about around the world, about the potential for this to spread. Early on, we were opening our minds to that – but probably thinking of it more as an international shock – would it be a bad shock, affecting China? – not a sense of how it would move around the globe. I mean, in this job, you get lots of free advice, and I was being sent pieces from former colleagues or friends of theirs, who were alerting me to the fact of how significant this [pandemic] would be if it spread.
SHANE: Just going to your previous position as Infrastructure Secretary for a moment – do you think that the virus is going to change policy responses in infrastructure? We’ve had all these expectations about population growth changed. Do you think the virus requires a rethinking of certain policies?
STEVEN: Look, that’s a really good question. I was in Sydney recently and I found it quite congested and was asking a colleague about it. They said that it’s partly because everyone’s driving rather than catching public transport.
SHANE: Everyone bought an expensive second-hand car!
STEVEN: That’s right. And the buses aren’t as full as they otherwise would be because of Covid restrictions. So it is always hard to think a little bit beyond what that looks like: how will people feel about very full buses, very full trains? Is there a world in which we go back to that? My guess is yes, but maybe in the way that it’s subsequently affected how people travelled in Asia. You saw a lot more masks in Asia, for example, post-SARS. But people did return to travel and to working in highly dense environments…so here are my best guesses: my best guess is that all the trains return. But that will take some time – a number of years – and with a new feature that could be, for example, the use of masks and other changes in personal hygiene.
SHANE: What are now the biggest economic issues facing the country? How have they changed?
STEVEN: The very significant goal for any country is the importance of employment. In a mental health sense, individuals get to engage in society and generate opportunity. So [the goal is] to get back to what people might call full employment or very low unemployment rates. Then, from a more technical sense, to get back to a world of interest rates that are more usual – we are at the zero lower bound. With that, with a very low unemployment rate, you have productivity for wages because that generates income for people. That is an enduring challenge for a country.
The pandemic doesn’t really change that. But what it has done is come in at the top of a period in which we had a macroeconomic state of consensus that saw low interest rates and low inflation, and we’re unsure about where full employment should be. It hasn’t created any more certainty about that, but it’s left us to go back to that point.
The second set of issues that I think people will think about is, as after many crises, you see the lingering increase in how our government is involved in the economy more broadly. The design of most policies [in response to the pandemic] has been around [things that are] temporary and targeted; they’re basically the classically designed responses for a shock. But – as you’ve written about, Shane – it’s a long time back to a balanced budget. Debt levels in this country remain well below what they are in other countries. We would be very resilient in the face of even another shock on top of this, and other countries are quite resilient too. But that focus will come back to look at what services Australians really want to see delivered, and the government has to decide the best way to raise money to deliver those.