Monday, May 20, 2019

Their biggest challenge? Avoiding a recession

Albo, or Plibersek, or whoever turns out to be the next Labor leader, might have had a lucky accident. Usually, it’s Labor that inherits an economy turning down.

This time, it’s the Coalition. And because of regular updates from the Reserve Bank and the Bureau of Statistics strikingly at odds with their public position that the economy is strong, they ought to be finely attuned to it.

Economic growth, the catch-all that is supposed to show us where the economy has been and where it is headed, is frighteningly small.

The Treasury’s best estimate of potential growth – how strongly the economy could be growing over time if things were well managed – is 2.75% per year.

The reality, for the two most recent quarters for which we have data, is 0.3% and 0.2%.

The economy is anaemic, despite the crowing

If you add those two numbers together and multiply by two you discover that for six months the economy has been growing at an annualised pace of just 1% – way, way short of its potential.

Stripping out population growth and minimal price growth, real living standards have been going backwards.

The result of what the Reserve Bank describes as “persistently slow growth in household incomes and declining housing prices” has been something of a strike in consumer spending. The real value of spending per household hasn’t been falling, but it hasn’t really been climbing either.

The bank says consumption growth has slowed most noticeably for discretionary items that tend to have the strongest relationship with home buying, such as furnishing and household equipment. It says growth in other types of discretionary spending, such as eating out, has also slowed. Consumption of so-called “essential” items is holding up.

We’re going to need a boost

It means we can’t rely on household spending to revitalise the economy (although the government will give it a go, stumping up a bonus of as much as $1,080 to be delivered with each tax return from July in a much-needed boost that will be disguised as a tax cut rather than spending).

Household spending accounts for three-fifths of gross domestic product. The bank identifies uncertainty over household spending, which itself derives from uncertainty over income growth, as a “key risk” for economic growth:

Should households conclude that low income growth will be more persistent than previously expected, households may adjust their spending by more than currently projected and consumption growth could remain weak for a longer period.

Labor would have helped stabilise uncertainty over income growth by immediately intervening before the Fair Work Commission to get higher wages, directing it to draw up a long-term strategy for higher wages, restoring cut penalty rates, and funding the increases of some childcare workers itself.

Having won an election opposing those things, the Coalition will have to try other things, perhaps even bigger and earlier tax cuts.

Prayer would help – prayer that international commodity markets remain strong, that the Reserve Bank cuts rates on June 4 (it is practically certain to), that it cuts them again before the end of the year (financial markets are literally 100% certain that it will) and that home prices stabilise.

Perhaps a very big boost

On the face of it, none of these would be enough to force economic growth back up. If it falls even further and continues to fall, Australia will enter a recession within this term of government, an outcome to which the academic economists polled by The Conversation in January assigned a 25% probability.

So far employment growth has been the economy’s brightest light, but in its quarterly update released a week before the election the Reserve Bank pointed out that employment growth can lag economic growth by up to nine months, meaning it might be about to turn down, although it added that it was not unusual for “trends in GDP growth and the labour market to diverge for sustained periods”.

If employment growth does turn down (and the bank says “near-term leading indicators of labour demand have softened”) it is likely to happen first in the construction and retail industries. The construction jobs will come again (and the government is doing its best to bolster them with promises of spending on infrastructure) but the retail jobs might never return, the nature of retailing having changed.

The economy matters more than the surplus

If needed in order to avoid a recession the government will have to be prepared to abandon its promised 2019-20 budget surplus. If the prospect of a recession does loom, it’ll have the political cover. And if it looms early in its term, it might still be able to deliver a budget surplus by the end.

Scott Morrison and his treasurer, Josh Frydenberg, were elected to manage the economy, and that means doing whatever is needed to avoid a recession and the long-term damage to lives and living standards it would deliver.

Speaking personally, I’ve no doubt they are up to the task, just as Labor would have been. In a way it’s a pity they didn’t adopt one of Labor’s key economic promises, which was to have a new budget in August, to refresh things.

And it matters more than superannuation

And they’ve got to focus on lifting living standards over the longer term where, conveniently, they have a big advantage over Labor.

Labor has a blindspot when it comes to superannuation. It wants to lift compulsory contributions from 9.5% of salary to 10% on July 2021, and then by another 0.5% the next year and another 0.5% the next year and so on for five consecutive years, apparently regardless of what it will do to incomes now.

It’s a good thing that, unlike Labor, the Coalition will be relaxed about pushing out the timetable if the economy can’t stand it, as it has done before.

Read more: The next government can usher in our fourth decade recession-free, but it will be dicey

Before the election it was preparing to respond to the landmark Productivity Commisson report that found that unintended multiple accounts and the defaulting of new workers into entrenched underperforming funds were costing members an extraordinary A$3.8 billion per year.

The Coalition can set up super for the future

Weeding out the chronic underperformers, clamping down on unwanted multiple accounts and insurance policies, and letting workers choose funds from a short menu of good funds and stay in them for life would give the typical worker entering the workforce an extra A$533,000 in retirement.

The commission recommended a full-blown independent inquiry into how much superannuation we need.

Labor, wedded to a series of increases, would never have done it. The Coalition can.

Read more: No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Friday, May 10, 2019

Labor's costings broadly check out. The days of black holes are behind us, thankfully

Is there a “big black hole” in Labor’s election costings? It’s unlikely.

The final campaign before the arrival of the Parliamentary Budget Office in 2012, the 2010 Gillard versus Abbott contest, was full them.

Abbott was in opposition, Joe Hockey was his treasury spokesman. A treasury analysis of the costings document he produced, delivered to the newly-elected independent members of parliament to help them decide who would form government found errors including double counting, purporting to spend money from funds that sweren’t there, using the wrong time period to calculate savings, and booking debt interest saved from a privatisation without booking the dividends that would be lost.

All up, the mistakes were said to amount to A$11 billion.

Opposition costings used to be awful

In order to give his calculations a veneer of respectability Hockey engaged two accountants from the Perth office of a firm then known as WHK Horwath and wrongly said they had audited them.

“If the fifth-biggest accounting firm in Australia signs off on our numbers it is a brave person to start saying there are accounting tricks,” he told the ABC. “I tell you it is audited. This is an audited statement.”

It wasn’t. The letter of engagement later seen by Fairfax Media explicitly said the work was “not of an audit nature”. Its purpose was to “review the arithmetic accuracy” of Hockey’s work.

The Institute of Chartered Accountants later fined the two accountants who it found had breached professional standards by allowing their work to be represented as an audit.

Three years on, with the Parliamentary Budget Office in place, Hockey’s costings were comparatively controversy-free, as were Chris Bowen’s when Labor was in opposition in 2016.

Now, they’re fairly controversy-free

Costings have become straightforward. The Parliamentary Budget Office prepares the best possible estimate of the cost of each policy, then a panel of eminent Australians goes over its calculations and adds the costs together.

Labor’s panel this time was the same as its panel last time: Professor Bob Officer, who chaired the commissions of audit for the Howard and Kennett Coalition governments, Dr Michael Keating, who used to head the department of prime minister and cabinet and finance under the Hawke and Keating governments, and company director James MacKenzie.

They found the Parliamentary Budget Office costings to be “of a similar quality as budget estimates generally”.

They provided “a reasonable basis for assessing the net financial impact on the Commonwealth budget”.

Labor’s costings are propped up by savings

That impact was a return to “strong surplus” of $22 billion under Labor in 2022-23, four years ahead of the Coalition, in a year which the Coalition is forecasting a surplus of less than half the size – $9.2 billion.

Extract from Labor’s costings document. Australian Labor Party

Labor is able to do it because it will raise (or avoid spending) more than the Coalition. Over ten years it will save

  • $58 billion by winding back payouts of dividend imputation cheques to people who don’t pay tax

  • $32.5 billion by winding back negative gearing and capital gains tax concessions

  • $29.8 billion by reducing superannuation tax concessions

  • $26.9 billion by more fully taxing trusts

  • $6.9 billion by cracking down on multinational tax avoidance and the use of high fees for tax advice as tax deductions, and

  • $6.3 billion from reintroducing for four years the Coalition’s temporary budget repair levy of 2% on the part of high earners’ income that exceed $180,000

Treasurer Josh Frydenberg attacked the costing saying Labor had confirmed “$387 billion in higher taxes; higher taxes on retirees, higher taxes on superannuants, higher taxes on family businesses, on homeowners and renters and low-income earners,” which it had, although it had hardly been a secret.

The tax measures are how Labor builds its bigger surpluses.

The best an opposition can produce

Frydenberg said Labor had failed explain the “economic impact these higher taxes will have across the economy”, a charge Labor had responded to earlier by saying that wasn’t a service the Parliamentary Budget Office provided.

It was work the treasury was able to do, but the resources of the treasury weren’t available to the opposition.

Besides which, a fair chunk of those savings would be spent, on programs such as Labor’s Medicare cancer plan, its pensioner dental plan, extra hospital funding and greater childcare subsidies. They would boost the economy.

Unlike the Coalition, Labor isn’t locking in tax changes years out into the future (although its costings set aside $200 billion for extra tax cuts at some point over the next ten years); it is giving itself flexibility in order to manage the economy as needed when the time came.

Read more: Why Labor's childcare policy is the biggest economic news of the election campaign

Frydenberg identified as the “big black hole in Labor’s costings”, what he said was its “failure to account for the increase in spending that they have promised with changes to Newstart, to aid, to research and development”.

Four years out is conventional

It wasn’t much of black hole. Labor has not promised changes to the Newstart unemployment benefit – it has instead promised to review it. Without the result of the review or without an indication of how much Newstart might be lifted or when it would be lifted, it’d be a hard thing to cost.

Frydenberg’s other beef was with programs Labor’s document costed in detail for four years but not in detail for ten. But that is how his own budget presented its figures. It’s how every previous budget has presented its costings.

Since the late 1980s it’s been the convention to cost programs in detail only four years ahead. Before that, the budget convention was to cost programs in detail only one year ahead.

Read more: Mine are bigger than yours. Labor's surpluses are the Coalition's worst nightmare

It is possible that Labor’s costings document is less than perfect. It is possible that the three eminent Australians who lent their names to it have been hoodwinked. But the contours of the document are clear. Labor will tax more and spend more than the Coalition, and deliver bigger surpluses.

But it only plans to tax more up to a certain point: 24.3% of gross domestic product, which was the tax take in the final year of the Howard government. The Coalition’s limit is 23.9% of GDP, which will mean it finds it harder than Labor to build up a big surplus quickly.

The days of black holes are behind us, thankfully.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Mine are bigger than yours. Labor's surpluses are the Coalition's worst nightmare

On Friday morning the Coalition’s worst dream will come true.

All throughout the campaign, and all through the two terms in office and three prime ministers and three treasurers who preceded it, they’ve argued they are better than Labor at managing money. They had budget surpluses under Howard that Labor didn’t have under Rudd and Gillard.

In the last election, Labor allowed them to get away with it. Its costings document actually forecast a better budget position than the Coalition’s over ten years (because it rejected the Coalition’s expensive company tax cuts) but a worse position over the immediate four-year “forward estimates”, because of its more generous programs.

The Coalition focused on the four years, not the ten, and painted Labor as irresponsible.

Bigger, sooner surpluses

On Friday morning, Labor won’t make the mistake again. Yes, it’ll detail (and have year-by-year costs for) programs that are more generous than the Coalition’s, among them cheaper childcare, its Medicare cancer plan and its pensioner dental plan.

But it’ll be able to more than pay for them in every one of the next ten years because of a number of courageous decisions that’ll save money, the most financially important of which is the decision to stop sending company tax refund cheques to people who don’t pay tax. It’ll save A$5 billion in the first year and more in future years because the cost of the refunds has been ballooning.

The result will be a larger budget surplus in every one of the next ten years, including each year of the forward estimates and including the financial year about to start, which is when the budget is scheduled to return to surplus.

Read more: Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'?

So big will be these bigger surpluses that Labor has its budget on track to hit the Coalition’s target of 1% of gross domestic product four years earlier than the Coalition in 2022-23 rather than 2026-27.

That means that in Labor’s first budget, which it will deliver in August this year if elected as a means of resetting forecasts, its projections will show the long-awaited surplus of 1% of GDP within the forward estimates, rather than beyond them as in the Coalition’s budget.

Labor’s 1% of GDP will be A$22 billion, twice the surplus of $9.2 billion the Coalition plans to deliver in that year.

All Labor needed was courage, and the ability to withstand complaints from people who own shares but don’t pay tax and are naturally upset about losing government cheques they’ve become used to.

And lower government debt

Bigger surpluses and the much more rapid delivery of a substantial surplus will mean much quicker reductions in government debt. The budget had the government on track to eliminate net debt by 2030. Labor’s costings will have it on track to eliminate it much sooner.

Despite what the Coalition would like to claim, the key reason Labor’s surpluses will be bigger isn’t that Labor won’t be matching its longer-term tax cuts. Bracket creep means tax rates need to be cut or thresholds adjusted from time to time to ensure the personal tax take doesn’t climb too high. Labor’s costings recognise this, including a built-in assumption of tax cuts after the tax take hits 24.3% of GDP, a figure cunningly selected because it was the tax take when Howard left office.

If delivered as income tax cuts, at about the time the Coaltion’s high-end tax cuts are due, it’ll cost A$200 billion, but the method of delivery will depend on circumstances at the time.

With future tax cuts baked in

Labor’s “technical assumption” that the tax take won’t climb beyond 24.3% of GDP is different to the Coaltion’s “guarantee” that it won’t climb beyond 23.9% of GDP. It is a technical assumption rather than a promise, of the kind usually included in budget documents as a way of allowing for inevitable future tax cuts.

Without it, Labor’s surplus projections would have been much bigger and would have been hard to believe. With it, the projections should be credible.

Read more: Election tip: 23.9% is a meaningless figure, ignore the tax-to-GDP ratio

The secret sauce in Labor’s better budget projections isn’t that it isn’t adopting the Coalition’s tax cuts. It is that it’s tackling the handing out of billions of dollars in dividend imputation cheques to people who don’t pay tax in a way the Coalition wasn’t prepared to.

Not that it didn’t think about it. A file list seen by Fairfax Media shows Treasury created a file entitled “Tax Policy - Dividend Imputation” in the lead-up to then Treasurer Scott Morrison’s 2017 budget.

The tax reform discussion paper commissioned by his predecessor, Joe Hockey, found “revenue concerns with the refundability of imputation credits”.

Read more: Vital Signs: When it came to the surplus, both Bill and Scott were having a lend The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.