Sunday, October 25, 2020

‘Could do better’: top Australian economists award the budget a cautious pass

Australia’s leading economists have struggled to grade this month’s budget.

Challenged by the Economic Society of Australia and The Conversation to rate it on a scale of A to F when judged by its stated aims of rebuilding the economy and creating jobs, none of the 43 economists who responded gave it the lowest grades of E or F.

But most who gave it a pass were unhappy.

Financial markets expert Kevin Davis praised “the willingness of a conservative government to adopt needed large deficit spending at variance with its ideology”.

Economic modeller and former Reserve Bank board member Warwick McKibbin said he would give it an A for scale.

But Davis said tax cuts “to the better-off employed” weren’t the best way of achieving desired outcomes, and McKibbin said the composition could have been much better designed.

Read more: It's not the size of the budget deficit that counts; it's how you use it

“There was an opportunity to invest in green infrastructure as part of a fiscal response and a climate/energy policy response that would have longer-term economic and environmental payoffs,” McKibbin said.

“For spending support, transfers to low income households rather than income tax cuts would have given a bigger bang for the buck. Greater support of childcare would support incomes and labour supply.”

Bob Breunig said the design of the childcare benefit created a well-documented income cliff for second earners making it difficult for them to work more hours. It was a known problem and would have been easy to fix.

Hard hats instead of soft skills

The Grattan Institute’s Danielle Wood said it was “absolutely the right call to change course on fiscal strategy and recognise the need for sizeable stimulus, so marks for that”.

But the budget “very much bet the house on a private sector-led recovery”.

Where it had spent money directly it mostly went to “hard-hat” professions such as infrastructure, construction, manufacturing, defence, utilities and energy.

Read more: High-viz, narrow vision: the budget overlooks the hardest hit in favour of the hardest hats

“Some of these sectors haven’t even seen job losses during COVID,” Wood said, and there is already a healthy pipeline of work for transport infrastructure projects, so why spend your stimulus dollars here?“

Renee Fry McKibbin noted that the burden of COVID-19 falls on front-line workers in health, caring industries, hospitality, tourism, arts and education, yet she said the budget focused on sectors "traditionally dominated by men”.

Climate change overlooked

Wood said the price of those blindspots would be a weaker recovery than otherwise, unemployment higher for longer than it could have been, and women’s economic disadvantage entrenched.

Labour market specialist Sue Richardson said relying on incentives such as instant asset write-offs and hiring subsidies was risky because the private sector might not respond in the way that had been hoped.

What direct spending there was seemed “intended largely to recreate the economy of the past, rather than invest in the economy of the future”.

Read more: Budget 2020: promising tax breaks, but relying on hope

“The economy of the future will, among other things, need to have much lower greenhouse gas emissions and much greater ability to cope with the unavoidable damage arising from climate change.”

How we handle the recovery will either set us on a path towards net-zero emissions or lock us into a fossil fuel system from which it will be hard to escape.

Saul Eslake gave the government “great credit for being willing, explicitly, to recalibrate its budget strategy” and run up what (for Australia) were large amounts of debt.

On average, a bare pass

But he said the measures chosen would be less effective in delivering jobs and recovery than others available including vouchers for spending in sectors hard-hit sectors and spending on social housing and childcare.

All but one of the 43 economists who responded to the survey also responded to the pre-budget survey which nominated spending on social housing, education and training and permanently boosting JobSeeker as the top budget priorities.

Assessing the budget, 16 of the 43 (37%) awarded it either an A or a B. Almost half (49%) awarded it a C, or “bare pass”. Six (14%) gave it a D.

The Conversation, CC BY-ND

Some of the economists who awarded a B said it was really a “B-minus”

One of them, Lata Gangadharan, said when it came to opportunities for women (those worst affected by the downturn) the budget “failed miserably” and would attract a D.

James Morley said he might have been “too easy of a marker” by awarding a B, but that it was “possible to lose the forest for the trees when only evaluating the budget on its specifics”.

‘B’ reflects the big picture, not the details

The big picture was that deficit-financed stimulus was needed and that the budget provided much more than might have been expected given the previous positions of the treasury and the Morrison government.

He said the forward guidance that put off “budget repair” until after the unemployment rate fell below 6% was welcome, even if one could ask why the threshold of 6% number had been chosen.

The more one looks at the details, the more one wants to significantly mark down the grade for budget. But I will still give it a “B” because the big picture is on the right track and I will just hope the Treasurer somehow becomes an “A” student in the future.

Rana Roy said he would have to grade the budget a C rather than an A or B, “more in sorrow than in anger”.

While he approved of the deficits and the tax cuts and the focus on infrastructure, he strongly suspected the measures would not be enough.

“For example, in an immediate sense it is likely that the negative impact of tapering and terminating JobKeeper will overpower the positive impact of the new wage subsidies for new hires.”

Read more: Top economists back boosts to JobSeeker and social housing over tax cuts in pre-budget poll

Two of those surveyed awarded the budget a B primarily because it had shown restraint. Tony Makin said too much spending would have pushed up the dollar and drawn resources away from the private sector. Geoffrey Kingston said it was important to avoid “maxing out the national credit card”.

Chris Edmond awarded it a C primarily because its assumptions relied on hope.

By simply assuming a widespread effective vaccine will be available next year and not otherwise thinking hard about how to beat the pandemic, the government is being very optimistic.

Others said it had ignored the one thing recommended by most economists, which was to invest in social housing to make housing affordable and create jobs.

A permanent increase JobSeeker would have given a million Australian confidence in the leadup to Christmas. Higher education, a major export earner with a direct impact on productivity, was being left to shrink.

John Quiggin said the budget pursued “cultural/ideological vendettas against perceived enemies like renewable energy and the university sector”.

But he said it was still worth a C. The government was right to budget for a large deficit, and deserved continuing credit for JobSeeker and JobKeeper.

Individual responses

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.


Tuesday, October 06, 2020

Budget 2020: promising tax breaks, but relying on hope

Tax cuts aren’t the half of it.

The personal income tax cuts promised in the budget will cost A$17.8 billion over four years.

The measures aimed at supporting businesses – the temporary instant tax write off of capital investments, the temporary ability to use losses to reduce previous tax payments, the JobMaker hiring credit and the enhanced apprentice wage subsidy — will cost $26.7 billion, $4.8 billion, $4 billion and $1.2 billion.

That’s a total of $36.7 billion — a subsidy for private businesses without precedent.

The clumsy wording in the part of the budget that sets out strategy says the aim is to “drive sustainable, private sector-led growth and job creation”.

‘Driving private sector-led growth’

Driving private sector-led growth doesn’t quite make sense, but it’s easy to get a handle on what it means.

By itself, business isn’t in a position to drive much.

Even with the budget measures – even with the Australian Taxation Office allowing most businesses to write off everything they spend on equipment over the next two years – non-mining business investment is expected to collapse 14.5% this financial year and bounce back only 7.5% the next.

The JobMaker hiring credit is intended to be a smarter version of the JobKeeper wage subsidy, which was wound back at the end of September, and will be wound back again after Christmas, before vanishing at the end of March.

Instead of helping pay the wages of all employees in businesses affected by the pandemic – the budget papers say right now it is helping pay 3.5 million wages, more than a quarter of the workforce – it’ll help pay the wages only of extra employees taken on.

JobKeeper replaced with something weaker

And only if they are aged between 16 and 35 and have previously been on JobSeeker or a related payment.

It’ll last for just a year and be worth only $100 or $200 a week, depending on the age of the person hired.

The government says it will support 450,000 positions.

But because a much larger subsidy for millions of positions will be withdrawn, there’s a risk employment will collapse as businesses especially affected by the pandemic (in industries such as tourism) find they can no longer afford to keep the staff they’ve got, let alone take on new ones.

It makes the budget a statement of faith, or hope.

Tax cuts in the hope we spend

There’s also hope we’ll spend the tax cuts that have been brought forward.

As of the start of this this financial year (it’ll be backdated), you can earn up to $45,000 instead of $37,000, paying just 19 cents in the dollar tax and nothing on the first $18,200.

High earners can keep paying 32.5 cents in the dollar right up to $120,000 instead of $90,000.

Low earners will get an offset of up to $700, middle earners an offset of up to $1,080 for another year.

Pensioners and recipients of carer payments and family tax benefits will get two extra cash payments of $250, on top of the two of $750 each earlier this yer, to be delivered in December and March.

The government is hoping the payments and the tax cuts will keep the slump in consumer spending to 1.5% this year, followed by a rebound of 7% next financial year.

All being well, unemployment will fall

It expects the unemployment rate to peak at 8% in the last three months of this year and then to fall to 6.5% by mid-2022.

It says the “effective unemployment rate”, which counts as unemployed people who are working zero hours (because of JobKeeper or other reasons) peaked at close to 15% in April, before sliding to around 9.25%.

The economy is expected to grow a larger than normal 4.75% next financial year and then to grow by 3% after falling 1.5% this financial year.

While not returning to surplus at any time in the next ten years, the budget deficit is expected to shrink from an eye-watering $213.6 billion this financial year (11% of gross domestic product) to -11.0 to $66.9 billion in 2023-24 (3% of GDP).

It’ll do it as spending returns to normal, which it might, if everything turns out as assumed.

A lot needs to go right

But the budget says, in words stronger than those used previously, “outcomes could be substantially different to the forecasts, depending upon the extent to which these assumptions hold.”

Those assumptions are that from here on, localised outbreaks of COVID-19 occur but are largely contained, a population-wide vaccination program is fully in place by late 2021, general social distancing restrictions continue until that happens and Victoria’s special restrictions and state border restrictions are lifted by the end of the year — except for Western Australia’s which will be lifted by April 2021.

There are other assumptions.

International travel is expected to remain low until late next year and then climb, allowing net overseas migration to reach 201,000 by 2023-24, still less than the 271,000 per year that was common.

For this year and next year, net overseas migration will be negative, as we lose more people to overseas than we gain from overseas.

Only a (somewhat diminished) birth rate will stop the population shrinking.

A lot could quickly date

The government’s most-recent economic statement, in July, was rendered out of date within days as Victoria went into stage 4 lockdown.

Anything could happen to render the budget forecasts redundant, and probably will.

Read more: Budget 2020: Frydenberg tells Australians, ‘we have your back’

From my standpoint, the government is putting too much store on businesses driving the recovery after JobKeeper has been wound back.

But if businesses don’t, it has given every indication it is prepared to do more. It’s hard to fault much of what its done. It has certainly shown its willingness to be flexible.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.