Top economists give budget modest rating and doubt inflation will fall as planned

Wes Mountain/The Conversation

Asked to grade Treasurer Jim Chalmers’ third budget on his own criteria of delivering on “inflation in the near term and then growth in the medium term”, most of the 49 leading economists surveyed by the Economic Society of Australia and The Conversation have failed to give it top marks.

On a grading scale of A to F, 17 of the 49 economists – about one-third – give the budget an A or a B. Two have declined to offer a grade.

The result is a sharp comedown from Chalmers’ second budget in 2023. Two-thirds of the economists surveyed conferred an A or a B on that budget.

The economists chosen to take part in the post-budget Economic Society surveys are recognised by their peers as leaders in fields including macroeconomics, economic modelling, housing and budget policy.

Among them are a former head of the Department of Finance, a former Reserve Bank board member and former Treasury, International Monetary Fund and Organisation for Economic Co-operation and Development officials.

Thirteen of those surveyed – more than a quarter – give the budget a low mark of D or an E. None have given it the lowest possible mark of F.

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Asked whether the budget was likely to achieve its aim of getting inflation back within the Reserve Bank’s 2-3% target band by the end of this year, and back to 2.75% by mid next year, 17 thought it would not. Only ten thought it would.

A greater number – 21 – were not sure.

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In his budget speech, Chalmers predicted inflation would come back to the Reserve Bank’s target band sooner than the 2025 expected by the Reserve Bank itself, “perhaps even by the end of this year”.

The budget papers forecast an inflation rate of 2.75% by mid-2025, well within the target band and a half a percentage point lower than the bank’s forecast.

The papers say two measures in the budget, not known to the Reserve Bank when it produced its forecasts in early May, explain why the budget forecast is half a percentage point lower.

They are an extra year of energy bill relief of $300 per household and $325 for eligible small businesses and a further 10% increase in the maximum rate of Commonwealth Rent Assistance.

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If the lower budget forecast is correct, and if the Reserve Bank sticks to the letter of its agreement with the treasurer that requires it to aim for consumer price inflation between 2% and 3%, the bank is likely to cut interest rates late this year or early next year as inflation approaches its target zone.

But economists including Flavio Menezes from The University of Queensland say while the budget measures might “mechanically” suppress measured inflation, they are:

unlikely to alleviate underlying inflationary pressures and may even exacerbate them; for households not experiencing financial strain, lower energy bills could simply lead to increased spending in other areas.

Former Reserve Bank board member Warwick Mckibbin says the bank is likely to “see through” (ignore) the largely temporary mechanical price reductions and “raise interest rates to where they should be”.

Others surveyed, a minority, argue the economy is too weak for the extra spending in the budget to boost inflation through consumer spending. Former Finance Department Secretary Michael Keating says any stimulus is “likely to be swamped by the economic slowing well under way”.

Independent economist Saul Eslake said the subsidies for energy and rent would inject only $3 billion into the economy in 2024-25. This meant any boost they would give to underlying inflation would be hardly “material”.

Tax cuts matter more than energy rebates

More important for boosting the economy would be previously budgeted Stage 3 tax cuts. These are set to inject $23.3 billion per year from June, climbing to $107.2 billion over four years.

Eslake said the decision to reskew the tax cuts toward middle and lower earners had saved the government from the need to direct extra specific support to these people. Politically, the government could not have got away with doing nothing.

But Eslake was appalled to discover that the cost of the single biggest spending item in the budget, the untied grants to the states, had blown out even more than expected. The special top-up for Western Australia is now set to cost $53 billion over 11 years instead of the $8.9 billion over eight years expected in 2018.

How the national government could justify gifting $53 billion to the government of Australia’s richest state was beyond his comprehension.

Big issues unaddressed

A repeated theme among the economists was that the budget did very little to boost productivity or address persistent problems.

Several described it as an election budget, others a budget driven by polling.

Macquarie University’s Lisa Magnani said the lack of attention to home prices, the funding of public schools and the poor performance of Australian firms was concerning, given Chalmers’ claim it was a budget for “decades to come”.

Former Department of Foreign Affairs chief economist Jenny Gordon said the budget had failed to tackle the distortions in the housing market and the financial sustainability of needed services including health care, aged care and childcare.

Independent economist Nicki Hutley said crunch time for tax reform was coming, given the large baked-in increases in spending on defence, health and disability insurance and Australia’s over-reliance on income tax and company tax.

Warwick McKibbin said Australia’s main economic problems were its lack of productivity growth, the big changes needed to bring about the energy transition, the surge in artificial intelligence, the risk of much lower export prices and geopolitical uncertainty.

The government should have tried to build a bipartisan consensus about how to fix these.

Private investors were hanging back knowing that whatever the government did could be reversed at the next election.

Although many of those surveyed welcomed the Future Made in Australia Act, some criticised its approach of “picking winners” and “wasting precious resources” by putting money into activities such as the manufacture of solar panels, which could be done more cheaply elsewhere.

Bigger government

Former Industry Department chief economist Mark Cully said it was in some ways one of the most consequential budgets in years.

It locked in a clear shift towards higher spending and revenue, which, at around 26% of GDP, was higher than any other time Australia had been near full employment.

Future Made in Australia was the most marked intervention by a government in shaping the future direction of the economy for decades.

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Beyond the spin, beyond the handouts, here’s how to get a handle on what’s really happening on budget night

Three weeks from now, some of us will be presented with a mountain of budget papers, and just about all of us will get to hear about them on radio, TV or news websites on budget night.

The quickest way to find out what the budget is really doing will be to listen to the treasurer’s speech, or to peruse online the aptly-named “glossy” – a document that last year was titled “Stronger foundations for a better future”.

But they will tell you exactly what the government wants you to hear, exactly as it wants you to hear it.

If you are looking instead for the truth – what the government is actually trying to achieve and what it is holding itself and its officials to, I would suggest something else, tucked away on about page 87 of the main budget document.

It is required by the Charter of Budget Honesty Act introduced in 1998 by Peter Costello, the treasurer under Prime Minister John Howard.

On taking office in 1996, Costello set up a National Commission of Audit to examine the finances he had inherited from the Hawke and Keating governments, presumably with an eye to discovering they had been mismanaged.

But the members of the commission weren’t much interested in that. Instead, they decided to deal with something more fundamental.

Budget as you wish, but explain your strategy

Governments were perfectly entitled to manage money in whatever way they wanted, and they were perfectly entitled to spend more money than they raised (which they usually do, it’s called a budget deficit).

What the commission wanted was for governments to make clear what they were doing, and to spell out the strategy behind it.

Only part of it was about being upfront with the public. The commission also wanted governments to be upfront with themselves – to actually develop frameworks for what they were doing, rather than doing whatever they felt like.

The commission recommended a Charter of Budget Honesty, which among other things requires officials to prepare independent assessments of the finances before each election, requires budget updates six months after each budget, and requires tax expenditures (tax breaks) to be accounted for like other expenditures.

And it requires the publication and regular updating of a fiscal strategy statement.

Where treasurers hold themselves accountable

The fiscal strategy can be thought of as an exam question set by the student who is being examined – something along the lines of “this is what you say you want your budget to achieve, please set out the means by which you plan to achieve it”.

It turns out to have been exceptionally effective in getting governments to organise their thoughts, make budgets at least try to achieve something, and let the rest of us know what they are trying to achieve.

Every few years, treasurers change the strategy, as is their right. Treasurer Jim Chalmers says he’ll change it again this budget, to de-emphasise the fight against inflation and to more greatly emphasise the need to support economic growth.

His statement will tell us what’s behind his actions in a way the glossy words in his brochure and speech might not.

The strategy that has signposted 26 years

Previous statements have signposted all the important turns in what the budget is trying to do.

The first, in 1998, committed Costello and Howard to achieving a budget surplus on average over the economic cycle and whenever “growth prospects remain sound”.

Making that commitment more difficult was another “not to introduce new taxes or raise existing taxes over the term of this parliament”.

Two years later, after the government had won an election promising a new goods and services tax, that commitment was changed to “no increase in the overall tax burden from its 1996-97 level”, a condition met by calling the GST a state tax.

Hockey and Morrison wound back spending

The Labor budgets from 2008 loosened the tax target to the average share of GDP below the reference year, which they changed to the higher-tax year of 2007-08.

The first Coalition budget under Treasurer Joe Hockey in 2014 changed the target from tax to spending, pledging to bring down the ratio of payments to GDP, and pledging a surplus of 1% of GDP by 2023-24.

Any new spending would be more than offset by cuts elsewhere, and if the budget did receive a burst of unexpected revenue it would be “banked” rather than spent.

In 2018 Treasurer Scott Morrison reintroduced tax as a target, that he spelled out precisely. Tax was not to increase beyond 23.9% of GDP.

Then during COVID, Frydenberg spent big

In 2020, in the face of a COVID-induced recession and soaring unemployment, Finance Minister Mathias Cormann and Treasurer Josh Frydenberg pushed the old strategy to one side.

They would spend big now to keep the economy afloat so they wouldn’t have to spend more bailing it out later, and they wouldn’t return to their old concern about the deficit until the unemployment rate was “comfortably below 6%”.

So well did they succeed that in 2021 Frydenberg made the momentous decision to keep going, abandoning the promise to return to worrying about the deficit when unemployment fell below 6%.

Instead he promised to keep spending big until unemployment was “back to pre-crisis levels or lower”.

The decision propelled unemployment down to a 50-year low of 3.5%.

Along with high iron ore prices, that one change of strategy has probably helped deliver Chalmers two consecutive budget surpluses – the one he announced last year for 2022-23, and the one he is set to announce this year for 2023-24. More of us have been in jobs paying tax, and fewer have been out of jobs on benefits.

It’s a powerful demonstration of the real-world difference budget decisions can make, and the way in which the fiscal strategy tells the story.

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Will Jim Chalmers’ budget drive up inflation? Not likely – and here’s why

The proposition that cutting prices will stoke inflation is a hard one to get your head around, even if you are an economist.

Yet it has been seriously put forward as a critique of this month’s budget; the one in which Treasurer Jim Chalmers announced measures that will take the edge off electricity and gas prices, the price of prescriptions and some visits to the doctor, and the out-of-pocket costs faced by low-income renters.

And childcare. Although announced in last year’s budget, measures to take effect in July are set to save a typical family with one child in care about $1,780 per year.

Some of the critics of these measures were participants in this year’s Economic Society of Australia post-budget survey.

What they said was that cutting these prices will give people more free money to spend on other things, pushing up prices elsewhere, and putting more pressure on inflation and the Reserve Bank, which might have to push interest rates higher.

As one of them put it, subsidising bills is “not really all that different” to giving people cash payments that they can use to bid up prices and push up inflation.

As I said, it’s a hard argument to get your head around. It makes sense in theory, but in practice I don’t think it makes much sense at the moment, given the measures actually in the budget.

Correct in theory, if not in practice

Here’s how it might make sense. Imagine a big expense that households had no choice but to pay. If the government introduced measures that increased it by $1,000 a month, those households would be forced to spend a good deal less per month on other things, and would put a good deal less upward pressure on prices.

Actually, we don’t need to imagine. It’s partly why the Reserve Bank has just ramped up interest rates – to increase mortgage payments by up to $1,000 per month, and in doing so take up to $1,000 a month from household budgets to take pressure off prices.

And it’s partly why the Reserve Bank cuts interest rates – to lower mortgage payments and free up money households can use to bid up prices.

The argument is that if a cut in the price of paying off a mortgage can be inflationary, so too can cuts in other prices.

Except that other price cuts are hardly ever anything like as big.

When the price of petrol (and diesel) jumped 40 cents per litre after Russia invaded Ukraine in 2022, few people doubted it was inflationary. It pushed up the price of nearly everything.

So when the price per litre fell 22.1 cents after the Morrison government temporarily cut fuel excise, few doubted that the measure restrained inflation as it was meant to, even though if the price had been cut by much more the cut might well have fed inflation.

Which is another way of saying that size matters. If I was to spit into the ocean, theory suggests I would lift the sea level. Practice suggests I would not.

A small effect, with a lag

In his post-budget address to Australian Business Economists last week, Treasury Secretary Steven Kennedy revealed the government’s calculations on the budget’s effects on inflation.

He said the changes to rent assistance, the price of prescriptions and bulk billing were small and would put only “small downward pressure on prices”, which he conceded might theoretically be offset by a boost to spending.

But he said that offsetting effect would be “largely immaterial”, meaning it would be too small to measure.

The energy price measures will do much more. Kennedy’s department reckons they will cut inflation by three quarters of a percentage point in 2023-24, producing an inflation rate of 3.25% rather than 4% in the year to June 2024.

It says the caps on wholesale prices will do most of the work, cutting the inflation rate by half a per cent, with the consumer and business rebates cutting inflation by a further quarter of a per cent. When the rebates end in mid-2025 their effect will be unwound.

The department says the offsetting effect from extra spending will be measurable but “small”, and will work “with a lag”. So by the time it has had much of an effect, inflation itself should be a good deal lower.

And Kennedy identified three things that should help offset the offsetting effect:

• lower energy prices and inflation will lower the indexation of payments that are linked to inflation, putting less money into the economy to add to inflation

• the expected 0.75 point cut in inflation should help restrain inflationary expectations, making it harder for high inflation to become self-sustaining

• the cuts in the profits of energy companies brought about by the energy price caps will themselves remove money from the economy.

And Kennedy says Australia is well placed to fight inflation in other ways.

All of the budget measures taken together, including the cost-of-living measures, should add just $20 billion to the amount the government pumps into the economy over the next four years – a mere fraction of $11 trillion that Australians will spend and earn over that time.

As well, Australia’s very, very low unemployment rate has pushed the proportion of the population in paid employment to record highs, making Australia better able than ever to call upon workers to respond to shortages as prices rise.

The faster-than-expected return of migration will help even more, adding to the capacity of the economy to provide services without pushing up prices, all the more so because the migrants Australia selects tend to be young enough not to need many services themselves.

While you can never know what’s around the corner, I’m yet to see a credible argument that inflation won’t do as predicted in the budget: come down swiftly from here on. It’s forecast to fall from 7% to 6% by the middle of this year, and to 3.25% by the middle of next year.

Rather than making inflation worse, it seems to me that by cutting prices for many of us, the budget will help bring down inflation sooner.

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Economists award Chalmers top marks for budget, but less for fighting inflation

Wes Mountain/The Conversation, CC BY-ND

Asked to grade Jim Chalmers’ second budget on his own criteria of delivering “relief, repair and restraint”, most of the 57 leading economists surveyed by the Economic Society of Australia and The Conversation give it top marks.

On a grading scale of A to F, 37 of the 57 economists – almost two-thirds – gave the budget an A or a B.

The proportion giving the budget top marks is far higher than for the COVID-era budgets of his Liberal predecessor, Josh Frydenberg, which attracted top marks from 41% and 37% of the experts surveyed.

The economists chosen to take part in the survey have been recognised by their peers as Australia’s leaders in fields including macroeconomics, economic modelling, housing and budget policy.

Among those surveyed are a former head of the Department of Finance, a former member of the Reserve Bank board, and former Treasury, International Monetary Fund and Organisation for Economic Cooperation and Development officials.

Only one of the 57 surveyed gave the budget the lowest possible mark of F, and only three awarded it an E.

Ten of the experts qualified their approval by saying the budget should have done more to help vulnerable Australians suffering from higher rents and energy prices, including – but not limited to – Australians on JobSeeker.

Melinda Cilento, chief executive of the Committee for Economic Development of Australia, said while the increases in payments and support were “a good start”, they didn’t go far enough.

Consultant Nicki Hutley said even the promise of a staged increase in JobSeeker would have been better than “the miserly increase given”.

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Few of those surveyed said they would have preferred a tougher budget. Some, including economist Saul Eslake, warned the economic growth forecasts were so weak (1.5% for 2023-24) that a budget that took money out of the economy might have increased the risk of a recession.

The budget saved 82% of the revenue upgrades that had come from better-than-expected jobs and commodity price growth. Economist Rana Roy said if the budget had tried to save 100% of the revisions or more, it could well have triggered a recession or the first signs of it, and a reversal of the measures.

“A tough policy that is unsustainable is not actually tough,” he said, referring to the fate of the measures introduced by Treasurer Joe Hockey in the Abbott government’s first budget in 2014, many of which were abandoned or modified.

Other criticisms of the budget were that it failed to wind back the high-end Stage 3 tax cuts due mid next year (seven panellists’ criticised); that it was less generous to wage earners than those on benefits (two panellists) and that it offered little to address climate change (four panellists).

Former Paris-based OECD director Adrian Blundell-Wignall said the budget was “short on policies to prevent climate change and long on policies to help people deal with it”. Some of the profits that had made the budget strong came from exporting fossil fuels, the emissions of which are not counted in Australia’s totals.

Ken Clements of the University of Western Australia said the entire budget process needed to change. Decisions about defence, aged care, resource taxation and hundreds of other issues were all announced at once. A staggered approach might lead to better decisions and a better-performing economy.

Disagreement on inflation

The economists were less generous in their assessment of the budget as a tool to fight inflation, with fewer than half (46%) awarding the budget an A or a B on its ability to keep inflationary pressures in check.

More than 10% gave the budget the lowest possible marks of an E or F.

Four of the economists flatly rejected the treasurer’s assertion that greater subsidies for rents, energy, prescriptions and doctors visits would dent inflation.

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Blundell-Wignal said putting cash into the hands of households had been the main cause of the surge in inflation worldwide.

James Morley of The University of Sydney said while spending to reduce power bills might make one or two quarters of the consumer price index look better, it would give consumers more money to spend spend and push up other prices.

Richard Holden said anyone who didn’t think growth in spending of 0.9% of GDP was inflationary was “off their rocker”. It was enough to make the Reserve Bank push up interest rates by 0.25 percentage points more than it would have.

The Grattan Institute’s Danielle Wood countered that the spending was likely to boost inflation by just 0.1%.

The budget has inflation falling from 7% to 6% by the middle of this year, and to 3.25% by the middle of next year.

Leonora Risse and Flavio Menezes said debate about whether the cost of living relief would slow the decline in inflation was misguided.

“Electricity rebates and JobSeeker increases are inflationary in the same way as wage increases,” Menezes said. “Yet no one suggests that we should not increase wages at all to alleviate inflation.”

Risse said rent still had to be paid and basics still had to be bought. If people couldn’t pay, they would skip meals, forgo heating during winter, and lose the stability of a safe place to call home, damaging the economy in more costly ways.

Treasurers needed to consider more than a narrow definition of economics.

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Budget 2023: budgeting for difficult times is hard – just ask Chalmers

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Surplus or not, the budget papers show us living through pretty awful times.

Living standards measured by the buying power of wages are set to go backwards again in 2023-24 as wages grow by 3.75% while prices rise by 6%.

Separate figures released by the Bureau of Statistics as Treasurer Jim Chalmers was preparing to deliver his speech show the volume of goods and services bought from Australian retailers has shrunk for the past six months.

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Living standards measured by gross domestic product are set to go backwards in 2023-24 as total GDP grows by an unusually low 1.5% while Australia’s population grows by 1.7%, producing a so-called “per capita recession”.

The good news on the government’s finances is largely historical.

The good news is old news

The budget positions for 2022-23 and 2023-24 have been improved by $42 billion each because of measures largely outside the government’s control (so-called “parameter and other variations”).

Chief among these has been an unexpectedly big increase in the number of Australians in work and subject to income tax (as the unemployment rate has fallen to a half-century low), and much higher prices for exports than expected (roughly twice as high for case of iron ore), producing more profits to tax.

The government has chosen to spend just $1 billion of the $42 billion bounty in 2022-23 and just $12 billion in 2023-24, which has allowed the rest of the bounty to produce a small budget surplus of $4.2 billion in 2022-23 and a much smaller than expected deficit of $13.9 billion in 2023-24.

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Beyond 2022-23, it will be deficits again for at least a decade on the budget’s projections, as the unusual circumstances that delivered the boost fall away.

The unemployment rate is set to climb from its long-term low of 3.5% to 4.25% by mid next year and to 4.5% by mid-2025. The number of Australians in work and in the income tax system is expected to grow by just 1% in 2023-24 and 2024-25 after growing by 2.5% in 2022-23. The iron ore price is expected to halve within a year.

Government income is set to grow 8.8% in 2022-23 and 5.1% in 2023-24. After that, it is scheduled to barely grow in 2024-25, climbing just 0.5%, before returning to growth of 4.4% and 4.9 in 2025-26 and 2026-27.

Given that the costs of some government programs are expected to grow by a lot (the cost of National Disability Insurance Scheme is expected to grow by an average of 10.4% per year and the cost of funding hospitals by 6.5% per year), it looks as if the government is going to have to find more money.

Spending on defence is set to climb 22% over the next four years, and doubtless by more beyond, as spending on building and buying the nuclear-powered submarines under the AUKUS agreement ramps up.

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Chalmers has sensibly abandoned the Coalition’s quaint commitment to keep the tax to GDP ratio to 23.9%, which is just as well because the influx of revenue scheduled for 2023-24 will to take it to 23.9% (25.9% including non-tax revenue) before it falls back.

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Longer term, Chalmers will have to raise more tax or cut government services. The increases in the tax on large superannuation balances, tobacco excise and the petroleum resource rent tax are a sign of what’s to come.

The ultra-expensive Stage 3 income tax cuts deliver a hard-to-defend $2,000 per year to high earners on $120,000 per year. Although legislated back before COVID, they are not due to take effect until mid next year, meaning there’s still time (and another budget) in which to wind them back and reorientate them to Australians who need them more.

Where Chalmers has supported Australians hit by ultra-high inflation in this budget, he has tried to do it cheaply.

Boosting JobSeeker and related payments by the $128 per week Chalmers’ economic inclusion advisory committee wanted would have cost $5.7 billion per year. Instead, Chalmers will lift it by $20 per week (and slightly more for most Australians on it aged 55 and over) at a cost of $1.3 billion per year.

As important as extending parenting payments to single parents with children up to 14 years of age will be those who need it. The measure is budgeted to cost just half a billion per year.

Boosting Commonwealth rent assistance by up to $16 per week (the “largest increase in more than 30 years”, Chalmers says) will cost a tad more, around $700 million per year.

Boosting Medicare, primarily by boosting payments to general practitioners who bulk bill children and patients on low incomes will cost $1.3 billion per year.

The cost of the energy package (which the treasurer says will take $500 per year off some power bills and three-quarters of a percentage point off inflation) is marked in the budget as “not for publication”, presumably in deference to negotiations with the states which will co-fund it.

Chalmers’ budgets will get harder

Chalmers said during his press conference this budget had been much harder to put together than his first. What he could have added is that his next budget is shaping up to be even harder.

Economic growth has been revised down. So convinced are financial markets the economy is weakening, that ahead of the budget they were pricing in no further Reserve Bank interest rate increases in this year and one interest rate cut, by December.

The economic forecasts in the budget suggest the coming per-capital recession won’t turn into an actual recession. Economic growth is expected to climb from an ultra-low 1.5% in 2023-24 to a still-low 2.25% in 2024-25 and then to 2.75%.

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Inflation, which was 7% in the year to March, is forecast to fall to 6% in the year to June, and then to a less-worrying 3.25% by June 2024.

Although the forecasts move in the right direction, they are not good. Chalmers said getting things right this time required a “fine balance”. Future budgets are shaping up to require just as much.

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Cut emissions, not petrol tax. The budget economists want

Overwhelmingly, Australia’s top economists would rather the budget funds measures to cut carbon emissions than cuts income tax or company tax.

They are also dead against rumoured cuts to petrol tax and the tax on beer.

The Conversation’s pre-budget survey of a panel of 46 leading economists selected by the Economic Society of Australia finds almost half want a budget deficit smaller than the A$99.2 billion expected for 2021-22 and the $98.9 billion forecast for 2022-23 in the December budget update.

Higher commodity prices and lower than expected unemployment – which is lifting tax revenue while also cutting spending on benefits – is set to produce a deficit tens of billions of dollars lower, perhaps as low as $65 billion, absent new spending.

But a substantial chunk of those surveyed (41%) want an unchanged or bigger deficit to boost spending in other areas, including an accelerated transition to net-zero carbon emissions and Australia’s defence.

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Arguing for a deficit about as big as last year’s, former OECD official Adrian Blundell-Wignall said while spending on defence was important, so too was spending on supply lines to make Australia less dependent on other countries. Events in the Ukraine showed supply chains were as important as weapons.

Curtin University’s Margaret Nowak said the huge reconstruction needs following the floods in NSW and Queensland suggested there was no potential to reduce the deficit and good reasons why it might climb.

Arguing with the majority in favour of a lower deficit, independent economist Nicki Hutley said the government should bank rather than spend any improved psoition to reduce debt ahead of higher interest rates. It would need “reserves at the ready” to deal with economic and geopolitical uncertainty.

James Morley of the University of Sydney said with the economy on the road to recovery, more government handouts would be likely to be inflationary, making it harder for the Reserve Bank to keep inflation within its target band.

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Asked to pick up to two spending or tax bonus measures from a list of twelve that would most deserve a place in the budget, more than 60% of those surveyed nominated spending on the transition to net zero carbon emissions.

University of Adelaide economist Sue Richardson said if she had the option, she would have picked “remove all subsidies to fossil fuels”. More than 90% of Australia’s energy now comes from fossil fuels. Reducing that – as the government has said it expects to do to get to net zero emissions by 2050 – will require a massive effort, “made much harder by starting so late”.

More than 32% of those surveyed backed increases subsidies for childcare, in part because it would allow more parents to do more paid work. More than 26% supported a temporary boost to JobSeeker and other payments; 13% supported increased defence spending; and 10.9% supported infrastructure spending and investment in domestic manufacturing.

Asked which of the measures should not be adopted, almost half (45%) picked a reduction in beer tax, and almost 35% nominated a reduction in fuel excise.

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Saul Eslake said “gimmicks” such as cuts in beer or petrol excise failed to address the reality that Russia’s invasion of Ukraine had serious economic consequences for Australia, including reducing national income. Governments can’t “pretend this hasn’t happened”.

Instead, what governments could do was ensure Australia’s lowest earners don’t bear the brunt of that economic pain.

The best ways to do this were temporary increases in social security payments, or a one-off special payment, and tax rebates for genuine low earners.

Eslake would fund them from the extra tax that will flow from the companies and shareholders who will benefit from the higher commodity prices following Russia’s invasion.

UNSW Sydney’s Nigel Stapledon was sceptical about higher social security payments. Given Australia’s experiencing a near five-decade low in unemployment, and unprecedentedly high number of job vacancies, he said it was hard to justify a higher rate of JobSeeker.

Also high on the list of measures panellists felt should not be adopted were further company tax cuts (21.7%) and bringing forward the Stage 3 tax cuts income tax cuts directed at high earners and due to start in July 2024 (21.9%).

The budget will be delivered on Tuesday night.

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

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‘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.

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

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“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.

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

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“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”.

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

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“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.

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The Conversation, CC BY-ND

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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.”

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

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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.

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Individual responses

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.

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

Overwhelmingly, Australia’s leading economists want the budget to boost social housing and the JobSeeker unemployment benefit rather than bring forward personal income tax cuts.

The 49 eminent economists who responded to Conversation-Economic Society of Australia pre-budget survey were asked to rate 13 options in terms of “bang for the buck” – effectiveness in boosting the economy over the next two years.

Among the options offered were boosting JobSeeker (previously called Newstart), wage subsidies beyond the expiry of JobKeeper, one-off cash payments to households, big infrastructure spending, bringing forward the personal income tax cuts, and company tax cuts.

The options were selected by a committee of the central council of the Economics Society and were presented to each surveyed economist in a random (shuffled) order.

The economists surveyed are Australia’s leaders in the fields of microeconomics, macroeconomics, economic modelling and public policy. Among them are former and current government advisers, former heads of statutory authorities, and a former member of the Reserve Bank board.

Each was asked to nominate the four most effective options for boosting the economy.

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Economic Society of Australia/The Conversation, CC BY-ND

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The most popular option, endorsed by 55% of those surveyed, was boosting spending on social housing.

Monash University econometrician Lisa Cameron said the budget provided an unusual opportunity to fix things for the long term while boosting the economy.

Social housing would leave us with something worthwhile (as did the school hall building program during the global financial crisis) in addition to providing work for the building industry. Alleviating homelessness would be a lasting benefit.

If it goes to the unemployed, it will be spent

The second most popular option, endorsed by 51%, was permanently boosting JobSeeker, previously known Newstart. The temporary boost in the A$282.85 per week payment was wound back last week and will end in December.

Melbourne University economist John Freebairn pointed out that with no real increase in Newstart since 1993 and many on it in demonstrable poverty, every extra cent spent on it will be spent rather than saved.

Supported by fewer than half of those surveyed, but third most popular at 45%, was more funding for education and training.

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Read more: Should the government keep running up debt to get us out of the crisis? Overwhelmingly, economists say yes

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Flinders University labour market specialist Sue Richardson said education was labour-intensive, which would help with employment, and would assist young people severely hit by the pandemic to get the skills they would need to get jobs rather than stay unemployed.

Matthew Butlin, who heads the South Australian Productivity Commission, said the decimation of income from student fees means universities will have less money to subsidise research. There was a case for more direct funding of university research in the form of competitive grants for projects with practical applications.

The fourth most popular option was infrastructure spending, supported by 41%.

Why not a Hoover Dam, a new Opera House?

Many made the point that the projects chosen would have to be worthwhile in their own right, and feared this might not be the case. Others looked to big “nation building” projects along the lines of the Hoover Dam in the United States which was built during the Great Depression and employed 21,000 people.

“Why not building a massive dam in Australia? Why not building a new Sydney Symphony Orchestra building like the Berlin Philharmonie? Why not expand the National Parks? Why not building green libraries all over Australia?,” asked Sydney University’s Stefanie Schurer.

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Read more: Homelessness and overcrowding expose us all to coronavirus. Here's what we can do to stop the spread

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Done right, like the Sydney Harbour Bridge which was completed during the Great Depression, big imaginative projects could leave us with something valuable.

There was less enthusiasm for continued wage subsidies (35%) and an expanded investment allowance (29%) with University of NSW economist Gigi Foster saying investment allowances could be replaced with income-contingent loans along the lines of the Higher Education Contributions Scheme.

That way businesses could borrow to invest, with an obligation to repay if the investment paid off.

If it goes on tax cuts, it might not be spent

The same approach was taken by some to funding higher quality aged care (supported by 31%) and increasing subsidies for child care (29%).

Economic modeller Warwick McKibbin suggested funding child care through income-contingent loans (repayable on the basis of income) rather than subsidies.

Bringing forward the leglislated personal income tax cuts as proposed by the government and cash payments to households were relatively unpopular, supported by 20% and 16%.

Saul Eslake said that while he agreed with the treasurer that early tax cuts would “put money in people’s pockets”, there was no guarantee the high earners “into whose pockets most of that money would be put”, would take it out and spend it in sufficient quantity.

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Read more: Frydenberg is setting his budget ambition dangerously low

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Eslake suggested that rather than supporting households with cheques as happened during the financial crisis, households could be handed time-limited tradeable vouchers that could be spent in areas hurt by restrictions, such tourism and the arts, or used for other worthwhile purposes such as childcare or reskilling.

Among those who did support bringing forward the tax cuts was John Freebairn, who said that although presented as cuts, what was proposed would do little more than restore what had been lost to bracket creep, keeping income tax steady.

Company tax cuts an also-ran

Company tax cuts, once touted by former prime minister Malcolm Turnbull as the key to jobs and qrowth garnered minimal support, being backed by just six of the 49 economists surveyed.

The least popular option, backed by only two economists surveyed, was government support for cleaner fossil fuels such as natural gas, as the prime minister is promising. In contrast 13 (26%) backed support for renewable energy.

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Individual responses

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.

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We asked 13 economists how to fix things. All back the RBA governor over the treasurer

Thirteen leading economists have declared their hands in the stand off between the government and the Governor of the Reserve Bank over the best way to boost the economy.

All 13 back Reserve Bank Governor Philip Lowe.

They say that, by itself, the Reserve Bank cannot be expected to do everything extra that will be needed to boost the economy.

All think that extra stimulus will be needed, and all think it’ll have to come from Treasurer Josh Frydenberg, as well as the bank.

All but two say the treasurer should be prepared to sacrifice his goal of an immediate budget surplus in order to provide it.

The 13 are members of the 20-person economic forecasting panel assembled by The Conversation at the start of this year.

All but one have been surprised by the extent of the economic slowdown.

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

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The 13 represent ten universities in five states.

Among them are macroeconomists, economic modellers, former Treasury, IMF, OECD and Reserve Bank officials and a former government minister.

The Bank needs help

At issue is the government’s contention, spelled out by Frydenberg’s treasury secretary Steven Kennedy in evidence to the Senate last month, that there is usually little role for government spending and tax (“fiscal”) measures in stimulating the economy in the event of a downturn.

Absent a crisis, economic weakness was “best responded to by monetary policy”.

Monetary policy – the adjustment of interest rates by the Reserve Bank – is nearing the end of its effectiveness in its present form. The bank has already cut its cash rate to close to zero (0.75%) and will consider another cut on Tuesday.

It is preparing to consider so-called “unconventional” measures, including buying bonds in order to force longer-term interest rates down toward zero.

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Read more: If you want to boost the economy, big infrastructure projects won't cut it: new Treasury boss

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Governor Lowe has made the case for “fiscal support, including through spending on infrastructure” saying there are limits to what monetary policy can achieve.

The 13 economists unanimously back the Governor.

Seven of the 13 say what is needed most is fiscal stimulus (including extra government spending on infrastructure), three say both fiscal and monetary measures are needed, and three want government “structural reform”, including measures to help the economy deal with climate change and remove red tape.

None say the Reserve Bank should be left to fight the downturn by itself without further help from the government.

There is plenty of room for fiscal stimulus, particularly infrastructure spending – Mark Crosby, Monash University

I agree with the emerging consensus that monetary policy is no longer effective when interest rates are so low – Ross Guest, Griffith University

It is time for coordinated monetary and fiscal policies to boost domestic demand – Guay Lim, Melbourne Institute

The surplus can wait

Eleven of the 13 believe the government should abandon its determination to deliver a budget surplus in 2019-20.

Economic modeller Renee Fry-McKibbin says the government should “ease its position of a surplus at all costs”.

Former Commonwealth Treasury and ANZ economist Warren Hogan says achieving a surplus in the current environment would have “zero value”.

Former OECD director Adrian Blundell-Wignall says that rather than aiming for an overall budget surplus, the government should aim instead for an “net operating balance”, a proposal that was put forward by Scott Morrison as treasurer in 2017.

The approach would move worthwhile infrastructure spending and borrowing onto a separate balance sheet that would not need to balance.

Political debate would focus instead on whether the annual operating budget was balanced or in deficit.

Former treasury and IMF economist Tony Makin is one of only two economists surveyed who backs the government’s continued pursuit of a surplus, saying annual interest payments on government debt have reached A$14 billion, “four times the foreign aid budget and almost twice as much as federal spending on higher education”.

Further deterioration of the balance via “facile fiscal stimulus” would risk Australia’s creditworthiness.

However Makin doesn’t think the government should leave everything to the Reserve Bank.

He has put forward a program of extra spending on infrastructure projects that meet rigorous criteria, along with company tax cuts or investment allowances paid for by government spending cuts.

Former trade minister Craig Emerson also wants an investment allowance, suggesting businesses should be able to immediately deduct 20% of eligible spending.

It’s an idea put forward by Labor during the 2019 election campaign. Treasurer Josh Frydenberg has indicated something like it is being considered for the 2020 budget.

Emerson says it should be possible to deliver both the investment allowance and a budget surplus.

Quantitative easing would be a worry

Five of the 13 economists are concerned about the Reserve Bank adopting so-called “unconvential” measures such as buying government and private sector bonds in order to push long-term interest rates down toward zero, a practice known as quantitative easing.

Jeffrey Sheen and Renee Fry-McKibbin say it should be kept in reserve for emergencies.

Adrian Blundell-Wignall and Mark Crosby say it hasn’t worked in the countries that have tried it.

A quantitative easing avalanche policy by the European central bank larger than the entire UK economy has left inflation below target and growth fading. Quantitative easing destroys the interbank market, under-prices risk, and encourages leverage and asset speculation – Adrian Blundell-Wignall

Steve Keen says in both Europe and the United States quantitative easing enriched banks and drove up asset prices but did little to boost consumer spending, “because the rich don’t consume much of the wealth”.

The treasurer should step up

Taken together, the responses of the 13 economists suggest it is ultimately the government’s responsibility to ensure the economy doesn’t weaken any further, and that it would be especially unwise to palm it off on to the Reserve Bank at a time when the bank’s cash rate is close to zero and the effectiveness of the unconventional measures it might adopt is in doubt.

Measures the government could adopt include increasing the rate of the Newstart unemployment benefit, boosting funding for schools and skills training, borrowing for well-chosen infrastructure projects with a social rate of return greater than the cost of borrowing, further tax cuts that double as tax reform (including further tax breaks for business investment) and spending more on programs aimed at avoiding the worst of climate change and adapting to it.

The economists are backing the governor in his plea for help. They think he needs it.

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The 13 economists surveyed

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Read more: Buckle up. 2019-20 survey finds the economy weak and heading down, and that's ahead of surprises

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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.

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How Turnbull can back down on company tax, 'obviously'

How do you walk away from something to which you’ve committed your soul? You say things have changed, “obviously”.

It’s how marriages end in divorce, how deputies abandon their prime ministers and how Labor treasurer Wayne Swan quietly but spectacularly abandoned his absolute commitment to a budget surplus in late 2012.

He had been holding the line for half a decade, promising in his first budget “the largest surplus as a share of GDP in nearly a decade”, and then in his second, after the surplus evaporated during the financial crisis, “hard choices that chart the course back to surplus”.

In his third it was a “return to surplus in three years' time, three years ahead of schedule, and ahead of every major advanced economy”.

In his fourth it was an upgraded surplus, “back in the black by 2012‑13, on time, as promised”.

And then in his fifth, an even grander pledge: “Madam Deputy Speaker, the four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies.

“This budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time. The deficit years of the global recession are behind us, the surplus years are here.”

Along the way he contorted language to avoid even conceding the possibility that he would never deliver a surplus.

“Let me hear in plain English that the budget is within a hair’s breadth of going into deficit,” the ABC’s Kerry O’Brien asked him as the financial crisis gathered pace. “It seems silly to me that anybody would bother to argue that proposition. Will you accept going into deficit, if you have to, to maintain appropriate stimulus of the economy under the threat of recession and high unemployment?”

Swan: “Kerry, it would be silly to speculate along the lines of your question.”

O’Brien: “Why?”

Swan: “Because I've made it clear. We are projecting modest growth and modest surpluses, but if the situation were to deteriorate significantly it would have an impact on our surpluses and it may well be the case that we could end up in the area that you're speculating about.

O’Brien: “Well, say it. In deficit.”

Swan: “I am not going to say it because we're projecting modest surpluses.”

Incredibly, in October 2012, a year before Labor lost office and four months into the financial year that was meant to deliver the continually forecast surplus, the mid-year budget update still penciled one in, albeit assisted by fancy accounting tricks. It was “absolutely appropriate to stick with our surplus objective”, Swan told reporters.

Until December 20, days before Christmas, at which point Swan opened a press conference expressing dismay that the October tax receipts had been well below forecasts.

“Obviously, dramatically lower tax revenue now makes it unlikely that there will be a surplus in 2012-13,” he intoned, as if he had been caught unawares. “A sledgehammer hit our revenues.”

I’ve retold that story to make it clear that even the most unlikely backdowns are easy for politicians, even after repeated declarations of undying fidelity.

All through the on-again off-again negotiations with senators over the company tax cuts, Malcolm Turnbull has maintained that he is “absolutely” committed to the remaining $35.6 billion, and, if necessary, will take them to the next election.

“The Prime Minister did not leave any wiggle room at all,” said his chief negotiator, Mathias Cormann, in February at an earlier time when it looked as if hope had been lost. “We are completely and utterly committed to our business tax cuts. They were very necessary at the last election, we took them to the last election. They will be even more important by the time of the next election. If the Senate were not to pass these very important business tax cuts, yes, we will fight for them at the next election.”

No wiggle room.

Until a moment of zen on Tuesday after Pauline Hanson had what is probably her fourth change of heart.

“We might not ever get to that point,” Cormann said when asked if the company tax cuts might ever get through the Senate. He repeated, for emphasis: “It might well be that we won’t ever get there.”

Cormann insists that he wasn’t paving the way for a last-minute backdown, but if it happened, just before the election, the lines would be delivered without shame, as were Swan’s when the economy and his government headed south. Things would have changed, “obviously”. Cormann would have $35.6 billion more to offer in real tax cuts - income tax cuts - to people who vote.

And probably much more. The Coalition won’t reveal the updated 10-year budget cost of its company tax cuts because it doesn’t want Labor to know how much it will have to offer that it can’t.

Like Labor, it could promise to revisit its company tax cuts later, when the budget and the Senate permitted.

It’d be acknowledging reality, shamefacedly, and promising more to voters now, rather than years down the track when the small and uncertain impact of uncertain company tax cuts worked its way through the system.

In The Age and Sydney Morning Herald

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