A question for the treasurer: how do you treat mental health without measuring well-being?


Carla Liuzzo, Queensland University of Technology

Treasurer Josh Frydenberg mocked the idea of a “well-being budget” as “laughable” back in February. He’s got less reason to laugh now.

According to an Essential Research poll last week, 78% of Australians agree the pandemic has exposed flaws in the economy and there is an opportunity to explore new ways to run things. A well-being budget might be just the ticket.

In February, Frydenberg dismissed a well-being budget as “just another word for Labor’s higher taxes and more debt”, after the shadow treasurer, Jim Chalmers, committed the heresy of saying gross domestic product was, on its own, a deficient economic measure, and countenanced “a version of New Zealand’s well-being budget, which redefines what success means in terms of economic outcomes”.

Frydenberg joked about Chalmers being “fresh from his ashram deep in the Himalayas, barefoot, robes flowing, incense burning, beads in one hand, well-being budget in the other”.

But now, with the federal government changing its tune on many things, such as debt, it might be a good time for Frydenberg to change his mind on this.

Well-being measures, for one thing, could greatly assist the Australian government in budgeting to improve mental health and prevent suicides – things Frydenberg said in his budget speech are national priorities.

It’s impossible to address the nation’s mental crisis just through the blunt tools of economic growth and money for band-aid services. If a bigger income was the main means to mental well-being, after all, James Packer would be happier.

Mental health is a complex problem, with complicated causes, requiring a sophisticated response. To do that, developing measurements of well-being can only help.




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Measuring what’s worthwhile

There is no universal definition of well-being economics, but essentially it is an economic perspective that acknowledges gross domestic product – the monetary value of all goods and services produced by a country in a given period – as an all-too narrow metric for building a prosperous, sustainable, human-centred economy.

GDP is useful, as Chalmers acknowledged in his February speech:

It does still provide a powerful insight into the current state of the economy, and is useful for historical comparisons. […]

More broadly, growth matters to the jobs and opportunities created in our society. A healthy, growing economy can make people more comfortable with farsighted social and economic policy changes as well.

But GDP does not, as Chalmers said, paint the whole picture. He quoted Robert Kennedy, who said GDP measured everything “except that which makes life worthwhile”; and Nobel-winning economist Joseph Stiglitz: “If we measure the wrong thing, we will do the wrong thing.” So his point was hardly fringe.

Indeed even the architect of GDP as an economic measure, economist Simon Kuznets, warned against putting too much emphasis on it, and of the dangers of it subverting the normally “valuable capacity of the human mind to simplify a complex situation in a compact characterisation”.




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Redefining GDP and what we mean by growth


New Zealand’s well-being budget

The first country in the world to introduce a well-being budget was New Zealand, in May 2019.

The main difference of The Wellbeing Budget to previous budgets was how it allocated resources to five priority areas: mental health; child well-being; Māori and Pasifika well-being; productivity; and environmental sustainability.

The traditional budget process tends to consider priorities on a yearly basis. This guides governments to put more money into short-term goals and less into initiatives with long-term returns. To overcome this bias, New Zealand’s Treasury created an assessment framework that considers the merits of projects according to 60 different measurements (covering economic, social and environmental impacts).

The intention is to ensure the budget doesn’t neglect to invest in long-term initiatives that can prevent problems, rather than being caught in a cycle of pumping money into alleviating the symptoms short-term.

In mental health this means more emphasis on policies that keep people well, rather than on providing help only once they are very unwell – the type of “defensive spending” dominating the Australian government’s priorities in mental health in last week’s budget.




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New Zealand’s well-being approach to budget is not new, but could shift major issues


Building back better

The Australian Capital Territory’s Labor government has already replicated New Zealand’s model in its own Wellbeing Framework.

In February Chalmers indicated a desire for federal Labor to take a well-being budget to the next election.

ALP leader Anthony Albanese’s response to the federal budget on Thursday night gave few signals the Labor Party will do so. Though he criticised the government’s short-term GDP growth focus, the word “well-being” did not pass his lips.

But popular opinion suggests both parties should be putting well-being measures on the agenda. Already more than 30 countries measure “life satisfaction”. Support for well-being economics should transcend party lines, as it does in countries such as Britain.

If the Australian government is to “build back better”, it’s hard to see how a well-being budget could possibly hurt.The Conversation

Carla Liuzzo, Sessional Lecturer, School of Business, School of Creative Industries, Queensland University of Technology

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

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



AAP/Lukas Coch

Michelle Grattan, University of Canberra

Accelerated tax cuts, cash splashes for pensioners, massive incentives for business to invest and a subsidy to hire unemployed people are the centrepieces of the Morrison government’s COVID-19 budget.

More than 11 million taxpayers will get a tax cut backdated to July 1, giving lower and middle-income earners tax relief this financial year of up to $2,745 and dual income families relief of up to $5,490, compared to their tax in 2017-18.

Australians on pensions and other eligible recipients will also receive a cash handout of $250 from December and another $250 from March next year.

Treasurer Josh Frydenberg said the Australia economy was “fighting back”, with more than half of those who had lost their jobs now back at work. But “there remains a monumental task ahead,” he said, assuring Australians “we have your back”.

“The road to recovery will be hard — but there is hope,” he said

A budget focused on creating jobs delivers multiple measures to boost business activity, and a new plan to subsidise hiring young people who are unemployed for up to a year.

Frydenberg said the Australian economy had been hit hard, but “we have a plan to rebuild our economy and to create jobs”.

Massive deficit

The budget has a massive $213.7 billion deficit for this year. It will stay in the red throughout the budget period, with deficits totalling $480.5 billion over the next four years.

Net debt will reach $703 billion this financial year – more than 36% of GDP, rising to $966 billion (44% of GDP) by June 2024.

Frydenberg told parliament, “this is a heavy burden, but a necessary one to responsibly deal with the greatest challenge of our time”.

The economy is forecast to contract by 3.75% this calendar year, with unemployment peaking at 8% in the December quarter. In the 2021 calendar year, economic growth is forecast to be 4.25%, with unemployment falling to 6.5% by the June quarter 2022.




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Budget 2020: promising tax breaks, but relying on hope


In his speech to parliament, Frydenberg reiterated the government’s two-phase strategy.

The first phase is to focus on “boosting consumer and business confidence, growing the economy and creating jobs”.

Once unemployment is “comfortably below 6%” the government will move to phase two, “where there is a deliberate shift from providing temporary and targeted support to stabilising gross and net debt as a share of the economy.”

“We will then rebuild our fiscal buffers, so that we can be prepared for the next economic shock,” Frydenberg said.

The income tax cuts, at nearly $7 billion, are the biggest cost this financial year, rising to nearly $18 billion in total over the forward estimates.

Tax cuts brought forward

The government is bringing forward stage two of its already legislated tax plan, lifting the 19% threshold from $37,000 to $45,000 and the 32.5% threshold from $90,000 to $120,000.

It is also retaining the Low and Middle Income Tax Offset for an extra year.

Frydenberg said, as a proportion of tax payable, compared to 2017-18, the greatest benefit would flow to people on lower incomes, with those earning $40,000 paying 21% less tax, and people on $80,000 paying about 11% less tax this year.

“Under our changes, more than seven million Australians receive tax relief of $2,000 or more this year,” Frydenberg said.

JobMaker hiring credit and huge tax breaks

A new JobMaker hiring credit will be available for employers who take on people on JobSeeker aged 16 to 35. The subsidy will be $200 a week for those under 30 and $100 a week for older people. These new hires must work at least 20 hours a week. All businesses except big banks will be able to use the scheme and the government says it will support about 450,000 jobs for young people.

The hiring credit will cost $850 million in the current financial year, rising to $2.9 billion in 2021-22, and $4 billion in total over the forward estimates.

The government says the initiative will support about 450,000 young people into jobs.

Tax breaks for business are huge over the budget period.

From budget night, more than 99% of businesses will be able to write off the full value of any eligible asset they purchase. The concession will be available for businesses with a turnover of up to $5 billion until mid-2022, with the program costing $26.7 billion over the forward estimates.




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Frydenberg described the concession as “a game changer” which “will unlock investment”.

“It will dramatically expand the productive capacity of the nation and create tens of thousands of jobs.”

In another business initiative, companies will be able to use their losses earlier.

Frydenberg said the combination of these two measures would create an extra 50,000 jobs.

Infrastructure and water spending

The government is also looking to infrastructure to stimulate activity, with Frydenberg saying “the budget will see $14 billion in new and accelerated infrastructure projects.”

As part of supporting the regions, Frydenberg announced $2 billion in new funding to build water infrastructure.

With women’s jobs particularly badly hit during the recession, the budget has a women’s economic security statement including $240 million in measures.

Thousands of new home care packages

On aged care, Frydenberg announced an increase of 23,000 home care packages, costing $1.6 billion. He said the government would provide “a comprehensive response” after the royal commission’s final report on aged care, which comes early next year.

The government is also implementing reforms to superannuation arrangements.

New superannuation accounts will no longer be automatically created when a worker moves jobs. “Under our reforms, your super will follow you,” Frydenberg said.
The government had previously flagged that it would implement the change, recommended by the Productivity Commission.

Labour described the budget as a “grab bag of headline seeking announcements” which would “rack up a trillion dollars of debt, but still doesn’t do enough to create jobs, fails to build for the future and leaves too many Australia’s behind”.

Business welcomed the budget, with the Business Council of Australia saying it was “about getting Australians back to work, and getting businesses back on track”.

The Australian Chamber of Commerce and Industry said “Australian entrepreneurs will be energised by the unparalleled investment incentives”.

ACTU secretary Sally McManus tweeted:

The Community Housing Industry Association said the budget’s extension of the government guarantee for the National Housing Finance and Investment Corporation by $1 billion was welcome but criticised the lack of direct investment in social housing.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

Big budget spending isn’t new: it’s a return to what worked before


Steven Hail

It’s easy get the impression the massive government spending and deficits and debt required by the pandemic are new.

It would be understandable, because much of what happened before the 1980s has been forgotten.

Yet for almost all of the years since Federation – almost every one – the Commonwealth budget has been in deficit, right through til the late 1980s.

And it has hurt us not at all.



Centric Wealth

Seventy five years ago, the world faced daunting challenges: the reconstruction of Europe and Japan; the long-overdue end of an empire; the threat of communism; urgent demands for public services, social welfare and housing; and the orientation of economic activity away from the demands of war towards improvements in the quality of life.

The Argus, May 31 1945.
NLA Trove

In Australia, the Commonwealth published a white paper, Full Employment in Australia, in which it accepted responsibility for ensuring that there would always be enough demand for labour so that everyone who wanted to a job would be able to get one.

In pursuit of this goal, both sides of politics understood that they would usually need to run budget deficits.

For 40 years under prime ministers Chifley, Menzies, Holt, Gorton, McMahon, Whitlam and Fraser that is exactly what happened, as it had for most of the 40 previous years without the guiding light of the white paper.

Governments would spend as much as was needed (some of it in the form of gigantic nation-building projects such as the Snowy Mountains Scheme) and tax as little as was needed in order to keep the unemployment rate at close to zero as practical without putting too much pressure on prices.

If there were deficits, low interest rates and the economic growth that flowed from those deficits would shrink the resulting debt as a proportion of GDP.

Banks were regulated to ensure interest rates stayed low and credit was directed to businesses and households.

Menzies was a Keynesian

These were the golden years of so-called Keynesian economics with a consensus across the political spectrum that it was right to use government spending and tax measures to sustain the economy, disputed only by Marxists on the Left and a small band of neoliberals on the Right.

Up until the mid-1970s, when war in the Middle East, fautrising energy prices in a world dependent on oil and rising union militancy in Australia combined to create double-digit inflation and an unemployment rate far higher than the one or two per cent Australia had enjoyed since the war.




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Memories. In 1961 Labor promised to boost the deficit to fight unemployment. The promise won


In Australia and elsewhere it allowed a takeover by a new band of neoliberal politicians and economists who believed in small government (sometimes austerity), balanced budgets and outsourcing economic management to central banks who were given the autonomy to adjust interest rates and the supply of money in a deregulated market.

It happened slowly, under the governments of Margaret Thatcher in the United Kingdom, Ronald Reagan in the United States and (Labor prime minister) Bob Hawke in Australia.

Hawke was an exception

By the 1990s, the old consensus had not only disappeared, its successes had been erased from memories. A new academic and institutional consensus emerged, shared by prime ministers Hawke, Keating and Howard and treasurers Keating and Costello.

Although it does not require balanced budgets, the Charter of Budget Honesty introduced by Treasurer Peter Costello requires governments to publish the fiscal strategy they intend to use in drawing up budgets.




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Frydenberg is setting his budget ambition dangerously low


The first, in 1997 required the government to achieve “underlying budget balance, on average, over the course of the economic cycle”.

Over time it was hardened to “achieve budget surpluses, on average, over the course of the economic cycle”.


Commonwealth budget, 2019-20

It has been honoured in the breach since 2008, because surpluses usually aren’t consistent with good economic management, regardless of charters.

If the private sector is a net saver, as it usually is, the public sector usually needs to be a net spender in order to keep resources fully employed.

In last year’s election Prime Minister Scott Morrison and his opponent Bill Shorten disagreed about many things, but the need for surpluses wasn’t one of them

Surpluses no longer

No longer. In the leadup to tomorrow’s budget Treasurer Josh Frydenberg has promised a new fiscal strategy, one that for the first time is likely to promise neither a surplus or a balanced budget.

“It would now be damaging to the economy and unrealistic to target surpluses over the forward estimates, he said in September. “This would risk undermining the economic recovery we need to bring hundreds of thousands more Australians back to work and to underpin a stronger medium-term fiscal position”.

Proponents of the neoliberal consensus would argue that the decade of surpluses between the late 1990s and the global financial crisis was a golden time. It was certainly helped by the mining boom.




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But inequality grew, household debt trebled, and as the government continued to target a surplus, interest rates had to be cut to the point where further cuts may no longer have an effect.

Inflation has been below the Reserve Bank’s target and unemployment above it for a decade. The budget is about all that’s left to support the economy. It certainly shouldn’t be getting out of the way to allow the private sector to create wealth, as those proponents used to suggest.

We are on the cusp or a second Keynesian revolution, one expression of which is Modern Monetary Theory, which suggests deficits need to be embraced where they are necessary to bring about full employment.

A government such as Australia’s which issues its own currency is able to fund deficits for as long as it needs to, and would be wise to do so up until the point where it creates too much inflation.

Something stronger

With the package comes the idea of a job guarantee, first put forward by the American economist Hyman Minsky in the 1960s, and promoted now by University of Newcastle labour market specialist Bill Mitchell and the founder of the Cape York Institute Noel Pearson.

It is the unconditional offer of a job at a minimum wage to anyone willing and able to work, normally funded by budget deficits and bigger when the economy is weak and smaller when it is strong.

Will it happen? As Stephanie Kelton, the world’s most prominent Modern Monetary Theorist and author of the New York Times bestseller The Deficit Myth said recently, “I won’t say no. But it’s going to be a hell of a fight.The Conversation

Steven Hail, Lecturer in Economics

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

Frydenberg is setting his budget ambition dangerously low


Brendan Coates, Grattan Institute and Matthew Cowgill, Grattan Institute

Treasurer Josh Frydenberg’s announcement that he’ll prioritise reducing unemployment ahead of reducing government debt is welcome news.

The government is required by the Charter of Budget Honesty to develop and publish a fiscal strategy to be used in each budget.

The one that it has been using doesn’t mention unemployment at all and instead talks about offsetting new spending “by reductions in spending elsewhere” and commits it to “achieve budget surpluses, on average, over the course of the economic cycle” – something that’s not going to happen for a long time.

A realistic fiscal strategy is a good idea. A lot of behaviour is driven by expectations. If consumers and businesses think the government is going to slash and burn its way to a surplus, any stimulus in the meantime will be less effective.

People are more likely to save, and businesses less likely to hire, if they think tax hikes and spending cuts are around the corner.

A clear statement that is not the case will help.

But the Treasurer’s pledge to keep running deficits “until the unemployment rate is comfortably back under 6%” is nowhere near ambitious enough.

Former US Federal Reserve Chairman William McChesney Martin Jr. once famously said that the central bank’s role is “to take away the punch bowl just as the party gets going”.

Tightening budget policy – raising taxes or cutting spending – when unemployment crosses the 6% mark would be packing away the booze when many of the guests haven’t even arrived.

In the 15 years before COVID-19 struck, Australia’s unemployment rate had been above 6% only briefly, between mid 2014 and early 2016.


Unemployment rate, 2015 – 2019

Seasonally adjusted.
ABS Labour Force, Australia

The unemployment rate was well below 6% before the pandemic struck, yet the labour market was clearly running below its potential.

Before the pandemic, the Reserve Bank revised down its estimate of the unemployment speed limit – the unemployment rate at which inflation and wages would accelerate – from 5% to around 4.5%.

The Treasurer should wait until we’re closer to that speed limit before reaching for the brakes. The difference between 6% and 4.5% unemployment might not sound like much, but it amounts to an extra 200,000 people or so in work.

And it affects the rest of us too. Most Australians won’t get anything more than modest pay rises until the labour market tightens.

The danger is declaring victory too soon

The government handled the acute phase of this crisis well, although not perfectly. It deserves credit for moving very quickly to support the economy. But the danger now is that it turns too soon to budget tightening, stunting a nascent recovery.

This is the mistake many governments and central banks made after the global financial crisis – acting commendably to shore up activity in the crisis phase, but then pulling away support before enough of the damage had been repaired.

With interest rates so low, the government has a lot of capacity to run deficits without the debt-to-GDP ratio getting out of control.

As Frydenberg noted, “with historically low interest rates, it is not necessary to run budget surpluses to stabilise and reduce debt as a share of GDP — provided the economy is growing steadily”.




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It’s a point made by former IMF Chief Economist Olivier Blanchard in one of the most influential recent papers in economics – his 2019 presidential address to the American Economics Association.

Blanchard noted that when the interest rate on government debt is less than the nominal growth rate of the economy, “public debt may have no fiscal cost”.

We’ve access to money for nothing

The Australian government can borrow for 10 years at a fixed interest rate of about 0.9%. It recently issued 30-year fixed-rate bonds for less than 2%.

Both are less than the Reserve Bank’s inflation target, suggesting that over time in real terms the money will cost nothing.

Over the past five years, Australia’s nominal growth rate has averaged 4%. The most recent Intergenerational Report projected average nominal growth of 5.25% a year for 40 years.

Even if economic growth falls well short of that projection it is hard to imagine it going below the rate at which the government can borrow for very long.

That means debt is likely to remain manageable relative to the size of the economy, and debt servicing costs will be modest, particularly compared to the benefits of stimulus.




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Over the medium-term the government will need to ensure its debt is sustainable and does not continue to rise as a share of the economy.

But rushing too quickly to “repair” the budget position would be an economic ‘own goal’ – hampering job creation, economic growth, and ultimately the bottom line it sought to protect.

Reserve Bank Deputy Governor Guy Debelle said this week that “absent the fiscal stimulus, the economy would be significantly weaker and debt levels even higher”.

He is right. Taking the foot off the economic accelerator when unemployment is at 6% would condemn Australia to a long and slow recovery. It’s not in the Treasurer’s interest, and it’s not in ours.The Conversation

Brendan Coates, Program Director, Household Finances, Grattan Institute and Matthew Cowgill, Senior Associate, Grattan Institute

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

Job recovery may be slowing as border closures have tightened: Frydenberg


Michelle Grattan, University of Canberra

More than half of the 1.3 million people who lost their jobs or were stood down on zero hours at the start of the pandemic had started some form of work by July, according to figures released by Treasurer Josh Frydenberg.

Treasury figures show the national effective unemployment rate at 9.9% in July, compared with a peak of 14.9% in April, with 689,000 gaining effective employment. The official July unemployment rate was 7.5%.

Excluding Victoria – which is in full lockdown combatting a second COVID wave – the national effective unemployment rate would be 9.5%.

The effective unemployment rate includes the jobless looking for work, those who are employed but on zero hours, and those who have left the labour force since March.

Frydenberg said Victoria was a setback however “the jobs recovery across the rest of the country gives cause for optimism”.

But he warned, “high frequency data is showing signs that the jobs recovery may be slowing as state border closures have been tightened.”

The effective unemployment rate is expected to increase above 13% with a rise of about 450,000 effectively unemployed over August and September compared to July. Most will be in Victoria.

The effective unemployment rate is lowest in the ACT (5.2%), Tasmania (7.9%) and NSW (8.5%) and highest in the NT (12.1%), Queensland (11.4%) and Victoria (10.5%). South Australia and Western Australia are both at 9.8%.

NSW has had the strongest recovery with 315,000 people gaining effective employment since April. This is 46% of total effective employment, and compares with NSW’s 32% of the country’s population.

NSW has supported the federal government’s argument for open borders, although its border with Victoria has been shut in light of Victoria’s second wave.

In July, nearly half of those who were employed but working zero hours for economic reasons were from Victoria. This contrasts with April, when only 30% of zero hour workers were in Victoria and about 35% in NSW.

Outside Victoria, the number of people on unemployment benefits is about 3% below the May peak. In Victoria it is 3.8% above its previous peak in May, after a 6.3% rise since the end of June.

By mid August, the number on unemployment benefits had fallen by 22,800 from the May peak, despite an increase of 14,900 in Victoria.

The fortnight parliamentary session beginning Monday will have as the main legislation before it the extension of the JobKeeper scheme and the Coronavirus supplement beyond the end of September. Each would be scaled down.

The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

Frydenberg’s three-stage economic recovery is abominably hard to get right



Shutterstock

Warren Hogan, University of Technology Sydney

Gone are the days when economic policy was adjusted once each year by the government in the budget and fine-tuned once each month at meetings of the Reserve Bank board.

The coroanvirus means we haven’t had a budget in more than a year. What the Reserve Bank has done to interest rates means its monthly board meetings matter less.

Governor Philip Lowe reaffirmed this week that monetary policy was on hold for the foreseeable future. The bank’s cash rate is as low as it can go (actually well below its 0.25% target) and the bank will only intervene in the bond market if it has to in order to keep bond rates low (which it doesn’t — the demand for even the rush of new bond issues is much bigger than the supply).

It has lobbed the ball to Frydenberg’s side of the court.

The only situation in which it might be brought back into play is if the government ran into funding problems, of which there is no sign whatsoever.

Holding the racket

Credit: Josh Frydenberg.

The treasurer’s problem is sequencing, and we will are likely to get hints on how he’ll play it in the economic statement to be released today.

The first challenge was to limit the damage to the economy from the initial shock near the start of the year — to stop a vicious cycle of weaker spending, plummeting investment and soaring unemployment.

These self-reinforcing crises required a circuit breaker.

The emergency stimulus provided through Jobkeeper and Jobseeker has been a great success at putting a floor under incomes and demand.

The government ensured a basic income for people whose jobs were axed or at risk, kept hundreds of thousands attached to their jobs and bolstered household incomes despite a massive loss of activity. It gets a tick.

But these emergency measures will not get the economy going again once the crisis has eased.

Some argue they will stand in the way of a recovery if they keep people ensconced on benefits or attached to firms without futures.

A tricky transition

Phase two will require genuine fiscal stimulus: not a security blanket of the kind we have had, but a direct injection of money that will spark a new wave of investment and employment.

The trick is to sequence it properly.

The announced tapering of JobKeeper and JobSeeker will cut incomes and cut jobs as firms pay people less and realign staff levels in line with lower subsidies.

The government believes it has got it right, but it is forecasting an 80% drop in JobKeeper payments between September and the end of the year. It might not be a cliff but it is still a very steep slope that will need to be matched by a sharp recovery in economic activity.

It needs to be ready to revise the timetable as needed. Its current projections look like a best case scenario.

An unknowable stage two

The second stage will involve a good deal of spending on infrastructure. But, especially without certainty about immigration, it is hard to tell what will be needed.

The pandemic will have changed the way we work and play. It is not yet clear whether people take advantage of remote working and move out of congested cities. it is not yet clear what it will mean for digital health, digital education and digital shopping.

An even-harder stage three

The final stage will involve structural reforms; alterations to tax settings, regulations and industrial relations. Which is where it gets really hard. It will require not only sequencing but getting agreement across the political divide.

No civil society can base its economic and social structures on the mere desire for efficiency. Fairness and social justice matter just as much, and they can best be guaranteed if the measures are pulled together as a package with trade-offs that protect the values that matter to Australians.

That’ll be Frydenberg’s biggest challenge. The future doesn’t need to be rushed out this week, or in the October Budget, but in the months to come it’ll have to take shape.




Read more:
These budget numbers are shocking, and there are worse ones in store


The Conversation


Warren Hogan, Industry Professor, University of Technology Sydney

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

Josh Frydenberg warns against Australia turning protectionist after COVID


Michelle Grattan, University of Canberra

Treasurer Josh Frydenberg will warn against the danger of a protectionist push in Australia as a result of the virus crisis, in a Tuesday speech that also stresses it is vital to get the country moving as soon as possible.

“There is a risk that protectionist sentiment re-emerges on the other side of the crisis, and for that we must be vigilant,” Frydenberg will tell the National Press Club. An extract of his address was released ahead of delivery.

The crisis has prompted a debate about Australia being too dependent on China in terms of both exports and imports, with calls for greater self-sufficiency.

Without mentioning China in the extract, Frydenberg says, “While we must always safeguard our national interest, we must also recognise the great benefits that have accrued to Australia as a trading nation”.

“Unleashing the power of dynamic, innovative, and open markets must be central to the recovery, with the private sector leading job creation, not government.”

As the national cabinet this week considers lifting some restrictions, Frydenberg says for every extra week they remain, “Treasury estimates that we will see close to a $4 billion reduction in economic activity from a combination of reduced workforce participation, productivity and consumption.

“This is equivalent to what around four million Australians on the median wage would earn in a week.”

“We must get people back into jobs and back into work.”

He points out the longer people are unemployed, the harder it is to rejoin the workforce – in the early 1990s, unemployment increased by 5% over three years, then took seven years to get back to its former level.

“As has been remarked, unemployment went up in the elevator, and went down by the stairs. In the current coronavirus, it is expected the unemployment rate will go up by around 5% in three months, let alone three years. It underlines the importance of getting people back to work as soon as possible to avoid the long-term economic and social impacts from a high unemployment rate.”

The national cabinet meets on Tuesday and Friday, with announcements on Friday about unwinding some restrictions.

JACINDA ARDERN JOINS TUESDAY’S NATIONAL CABINET

New Zealand Prime Minister Jacinda Ardern has been invited to join Tuesday’s national cabinet meeting. She said on Monday the meeting would discuss “the creation of a trans-Tasman travel bubble”.

But Ardern added the caveat: “Don’t expect this to happen in a couple of weeks time”. The health gains made in New Zealand had to be locked in, she said.

When Ardern spoke to the media on Monday, New Zealand had had no new cases in the previous 24 hours. Its strategy is one of trying to eliminate the virus, while Australia’s strategy has been one of suppression.

Ardern said Tuesday’s meeting “is without precedent”; it highlighted “the mutual importance of our two countries, and economies, to each other.

“Both our countries’ strong record on fighting the virus has placed us in the enviable position of being able to plan the next stage in our economic rebuild, and to include tran-Tasman travel and engagement in our strategy.”

There will be discussion at the meeting of the progress of Australia’s COVIDSafe app. More than 4.5 million people have downloaded it so far.

National cabinet will also receive a presentation on COVID safe workplaces, which has been a project of the National COVID-19 Coordination Commission.

In his speech Frydenberg says when widespread restrictions were imposed in March Treasury estimated a 10-12% fall in GDP in the June quarter, the equivalent of about $50 billion.

If these restrictions had been akin to the eight-week lockdown in Europe, the impact on GDP could have been 24%, or $120 billion, in the June quarter, he says.

“This would have seen enormous stress on our financial system as a result of increased balance sheet impairments, widespread firm closures, higher unemployment and household debt. This was the cliff we were standing on.”

But notwithstanding Australia’s success in suppressing the virus and its unprecedented economic response, “our economic indicators are going to get considerably worse in the period ahead before they get better.

“Some of the hardest hit sectors like retail and hospitality are among the biggest employers, accounting for more than two million employees between them.”

Credit card data from the banks showed spending on arts and recreational services, accommodation and food services down about 60% and 70% respectively in late April compared to the year before.

“Despite the toilet paper boom and the record increase in retail trade in March due to panic buying, overall consumption, according to NAB data, has fallen 19.5% since the start of the year, with declines across all jurisdictions.”

Treasury forecasts unemployment doubling to 10% in the June quarter, but it could have been 15% without the JobKeeper package, Frydenberg says.

“The economic shock the world is confronting dwarfs the GFC,” he says.

He says Australia has the advantage of having made real progress in suppressing the virus’s spread without a full lockdown. Agriculture, mining and construction have continued – 85% of mining businesses were still operating this month.

“We are by no means out of this crisis,” Frydenberg says. “Nevertheless as we build to the recovery phase, we must also turn our minds to the changes that will be needed to further drive economic growth and employment.”The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

5 things MYEFO tells us about the economy and the nation’s finances


Danielle Wood, Grattan Institute and Kate Griffiths, Grattan Institute

As we come to the end of 2019, you’d be forgiven for being confused about the health of the economy.

Treasurer Josh Frydenberg regularly points out that jobs growth is strong, the budget is heading back to surplus, and Australia’s GDP growth is high by international standards.

The opposition points to sluggish wages growth, weak consumer spending and weak business investment.

Monday’s Mid-Year Economic and Fiscal Outlook (MYEFO) provides an opportunity for a pre-Christmas stock-take of treasury’s thinking.

1. Low wage growth is the new normal

Rightly grabbing the headlines is yet another downgrade to wage growth.

In the April budget, wages were forecast to grow this financial year by 2.75%. In MYEFO, the figure has been cut to 2.5%.

Three years ago, when Scott Morrison was treasurer, the forecast for this year was 3.5%.



Each time wages forecasts missed, treasury assumed future growth would be even higher, to restore the long-term trend.

Today’s MYEFO is a long-overdue admission from treasury that labour market dynamics have shifted – in other words, lower wage growth is the “new normal”.

Even by 2022-23, wages are projected to grow at only 3% (and even that would still be a substantial turnaround compared to today).




Read more:
Surplus before spending. Frydenberg’s risky MYEFO strategy


Of course, wages are still rising in real terms (that is, faster than inflation), a fact Finance Minister Mathias Cormann is keen to emphasise.

But Australians will have to adjust to a world of only modest growth in their living standards for the next few years.

2. Economic growth is underwhelming, especially per person

Economic growth forecasts have received a pre-Christmas trim.

Treasury now expects the economy to grow by 2.25% this financial year, down from the 2.75% it expected in April.

Particularly striking is the sluggishness of the private economy, with consumer spending expected to grow by just 1.75%, despite interest rate and tax cuts, and business investment idling at growth of 1.5%, down from the 5% forecast in April.




Read more:
Lower growth, tiny surplus in MYEFO budget update


The longer term picture looks somewhat better, with growth forecast to rise to 2.75% in 2020-21 and 3% in 2021-22, although treasury acknowledges there are significant downside risks, particularly from the global economy.

The government has made much of the fact our economy is strong compared to many other developed nations. But much more relevant to people’s living standards is per-person growth. Australia’s international podium finish looks less impressive once you account for the fact Australia’s population is growing at 1.7%.

As one perceptive commentator has noted, while Australia is forecast to be the fastest growing of the 12 largest advanced economies next year, it is expected to be the slowest in per-person terms.

3. The government is at odds with the Reserve Bank

You can imagine the government’s collective sigh of relief that it is still on track to deliver a surplus in 2019-20, albeit a skinny A$5 billion instead of the the $7 billion previously forecast.

Given the treasurer declared victory early by announcing the budget was “back in the black” in April, missing would have been awkward, to say the least.

And another three years of slim surpluses are forecast ($6 billion, $8 billion and $4 billion respectively).

The real issue for the treasurer is how to deal with the growing calls for more economic stimulus, including from the Reserve Bank.




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


Depending on what happens to growth and unemployment in the first half of 2020, he will come under increased pressure to jettison the future surpluses to support jobs and living standards.

4. High commodity prices are a gift for the bottom line

High commodity prices are the gift that keeps on giving for the Australian budget.

Iron ore prices in excess of US$85 per tonne, well above the US$55 per tonne budgeted for, have helped to keep company tax receipts buoyant.

Treasury is maintaining the conservative approach it has taken in recent years by continuing to assume US$55 per tonne.

This provides some potential upside should prices stay high – Treasury estimates a US$10 per tonne increase would boost the underlying cash balance by about A$1.2 billion in 2019-20 and about A$3.7 billion in 2020-21.




Read more:
Vital Signs: Australia’s wafer-thin surplus rests on a mine disaster in Brazil


The budget bottom line remains tied to the whims of international commodity markets for the near future.

5. The surplus depends on running a (very) tight ship

The forecast surpluses over the next four years are premised on an extraordinary degree of spending restraint.

This government is expecting to do something no government has done since the late-1980s: cut spending in real per-person terms over four consecutive years.



The budget dynamics are helping. Budget surpluses and low interest rates reduce debt payments, and low inflation and wage growth reduce the costs of payments such as the pension and Newstart.

But the government is also expecting to keep growth low in other areas of spending, in almost every area other than defence and the expanding national disability insurance scheme.

As the Parliamentary Budget Office points out, it is hard to keep holding down spending as the budget improves.

It is even more true while long term spending squeezes on things such as Newstart and aged care are hurting vulnerable Australians.

Where does it leave us?

The real lesson from MYEFO is that Australians are right to be confused: there is a disconnect between the health of the budget and the health of the economy.

MYEFO suggests both that the government is on track to deliver a good-news budget surplus underpinned by high commodity prices and jobs growth, and that the economy is in the doldrums with low wage growth in place for a long time.

Top of Frydenberg’s 2020 to do list: how to reconcile the two.The Conversation

Danielle Wood, Program Director, Budget Policy and Institutional Reform, Grattan Institute and Kate Griffiths, Senior Associate, Grattan Institute

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

Surplus before spending. Frydenberg’s risky MYEFO strategy


Stephen Bartos, Crawford School of Public Policy, Australian National University

Today’s mid-year economic and fiscal outlook (MYEFO) continues to promise a small budget surplus in 2019-20 and each of the following three years.

But the surpluses are very small, roughly half the size of those promised at the time of the April budget, and highly uncertain.



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The forecasts for economic growth and wages growth have been adjusted down, but are still optimistic, subject to downside risks, especially if international economic conditions deteriorate.

The lower wage growth forecast is an acknowledgement of the new reality that wage growth is not climbing and remains low.

Uncertainties abound

One key variable is iron ore prices: these affect both economic growth (gross domestic product) and company tax collections.

Recent high prices due in part to mining disasters in Brazil will not continue indefinitely.

Iron ore prices peaked in July at US$120 per tonne but are forecast to fall back to US$55 per tonne by the June quarter 2020.

The key determinant will be demand from China. Its steel mills might require more, or less, than expected.

MYEFO has a sensitivity analysis showing 2019-20 tax receipts could be lower than expected by A$0.8 billion or higher than expected by A$0.5 billion (and lower by $1.1b or higher by $1.3b in 2020-21) depending on how quickly prices fall.

Housing versus households

Another expected source of increased revenue is a recovery in capital city housing markets.

While this won’t have as large an impact on the Commonwealth as it will on the states which are reliant on stamp duties (see for example the recent NSW budget update) the Commonwealth still benefits.

The assumption on households

that some of the recent weakness in consumption reflects timing factors and that the household saving ratio will fall as households increase their consumption in response to higher after-tax income

seems optimistic.

However the treasury acknowledges

there is a risk that consumers remain cautious and the fall in the household saving ratio is slower than expected.

It is possible that households will remain nervous about the future and save rather than spend; or that we are seeing deeper shifts in preferences away from consumer spending.

Surplus before spending

MYEFO includes previously-announced new spending on infrastructure projects, drought and aged care, but there were no major additional announcements.

This is in line with the government’s determination to have a surplus this year, even if smaller than expected at budget time.

The underlying cash surplus of $5.0 billion forecast for 2019-20 is indeed small – a fraction under 1% of the total receipts number, $502.5.

MYEFO graphs the confidence we can have in the surplus forecasts: there is considerable uncertainty.



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Governments can always introduce either spending cuts or additional revenue raising measures in pursuit of a surplus.

The question is why. It is puzzling that having a surplus has become a sign of good economic management.

Surplus for the sake of surplus

Arguably what is more important is people’s real incomes, whether their chance of unemployment is rising or falling, whether they will be looked after in old age, have their health needs met, and be able to offer their children a good education.

There is a good argument against debt – government debt has to be paid off before the money spent servicing it can be spend on other needs, and excessive debt exposes a country to risk.




Read more:
5 things MYEFO tells us about the economy and the nation’s finances


Within reasonable bounds though, neither ratings agencies nor international financial markets care if a budget is $5b in surplus or $5b in deficit – these are for all intents and purposes the same number in terms of the government’s impact on the economy.

The government is no longer projecting net debt will fall to zero by 2029-30 – instead, it will fall to 1.8% of GDP (still much lower than the 2019-20 net debt of $392.3 billion or 19.5% of GDP).



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This is however a heroic projection, based on estimates of the structural budget position that are unlikely to be be realised.

The structural estimates (estimates of where the budget would be were it not for whatever was happening in the economy at the time) have surpluses growing every year up to 2029-30; an unlikely scenario in the face of an ageing population together with other pressures on government spending.

The impact of ageing will be analysed in more depth in the next Intergenerational Report to be produced by Treasury.


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This may explain why the Treasurer today announced the next five-yearly Intergenerational Report will not be published in March next year as scheduled, but held over until July, after the budget and after the report of the government’s retirement incomes inquiry.

There are several gaps in the estimates of spending.

Likely costs left out

There is no provision for additional spending on the new services delivery model, Services Australia, previously known as the department of human services, which runs Centrelink. Modelled on Services NSW, which offers a better customer experience, it will be expensive.

Services NSW meets its costs by charging other government agencies, spreading costs across government. There is less scope for this in the Commonwealth, and therefore a potentially higher direct call on the budget.




Read more:
The dirty secret at the heart of the projected budget surplus: much higher tax bills


Although the announced funding for aged care is included, most observers of the work of the aged care royal commission expect this is only a first instalment.

Other pressures on the budget are not included for technical reasons. For example, possible future disasters are not included in the forward estimates because they are unpredictable.

Should climate change make Australia more prone to frequent and costly disasters, future budgets will face additional pressure.

There are thus numerous uncertainties around MYEFO – among them the growth path of the Chinese economy and its impact on iron ore prices, consumer demand, wages, spending pressures.

The projections might be achieved if all goes well – but there are considerable risks all will not.The Conversation

Stephen Bartos, 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.

Lower growth, tiny surplus in MYEFO budget update


Michelle Grattan, University of Canberra

The government has shaved its forecasts for both economic growth and the projected surplus for this financial year in its budget update released on Monday.

The Australian economy is now expected to grow by only 2.25% in 2019-20, compared with the 2.75% forecast in the April budget.

The projected surplus has been revised down from A$7.1 billion at budget time to $5 billion for this financial year.

By 2022-23 the surplus is projected to be tiny A$4 billion, a mere one fifth of one per cent of GDP, less than half the $9.2 billion projected in April.

Combined, $21.6 billion has been slashed from projected surpluses over the coming four years.



The revenue estimates have also been slashed, down from the pre-election economic and fiscal outlook (PEFO) by about $3 billion in 2019-20 and $32.6 billion over the forward estimates.

The changes this financial year reflect downgrades to superannuation fund taxes, the GST and non-tax receipts. The downgrade in later years reflects changed forecasts for individual taxes, company tax and GST.

The official documents sought to put as positive a spin as possible on the worse economic figures:

Australia’s economy continues to show resilience in the face of weak momentum in the global economy, as well as domestic challenges such as the devastating effects of drought and bushfires.

While economic activity has continued to expand, these factors have resulted in slower growth than had been expected at PEFO.

The revised figures forecast growth will be 2.75% next financial year.

The impact of the drought is reflected in the fact farm GDP is expected to fall to the lowest level seen since 2007-08 in the millenium drought.

The downgrades will fuel calls already being made by the opposition and some stakeholders and commentators for economic stimulus.

But the government, which since the budget has brought forward some infrastructure and announced spending on aged care and drought assistance, is continuing to resist pressure for stimulus now, wishing to hold out until budget time.




Read more:
Surplus before spending. Frydenberg’s risky MYEFO strategy


The budget update – formally called the mid-year economic and fiscal outlook (MYEFO) – contains more bad news for workers’ wages.

Wages are forecast to rise in 2019-20 by 2.5%, compared with the forecast of 2.75% in the budget.

Employment growth remains at the earlier forecast level of 1.75% for this financial year, but the unemployment rate is slightly up in the latest forecast, from 5% at budget time to 5.25% in the update.



In its bring forward and funding of new projects, the government is putting an extra $4.2 billion over the forward estimates into transport infrastructure projects.

Its extra spending on aged care will be almost $624 million over four years, in its initial response to the royal commission. This is somewhat higher than the $537 million announced by Scott Morrison in November.

While the projected surplus has been squeezed, the government continues to highlight the priority it gives it, saying that despite the revenue write downs, it expects cumulative surpluses over $23.5 billion over forward estimates.

Spending growth is estimated to be 1.3% annual average in real terms over the forward estimates. Payments as a share of GDP is estimated at 24.5% this financial year, reducing to 24.4% by 2022-23, which is below the 30 year average.

Treasurer Josh Frydenberg said the update showed “the government is living within its means, and paying down Labor’s debt”.

He said “the surplus has never been an end in itself, but a means to an end. An end which is to reduce interest payments to free up money to be spent elsewhere across the economy.”




Read more:
5 things MYEFO tells us about the economy and the nation’s finances


The government’s economic plan was “delivering continued economic growth and a stronger budget position.

“MYEFO demonstrates that we have the capacity and the flexibility to invest in the areas that the public need most.”

Shadow treasurer Jim Chalmers said the update showed the government’s economic credibility was destroyed. At its core, there were “two humiliating confessions – the economy is much weaker and the government has absolutely no idea and no plan to turn things around”.

Chalmers said Morrison and Frydenberg “couldn’t give a stuff that Australians are facing higher unemployment and weaker wages and slower growth.

“If they cared enough about the workers and families of this country, they would stop sitting on their hands and they would come up with an actual plan to turn around an economy which is floundering on their watch.”The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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