Past pandemics show how coronavirus budgets can drive faster economic recovery



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Ilan Noy, Te Herenga Waka — Victoria University of Wellington

With New Zealand’s May 14 budget expected to chart the way out of the economic crisis, Finance Minister Grant Robertson should be looking to the past as well as the future. Finance ministers elsewhere are facing similar decisions, many even more constrained than New Zealand’s.

But the common claim that we live in “unprecedented times” is not entirely true. Social distancing and other dramatic interruptions to our lives are nothing new.

One clear precedent is the SARS epidemic that hit Singapore, China, Hong Kong, and Taiwan in 2003. Other more localised but catastrophic examples, such as the Haiti earthquake of 2010 or the 2004 Indian Ocean tsunami, are also instructive.

What is different is the scale of the current crisis. Economies everywhere are in freefall and unemployment is rising. Gross domestic product figures for the first quarter of 2020 show economic declines not seen since WWII. The second quarter is predicted to be even worse.

The challenge for governments is to manage both expectations and spending to drive recovery. Despite the fast-tracking of so-called “shovel-ready” construction projects, that does not necessarily mean infrastructural spending is a magic bullet.

An alphabet of possible recoveries

There are four plausible recovery trajectories. A V-shaped recovery suggests the affected economies will rebound rapidly after lockdown. A U-shaped recovery entails a similar return to normality but after a longer downturn.

The W describes a second hit to the economy, most likely from a second wave of infections (as happened in the second winter of the catastrophic 1918-1919 flu pandemic) but potentially also caused by misguided economic policies. Most worrisome here would be premature withdrawal of government spending support.

The worst case is L-shaped, in which the economy takes many years to come back.

Recovery from SARS was V-shaped in all the affected economies. While SARS spread to many fewer places and disappeared more quickly than our present nemesis, social distancing in the four affected countries was not dramatically different. Fear at the time was as palpable as it is now.




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Taiwan, Hong Kong and Singapore all experienced a dip in GDP growth in the first half of 2003. But by the third quarter their economies were growing fast again. Statistical analysis we did for the Asian Development Bank found the epidemic did not have any longer-term adverse effect on these three economies.

China is a much bigger country, but even when we looked at its two hardest-hit regions, Guangdong and Beijing, the picture was the same – a V. We could see this from economic data from the Chinese National Bureau of Statistics, and with satellite images of night-time light emitted by urban-industrial areas.

These data suggest there was some re-orienting of economic activity after the SARS epidemic (as observed in the diminished night-light) but very little long-lasting effect on aggregate incomes. The same rebound may be happening right now in Wuhan which emerged from lockdown in March this year.


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SARS affected, drastically but briefly, only a few countries in East Asia (and Toronto, due to travel-borne infection). Each had the institutional capacity and financial resources to successfully mobilise recovery once the infection had been vanquished.

The data from recoveries after other types of disasters tell a similar story. Except for very poor and chaotically-governed places (such as Haiti), countries tend to recover quite rapidly. This is true for Indonesia and Sri Lanka, hardest hit by the 2004 Indian Ocean tsunami. Their recovery was fuelled by generous assistance from abroad and large mobilisations at home.




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Targeted funding and managing fear to recover faster

Two main observations emerge in this rear-view mirror. The first is that the targeting of recovery funding is crucial. After previous shocks, when regions or cities failed to recover completely, it was usually because the recovery was under-resourced or funding was mis-targeted.

Unlike a natural disaster, the damage associated with COVID-19 is not to infrastructure. It is to employment in specific sectors such as tourism and culture. Policies should therefore target the maintenance of labour markets (even if it means sustaining them on life support) rather than spending on more infrastructure.




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“Shovel-ready” projects were critical after the 2008 global financial crisis, when the disruption was largely to the construction/housing sector. A construction injection now will not provide work for most of people who have lost their jobs in restaurants, hotels, retail, or travel.

Spending on better and greener infrastructure, when the existing infrastructure is crumbling or dangerous, is good policy in and of itself. But it will not provide the necessary antidote to our current malaise.

Secondly, recovery depends crucially on expectations. In those cases where the shock significantly increased the fear of future shocks, recovery was slower. Households and businesses were more reluctant to buy and invest.

Without assurances that we have “solved” COVID-19 – with a vaccine or effective control – a full recovery is going to be impossible. The longer it takes, the more our recovery will be shaped like a drawn-out U rather than a V. As the Economist magazine recently put it, we will have a 90% economy.

Without a good public health response we might even risk a W, where a second wave of infection requires further harsh but necessary social distancing.

Without managing expectations about a COVID-free future, and without aggressive but well-targeted government action, the post-pandemic trajectory will look like an L. That will put a far greater burden on future generations than any debt governments might take on now to develop a vaccine or keep businesses afloat and people on payrolls.The Conversation

Ilan Noy, Professor and Chair in the Economics of Disasters, Te Herenga Waka — Victoria University of Wellington

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

Grattan on Friday: If Scott Morrison is true to his word, October’s budget could be a doozy


Michelle Grattan, University of Canberra

With the coronavirus curve flattened, Scott Morrison is now hunting for steroids to drive up the curve of Australia’s national productivity.

The out-of-the-blue pandemic confronted the Prime Minister with health and economic crises unprecedented in our times. Out of that has come what is – in theory – an extraordinary opportunity for his government to reshape Australia’s economic landscape.

Reality, of course, may be quite another story. Unless the right medicines are administered and the patient is compliant, it will be very difficult for the economy to achieve the large and accelerated recovery desperately needed.

The International Monetary Fund forecasts the economy will shrink 6-7% in (calendar) 2020 before growing 6-8% in 2021. They’re breathtaking numbers.

Despite the enormous financial cushioning from government handouts, the economy is currently headed for as close to ground zero as you’d ever want to see.

Reserve Bank Governor Philip Lowe this week sketched a grim picture. National output to fall by about 10% over the first half of this year; total hours worked down by about 20% in that period; unemployment at about 10% by June (although maybe lower if businesses retain their workers on shortened hours).

Both Lowe and Morrison stress the economy on “the other side” won’t look like it did before, but they’re unclear how it might look.




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Lowe said the “overall challenge is to make Australia a great place where businesses want to expand, innovate, invest and hire people.” Indeed.

To go down this path, he suggested – and Morrison echoed this on Thursday – “we start off by reading the multitude of reports that have already been commissioned”.

Lowe summarised the thrust of these reports. “They say we should be looking again at the way we tax income generation, consumption and land in this country. They say we should be looking at how we build and price infrastructure.

“They say we should be looking at how we train our students and our workforce, so they’ve got the skills for the modern economy.

“They say we should be looking at how various regulations promote or perhaps hinder innovation and they say we should be looking at the flexibility and complexity of our industrial relations system.”

Implementing all this would be a huge agenda. The aspirations would find a good deal of common agreement across the political spectrum but get down to detail and it is another story. There’s a reason why many good ideas have languished – adoption is painful and/or strongly resisted by vested interests.

Morrison – who knows it’s important to jawbone in this time of hiatus rather than leaving a vacuum in the debate – said he wanted to “harvest” ideas. In other words, in a policy sense, we’re at a fresh start.

There’s more than one way of looking at what Morrison is doing.

Primarily, the government is driven by necessity. It will have to make a dash for growth and is desperately searching for ways to achieve this.

Secondly, Morrison sees an opportunity to be a reformer who leaves a mark, a chance to push changes that would be inconceivable in normal circumstances.

As part of this, the times might allow him – if he wished – to crash through some internal party road blocks, notably on the issue of climate change. Critical in itself, that could be useful electorally.

Morrison highlighted a Productivity Commission report he commissioned as treasurer, titled Shifting the Dial: 5 Year Productivity Review, which put forward a sweeping set of recommendations.

The commission emphasised the importance of the Council of Australian Governments (COAG) restoring “its role as a vehicle for economic and social reform” saying “the scope for the vital big reforms will require commitment to a joint reform agenda by all jurisdictions”.

The national cabinet (COAG wearing another hat and slimmed-down clothes) has worked extremely well during the pandemic. A key has been its juggling of unity and disunity. Disagreements between the Commonwealth and states have been part of the process, but they’ve been accommodated rather than turning into divisive public slanging matches.




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For an effective reform agenda some of the national cabinet’s spirit needs to be retained, although it is pie in the sky to think the same level of co-operation as we’re seeing would continue in dealings across a broad range of issues where there’d be differing interests and views.

The first big test of Morrison’s post-COVID-19 economic strategy will be the October budget. If he’s serious about reform, much will have to be piled into that document.

If this is done, it would be the first comprehensive “reform” budget since 2014. And we all remember what happened then.

A feature of big reform programs is they have winners and losers. Without a lot of money to throw around in compensation (and that’s unlikely to be available), some or many people would be unhappy, and vociferous.

“Reform” is great unless you are one of those who is run over by it.

An unknown is how the mood of the Australian public will be in another few months.

So far, the government has carried people along with the harsh measures required in tough times. Opinion polling indicates Australians believe the government has handled the pandemic well – as it has. (In this context it will be interesting to see whether it can segue this trust into take-up of its proposed tracing app.)

It will however, be a big jump to securing support for the ambitious economic reform measures Morrison is hinting at for the recovery phase.

The federal opposition has for some time been moving back to a more contested political debate. One issue of contention in coming months is likely to be that while Morrison wants a heavily business-led recovery the opposition sees a bigger role for the government, which has been highly interventionist during the crisis.

Anthony Albanese will face some sharp choices in dealing with the Morrison reform agenda. It will be replete with opportunities for Labor to exploit its many pinch points. On the flip side, depending on the public mood, Albanese will need to be careful to avoid looking like a leader stuck in pre-COVID thinking.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.

Budget delayed until October, and new restrictions on indoor gatherings in latest coronavirus decisions


Michelle Grattan, University of Canberra

The federal budget will be delayed until October 6, as the demands of dealing with the rapidly moving pandemic and the impossibility of forecasting have made the May timetable impossible.

State budgets will also be pushed back.

As the Morrison government prepares to announce on Sunday its second multi-billion package, which will dwarf last week’s $17.6 billion one, the national cabinet of federal and state leaders on Friday endorsed even tougher rules to limit numbers in non-essential indoor gatherings. Earlier this week these gatherings were limited to fewer than one hundred people.

Under the latest edict, in any given space, density must be kept to no more than one person per four square metres, so they can properly distanced from each other.

This would mean the permitted number in a 100 square metre room would be only 25 people.

Cinemas and theatres will reduce their densities, and some restaurants will be hit.

As the virus spreads, people are being advised to reconsider any unnecessary domestic travel. Scott Morrison said although air travel was considered low risk, “the issue is moving to different parts of the country and potentially large volumes of populations moving around the country”. He noted the conditions Tasmania had put on entry to the state, where non-essential travellers will have to self-isolate for a period, and said “other states may take those decisions for particular parts of their states, and that is entirely appropriate that they may consider doing that”.

With school holidays approaching, the national cabinet – which will meet each Tuesday and Friday – is considering further the travel question and more advice will be given.

Restrictions are being put on travel into and out of indigenous communities, where many residents have compromised health.

The recommendation remains for schools not to be closed.

Morrison announced $444.6 million for the aged care sector. This is in addition to the $100 million announced last week to support the aged care workforce. All aged care workers will be tested for the virus.

The national cabinet agreed measures will be put in place by the states for tenants, both commercial and residential, where there is hardship, for rent relief and protection.

“All Australians are going to be making sacrifices obviously, in the months ahead, and everyone does have that role to play, and that will include landlords … for people who are enduring real hardship,” Morrison said.

The national cabinet has asked for advice on dealing with localised outbreaks of COVID-19, which would require more severe restrictions in the area affected.

Morrison said the second economic package would focus on small and medium sized businesses, and sole traders, as well as giving the income support that would be needed by those most directly hit by the economic downturn caused by the coronavirus. The cabinet expenditure review committee went through the package late Friday.

Earlier, the banks announced loan relief for small business which needed assistance because of the impact of COVID-19.

Australian Banking Association CEO Anna Bligh said “banks are already reaching out to their customers to offer assistance and packages will start rolling out in full on Monday”.

Treasurer Josh Frydenberg said the banks’ decision “to defer payments by small businesses for six months will be a substantial boost to confidence and the spirit of millions of Australian small businesses. It’s a game changer.”

The government is also cutting red tape affecting lending to small business. “It’s critical that businesses not just have access to capital, but the speed at which that capital is delivered by the banks is as fast as possible,” Frydenberg said.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.




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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.




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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.




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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.




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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.

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



Bill shocks are the flipside of a surplus built on higher tax collections and tighter access to support payments.
Shutterstcok

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

The budget is bouncing out of deficit and is set to stay in surplus for the decade to come.

That’s what the April budget and the final budget outcome for 2018-19 tell us, and Thursday’s report from the Parliamentary
Budget Office doesn’t say any different.

It doesn’t have much choice. The Parliamentary Budget Office is required to take the government’s surplus and deficit projections for the next four years as given, and to take its economic forecasts and tax and spending announcments for the next ten years as given, whether realistic or not.

What it is allowed to do, and does once a year in a publication entitled medium-term fiscal projections, is to set out the implications of those projections.

Those implications, spelled out on Thursday, show the projected budget surplus to be so fragile as to be unrealistic, except the parts that rely on much higher personal income tax collections.

That’s right: much higher income tax collections per person, even after taking into account the coming decade of legislated tax cuts.

Middle earners hit hardest


Parliamentary Budget Office

But it won’t be higher for all of us.

The middle fifth of earners will pay far more of their income in tax in ten years’ time under the government’s projections, according to the PBO’s calculations. Instead of paying 14.9% of their income in tax, by 2028-29 they will pay 18.8%.

That’s after taking into account the long-term tax cuts the government pushed through parliament in May and went to the election on.

Without those legislated tax cuts, they would have been paying an extra 6.3% of their income in tax. With the legislated cuts (and others pencilled in by the PBO to keep the government’s tax take within its promised ceiling) they will be paying an extra 3.9%.

Put another way, the government’s tax cuts will undo some of the damage caused by bracket creep as more of each pay packet climbs into higher brackets, but not most of it.

It’s the same for pattern for the second-lowest fifth of earners. They will move from paying 5.3% of their income in tax to 9.9%, a near doubling, which is taken is taken into account in the surplus projections.




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Those future tax cut promises… they’re nowhere near as big as you’d think


The second-highest fifth will move from paying 22% of their income in tax to 23.4%, even after the tax cuts. The bottom fifth, who don’t pay much tax, will move from paying 0.6% to 1.2%.

Highest earners escape

But workers in the top fifth, which at the moment is workers earning above A$90,000, won’t pay a cent more, at least not on average.

The government’s projections, as spelled out by the PBO, have them paying less of their income ten years from today than they do today.

Put another way, they are the only fifth of the population that won’t be expected to wear pain to keep the budget surplus.



Parliamentary Budget Office

There are other contributors to the budget surplus. One is a pretty hefty assumed decline in growth in government spending over the next decade, amounting to 1% of GDP, taking government spending from around 24.9% of GDP to around 23.9%.

Much of it is projected to come from tighter eligibility criteria for payments, and measures to constrain their growth, something the PBO believes might be difficult to maintain:

The spending restraint seen over the past few years may be increasingly difficult to maintain over coming years given the length of time over which restraint has been applied, the pressures emerging in some spending areas, and the potential need for fiscal stimulus, noting that the projected improvement in the budget balance is mildly contractionary.

What it is saying, gently, is that it the longer the government attempts to restrain spending (for instance by imposing tough conditions on access to benefits and using debt collectors to recover alleged overpayments), the harder it will get.

And it is saying the government might need to spend in ways it hasn’t accounted for, including on measures to support the economy in the event of a downturn.

Budget conventions to the rescue

The projections assume the opposite of a downturn.

No blame should attach to this government for them, but our rather odd budget conventions dictate that the worse the economy is, the better the budget’s projections for economic growth. That’s right: the weaker our current economic growth, the stronger the budget’s projections for future economic growth.

The thinking is that over the long term, the economy should grow at roughly its long-term average growth rate. To get there when the economy is weak, as it is now, the budget assumes several years of stronger than normal economic growth to catch up.




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In this case it’s five years of stronger than normal economic growth.

The PBO contents itself with the observation that economic growth that was merely normal (or worse, remained weaker than normal) for some of those years would have a “significant and compounding effect on the budget position over time.”

The surplus is far from assured, and it shouldn’t be. The government might well find that it can’t and shouldn’t restrain spending on payments as much as is projected in the decade ahead, and it might find it needs to spend to support the economy.

It will almost certainly find that lifting the tax take on middle Australians from 14.9% of income to 18.8% is intolerable.The Conversation

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

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

The big budget question is why the surplus wasn’t big



Treasurer Josh Frydenberg and Finance Minister Mathias Cormann unveil a budget outcome as good as balanced on Thursday.
Lukas Coch/AAP

Warren Hogan, University of Technology Sydney

The budget was for practical purposes in neither deficit nor in surplus in 2018-19, the final figures released by Treasurer Josh Frydenberg and Finance Minister Mathias Cormann on Thursday reveal.

The underlying cash deficit was just A$690 million, which, on the scale of Commonwealth budgets, is close to nothing: 0.0% of GDP.

It’s a $3.5 billion improvement on the forecast made just five months ago in the April budget, and a $13.8 billion improvement on the original estimate for 2018-19 in Scott Morrison’s May 2018 budget.




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If there is a surprise in the result, it is that there wasn’t a surplus despite booming commodity prices, stronger than expected employment growth and a massive $4.5 billion saving on the roll out of the National Disability Insurance Scheme.

Underperformance abounded.

Company tax receipts haven’t changed much from the April estimate, despite much stronger than forecast commodity prices at the end of the financial year. Tobacco taxes came in at just $12.1 billion despite a forecast of $12.9 billion five months ago.

The tax boost is dwindling

Tax receipts from individuals were a little higher than expected in April, due mainly to higher taxes from capital gains and dividends. Personal income taxes were a little lower than expected, perhaps suggesting that the efforts of the Tax Office to make sure individuals pay more tax may have run its course.

If so, it’s good news for the economy, as it suggests consumers might start to enjoy stronger growth in post-tax incomes.

Here’s how Reserve Bank Governor Philip Lowe expressed his concerns about the Tax Office’s recent success to the Economic Society in May:

Over the past year, tax paid by households increased at a much faster rate than did income; almost 10%, compared with 3.25% – that is a big difference and it is unusual.

Where to now?

With the budget effectively in balance, a surplus in the financial year ahead seems all but assured. With government finances in good health, the next question is what to do with the surplus.

There is, as one commentator said after the release of the final outcome, “a mountain of debt to be repaid”.

That is currently the plan, but there is also a growing call for the government to spend more or cut taxes further to lift consumer spending and economic growth and take pressure off the Reserve Bank.

Neither option grasps the important opportunity that restored government finances present.

The surplus should be used for something special…

Australia’s most serious economic challenge is to reignite productivity growth and get the benefit of that into everyone’s pay packet via higher real wages.

With the election out of the way, now is the perfect time to re-set the economic policy agenda.

Structural reform is politically difficult. Getting out of bad industries and work practices into better ones is painful and hard to sell. But it works. It’s what the Hawke government did for us in the 1980s.

What’s needed is to encourage businesses to invest in technologies and work practises that maximise the output of every hour that people spend at work.

It requires a 20 year view, and it is best done by compensating losers. That’s expensive and can only really be done when finances are in good order, as they have just become.

…not simply spent

Right now the case for short-term stimulus isn’t particularly clear.

We are still waiting to see the effects of the tax refund boosts announced in the 2018 and 2019 budgets. We also need to wait a little longer to see what the impact of rate cuts and the easing of rules governing lending on the housing market and consumers.

The early signs are mixed. The only strong reaction we are seeing is in the Sydney and Melbourne property markets. Auction clearance rates are surging to boom-time levels and property prices are on the rise again.




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Consumption seems to have stabilised and consumer attitudes to their own financial positions remain healthy. The latest employment numbers show continued growth while the Treasurer noted that the proportion of working age population on welfare is at its lowest in 30 years.

Until it is clear that the economy is faltering, or employment growth is threatened, I very much doubt that this government will contemplate short-term fiscal stimulus.

It shouldn’t. There are more important uses for its money.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.

With climate change likely to sharpen conflict, NZ balances pacifist traditions with defence spending


New Zealand’s military aircraft are used for disaster relief, such as following a series of earthquakes in Sulawesi in 2018.
EPA/Holti Simanjuntak, CC BY-ND

David Belgrave, Massey University

In most countries, the question of whether to produce guns or butter is a metaphor for whether a country should put its efforts into defence or well-being. In New Zealand, this debate is much more literal and has been won easily by butter.

Dairy exports made up around 5.6% of New Zealand’s GDP in 2018 while defence spending only accounted for around 1.1%, with the tiny local defence industry adding little to that total.

Relative geostrategic isolation means New Zealand’s security has been more about ensuring global trade routes stay open for exports, like butter. But climate change is now challenging that notion as environmental change is expected to generate instability in the South Pacific.

While the government doesn’t expect core day-to-day defence spending to increase over the next few years, as much as NZ$20 billion will need to be spent on new equipment.

Replacing ageing equipment

Big ticket items such as warships and military aircraft last for decades and purchases are often years in the planning. Platforms purchased for the New Zealand military, including some acquired during the Vietnam War, are now reaching the end of their life.

New Zealand is facing significant bills as major aircraft, ships and army vehicles will need to be purchased in the next few years. The timing is particularly awkward for the government as it is shifting its spending towards well-being.




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To manage this problem the government has released its Defence Capability Plan 2019, which outlines its NZ$20 billion shopping list to resource the military into the 2030s.

The first purchase to come consists of new C-130J-30 Super Hercules transport planes. They will replace the Royal New Zealand Air Force’s existing C-130s which are now more than 50 years old. At the time of writing, all five of these planes have been grounded due to maintenance problems. A major justification for the upgrades is greater need for a variety of relief, monitoring and peacekeeping missions caused by the effects of climate change.

A recent New Zealand Defence Force report warned that extreme weather patterns will threaten water, food and energy security in the region and shortages could spark violence. New Zealand’s military provides humanitarian aid and disaster relief in the Pacific and the climate crisis is shifting the rationale for defence spending and the politics of defence in general.

Criticism from the opposition National Party has been less about the plan and more about whether it fits with the government’s overall well-being approach. But the real flak has come from the coalition government’s Green Party support partner.

This shows the complexity of defence politics in New Zealand, as different political parties represent distinct strands of public opinion on the role of the military.

Balancing pacifist and martial traditions

The last 50 years have seen significant disagreement over how the country should engage with the rest of the world and what it should do with its military in particular. Decisions over big purchases and overseas deployments can open up major divisions over New Zealand’s strategic identity.

New Zealand’s strong martial and pacifist traditions are both represented in the current government and major defence decisions have to be made with care.
Jacinda Ardern’s coalition is managing this complex balancing act. The coalition is made up of the centre-left Labour Party and the moderately populist New Zealand First Party, with the Green Party providing confidence and supply.

NZ First is the strongest supporter of the country’s martial traditions. It has always had a hawkish attitude towards China, which has become more relevant in recent years.




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While Labour is generally seen as more dovish than the National Party, the differences have been largely over tone rather than substance. Attitudes towards anti-nuclear policies, the scrapping of the RNZAF fighter wing, and the 2003 invasion of Iraq have been major points of difference in the past.

Labour has generally differentiated itself by being slightly more willing to criticise allies and placing more faith in collective security, the United Nations and disarmament.

To limit criticism that it is spending on “tanks not teachers”, Ardern’s coalition has skilfully outsourced the job of replacing ageing defence equipment to NZ First’s minister of defence Ron Mark. It was probably no coincidence that last year’s announcement that NZ$2.3 billion would be spent on new maritime patrol aircraft was made by NZ First leader Winston Peters while Ardern was on maternity leave.

Ardern has let NZ First claim the political credit and take the political risk with expensive defence replacements, lest they take the shine off Labour’s focus on social policies. That balancing was on show again last week when Ardern announced that New Zealand was ending its military training deployment to Iraq.

Pacifism in the age of climate change

By sitting outside cabinet, the Greens are able to represent the pacifist end of the political spectrum. The party has its roots in the Values Party of the 1970s, which helped make anti-nuclear attitudes mainstream in New Zealand and, by 1984, Labour Party policy.

The party’s defence spokesperson Golriz Ghahraman described the transport plane purchase as “war making capability” when New Zealand is good at humanitarian aid delivery, monitoring and supporting Antarctic research. She reconfirmed the Green Party’s commitment to peacekeeping through the UN.

This attitude is problematic as it forgets that the tools for war fighting are the same as those for peacekeeping and disaster relief. As the focus of Green movements worldwide has shifted to climate change, the commitment to disarmament is becoming more at odds with the realities of climate change. Rising sea levels, crop failures and mass migration will be massively destabilising to the international system.

It is not tenable to criticise the purchase of aircraft that will be largely used to send relief missions to the Pacific, scientists to Antarctica and peacekeepers to UN missions, simply because they could be used to send soldiers into combat. The challenge for the Greens will be to find a coherent message on the military that tackles the climate crisis and represents the views of its pacifist base.

The challenge for New Zealand’s allies will be to understand and respect how these contradictory threads of New Zealand’s strategic culture direct and constrain its defence spending.The Conversation

David Belgrave, Lecturer in Politics and Citizenship, Massey University

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

Vital Signs: the ‘ball-tampering’ budget trick they don’t want you to know about



File 20190418 28103 iz9jvq.jpg?ixlib=rb 1.1
Just not cricket: Politicians make promises but obfuscate how those promises will be paid for.
Shutterstock

Richard Holden, UNSW

The first week of the federal election campaign has been dominated by heated disputes about the numbers behind both government and opposition policies.

Both sides are under pressure. Notably, the cost of Labor’s 45% emissions-reduction target has been rightly questioned.

Opposition leader Bill Shorten’s answer to reporters that “our 45% reduction, including international offsets, has the same economic impact as the Liberals’ 26%” didn’t exactly engender confidence.

But the folly of Labor’s environmental plans is another tale for another column.

Our focus here is on how the Coalition is going to cut personal income tax by A$158 billion and balance the budget.

Wild assumptions

Earlier this week the Grattan Institute pointed out the Coalition’s budget assumption that expenditure will fall from 24.9% of GDP in 2018-19 to 23.6% during the next decade amounts to cutting spending by more than A$40 billion a year in 2029-30.

This raised the natural question of exactly where those cuts will come from. According to the government, it’s from things such as lower welfare payments and lower interest payments on government debt.




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The Grattan Institute’s Danielle Wood described these assumptions as “heroic”. Yup.

Now, you might wonder why the Coalition’s plan to cut personal income tax doesn’t fully kick in until 2025. Or, for that matter, why its “enterprise tax plan” on corporate tax is scheduled to be phased in over a decade.

Playing outside the rules

The short answer is that for the four years following a budget – the so-called “forward-estimates period” – there are rules about banking spending cuts.

During those four years, cuts need to be specified, or economic parameters need to be varied. And with good reason. That way the actual assumptions the government is making, however fanciful they may be, are plain for all to see.

But beyond the four-year period no such discipline applies. This allows governments of all stripes to make very specific claims about, for example, tax cuts they plan to deliver without having to be at all specific about how they are going to pay for them.

This is all just a conjuring trick. Politicians try to get us to focus on the tangible, specific thing we want – tax cuts, more money for hospital or schools, free cancer treatment – while obfuscating how they are going to pay for it.

It’s dirty pool. It’s not cricket. It’s the kind of thing a mob accountant does. Pick your favourite metaphor.

Bipartisan failure

Of course, treasurer Josh Frydenberg and finance minister Mathias Cormann didn’t invent this unscrupulous practice. Wayne Swan and Penny Wong, as treasurer and finance minister respectively, were guilty of these kind of shenanigans too.

The specifics of the current round can’t even be debated properly, because ten-year “guesses” don’t lay out specific assumptions that can be checked for internal consistency and plausibility.

Sadly, it seems futile to hope for cultural change among politicians and a shift to integrity.

To some extent, we need to be the change we want.

The fact both sides of politics so brazenly play us for suckers is as much our fault as it is theirs. If politicians thought there were real consequences at the ballot box for this sort of behaviour, they would think twice.

But there aren’t. When both sides are guilty it’s understandable that voters become so cynical that they just factor it in and look to other issues.

If more voters were willing to make “cooking the books” a decisive issue, that might change.

Need for incentives

Politicians respond to incentives. My favourite illustration of that is how United Nations officials used to be exempt from parking tickets in New York City. As economists Ray Fisman and Ted Miguel showed, when norms alone governed behaviour, officials from corrupt countries basically parked wherever they wanted. Once city authorities got the ability to confiscate diplomatic licence plates of violators, things improved radically.

So as long as the mainstream media refuses to issue our politicians with the moral equivalent of parking tickets for cooking the books of public debate, politicians are going to keep doing it.

Now, many commentators do exactly that – and some of them are brilliant and fearless. But other folks, on the right and on the left, seem to have the attitude that both sides play fast and loose with the facts so it’s fine for them to call out whichever side they personally like the least.

Actually, scratch “seem to have the attitude”. They’ll tell you that to your face.

When Australian cricket captain Steve Smith and vice-captain David Warner got caught in a ball-tampering racket, there were consequences.

When our elected representative do something similar, but with our nation’s finances –with consequences for growth, employment, welfare benefits, retirement incomes, and climate change – they get a pass.

That’s got to stop; and we’ve all got our part to play.The Conversation

Richard Holden, Professor of Economics, UNSW

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