Vital Signs: yes, we need to make things in Australia, but not like in the past



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Richard Holden, UNSW

Much of the focus of Opposition Leader Anthony Albanese’s budget reply speech was around Labor’s proposal to expand childcare subsidies – a policy with some flaws but which moves in the right direction.

Labor’s plan to modernise the electricity grid by setting up a “Rewiring the Nation Corporation” with A$20 billion in government support was also met with general approval.




Read more:
Albanese promises $20 billion plan to modernise electricity grid, and $6.2 billion for childcare


What got less attention was the third pillar of Labor’s budget strategy – a big push toward more local manufacturing jobs.

Albanese wasn’t shy about what he meant. He lamented the loss of Australia’s car-making industry:

Australians will never forget that it was this government that drove Holden, Ford and other car makers out of Australia, taking tens of thousands of jobs in auto manufacturing, servicing and the supply chain with them.

He then announced Labor would create a “National Rail Manufacturing Plan” to expand Australia’s boutique train-building industry:

We will provide leadership to the states and work with industry to identify and optimise the opportunities to build trains here in Australia – for freight and for public transport.

The economics of pillars 1 and 2 make sense. Pillar 3 involves trying to turn back the clock on the irrepressible, tectonic forces of globalisation and automation to pretend we should make things here we shouldn’t.

Understanding comparative advantage

Countries benefit from trade rather than seeking to produce everything they need locally. This is due to the idea of “comparative advantage”, originated by David Ricardo in his 1817 book On the Principles of Political Economy and Taxation.

One country (call it country A) might be more efficient than another (country B) in absolute terms at producing, for example, T-shirts and wine. It is tempting to think, then, that country A should produce both T-shirts and wine.

But what if country B is really inefficient at producing T-shirts but reasonable at producing wine? If country A specialises in producing T-shirts and country B specialises in producing wine, they can trade and both be better off.

Why? Because country A produces T-shirts much more efficiently than country B, and country B is only a little less efficient at producing wine. Overall, both economies get more efficient, raising living standards.

Making cars and trains in Australia

Does Australia have any comparative advantage at producing cars or trains?

With cars the evidence speaks for itself. Local manufacturing only survived for decades because of huge government subsidies. Without them Australian-made cars couldn’t compete.




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Holden’s dead end shows government policy should have taken a different road


Only part of that was to do with labour costs – and we should be rightly proud of our comparatively high wages and good working conditions. Germany – home of BMW, Mercedes Benz and Volkswagen – also has high wages and conditions.

What about trains? Some trains are made in Australia – by Downer EDI and Canadian multinational Bombardier. That’s good for a few thousand jobs. But the market is domestic, with the customers being state governments who buy with an eye on local jobs.

There’s not a lot to suggest it can become an export industry, competing for example with Japan, which has been making bullet trains since the early 1960s. Or France, whose train builders have sold hydrogen trains to Germany and high-speed freight trains to Italy.

With these competitors having such an edge, and the well-known phenomenon of “learning-by-doing”, are we really going to catch up?

There are many other sectors in which Australian producers are internationally competitive, such as agriculture, services and areas of high-tech manufacturing.
Building on and expanding comparative advantage in these areas makes a lot more sense.

The case for strategic manufacturing

That said, the COVID-19 pandemic has taught us how fragile certain parts of our economy are. The same logic of comparative advantage that has done so much to improve living standards has also made us vulnerable in some areas.

Having little or no manufacturing capacity in personal protective equipment or pharmaceuticals like insulin, EpiPens and antibiotics is potentially very dangerous. Importing more than 90% of our pharmaceuticals puts us in a vulnerable position if a state actor that controls important parts of the global supply chain decides to cut supply. This is what economists call the “hold-up problem”.




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Medical supply chains are fragile in the best of times and COVID-19 will test their strength


So it makes sense for Australia to have more presence in strategic manufacturing like pharmaceuticals and personal protective equipment, even if producing these goods locally is not as efficient as buying them from overseas.

From just-in-time to just-in-case

The pandemic has taught us that we have, as a nation, moved a little too far towards the efficiencies of “just-in-time” supply chains. We need to move back somewhat, but certainly not completely, in the direction of “just-in-case” – to a little less efficiency but a little more insurance.

That should involve a push for strategic manufacturing. We should at all times be looking to build on and expand our comparative advantage.

But trying to go “Back to the Future” and build an Australian De Lorean makes no sense.The Conversation

Richard Holden, Professor of Economics, UNSW

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

No snapback: the budget sets us up for an unreasonably slow recovery. Here’s how



Lukas Coch/AAP

Brendan Coates, Grattan Institute and Matthew Cowgill, Grattan Institute

Josh Frydenberg has told us his 2020 Budget is “all about jobs”.

What he hasn’t said is that it is actually aiming for a slower recovery from the recession, as far as unemployment goes, than from most recessions in Australia’s history.

That’s both the budget’s explicit forecast and the result of the measures in it.

You would be forgiven for expecting the recovery from this recession to be faster than the recoveries from previous recessions. Previous recessions haven’t involved the government requiring businesses close their doors.

In most recessions the government isn’t able to switch things back on.

Yet Australia’s recovery from this COVID recession is officially forecast to be on the sluggish side, as our graph of the recovery in the unemployment rate after each of the past eight recessions and slowdowns shows.

The budget expects the unemployment rate to peak at 8% in December this year, but then take three-and-a-half years to fall to 5.5% by mid-2024.

That’s an average decline of 0.71 percentage points per year in the unemployment rate.

Three-month moving average of unemployment rate used. The end date is the month with the lowest unemployment rate in the four years following the.
recession peak, excluding any that occur after a subsequent recession. Excludes ’micro recoveries: defined as those with less than 6 months or 0.5
percentage points between peak and trough. Recessions defined using the Sahm Rule.

OECD.Stat and Grattan calculations

In the 1990s recession – Australia’s most recent major recession – the unemployment rate peaked at 11.1% in late 1992, then fell to 8.3% by 1996.

That’s an average decline of 0.9 percentage points per year – a good deal faster than expected after this recession.

With, rather than ahead of, the pack

By the standards of past overseas recessions, our recovery is expected to be no more than typical.

We examined 150 past recessions in the countries that make up the Organisation for Economic Co-operation and Development and found that typically unemployment falls by 0.85 percentage points per year – about the same as what Australia expects this time.

This analysis uses all the labour force data kept by the OECD – which in Australia’s case goes back to 1966.

Three-month moving average of unemployment rate used. The end date is the the month with the lowest unemployment rate in the four years following the recession peak, excluding any that occur after a subsequent recession. Excludes ’micro recoveries’, defined as those With less than 6 months or 0.5 percentage points between peak and trough. Recessions defined using the Sahm Rule.
Source: OECD.Stat and Grattan calculations

The initial phase of the Australian recovery is forecast to be quite brisk, as you’d expect given the nature of this recession and the budget assumption that a COVID-19 vaccine will be found soon.

After peaking at 8% in late 2020, unemployment is expected to fall to 7.25% by mid-next year. That decline – 0.75 percentage points in 6 months, a 1.5-percentage-point annualised fall – is on the fast side.

We’re removing support too soon

But from there on, the recovery is forecast to stall, particularly in 2022-23 and 2023-24 when only 0.5 percentage points per year is expected to be knocked off the unemployment rate.

The budget papers show that support to date has kept unemployment much lower than it would have been.

Treasury believes that without it the unemployment rate would have peaked at about 13% instead of the predicted 8%.




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


Which raises the question: why isn’t the government being more ambitious and aiming to bring unemployment down faster?

The rapid recovery in unemployment peters out from mid-2022 because, as this graph shows, the stimulus is set to be withdrawn quickly – the deficit is set to more or less halve next year, and then halve again over the following two years.

Policy decisions made this year actually subtract from the deficit by 2023-24.


Source: Budget 2020-21, Paper 1, Statement 2

And the stimulus is made up of measures not particularly likely to create jobs, such as income tax cuts (where much of the money is likely to be saved rather than spent) and transport infrastructure, which creates fewer jobs per dollar spent than services such as child care, health and aged care.

We shouldn’t be content with a recovery that putters along at a below-average pace.




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Morrison is right. All governments will need to spend more to get us out of the crisis


We calculate that extra stimulus of about $50 billion over and above what was announced in the budget will be needed over the next two years to drive unemployment back down to 5%, a result that would kickstart wages growth nearly two years ahead of the government’s schedule.

Some may appear in upcoming state budgets, but there’s no doubt the Treasurer has more work left to do.

We could get unemployment down quickly

Every year that unemployment remains too high is another year that Australians can expect close to zero real wages growth, and another year that Australians young and old will continue to confront a dearth of job opportunities.

Reserve Bank governor Philip Lowe said last week he wanted to achieve more than just “progress towards” full employment.

For him and his board, addressing high unemployment was an “important national priority”.

It ought to also be an important government priority.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.

Grattan on Friday: Anthony Albanese tries to climb an impossible mountain


Michelle Grattan, University of Canberra

Many people who know Mathias Cormann – let us except Malcolm Turnbull – will hope he wins his bid to become secretary-general of the OECD.

Not only is he well qualified, but it would be a feather in Australia’s cap.




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Politics with Michelle Grattan: a budget for a pandemic


He’s certainly no shoo-in, however. There are already multiple candidates, the pandemic will make campaigning complicated, and Australian’s record on climate change might be a negative.

But he’ll have strong government support and, given his meticulous organisational skills and network of contacts abroad, nothing will be left undone.

Finance minister throughout the Coalition’s term, Cormann is respected across the political spectrum, which has made him effective as the government’s “wrangler” of the difficult characters in the Senate.

His dour image conceals a lighter side, seen in Wednesday’s cameo appearance on the ABC’s “Mad as Hell” as he jested with his “spokesman” Darius Horsham, a long-running character on the show.

Cormann’s October 30 parliamentary exit – the timing determined by the OECD’s process – is a significant loss for the government. But Scott Morrison was determined not to let it become a disruption.

Morrison has filled Cormann’s shoes even before his minister has stepped out of them, announcing Simon Birmingham will take over the finance portfolio and Senate leadership when Cormann goes.

The PM said he’d make no other changes at that time, but there’ll be a reshuffle at year’s end.




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Simon Birmingham to become finance minister and Senate leader as Australia nominates Cormann for OECD


Birmingham will then shed his trade ministry, and Morrison will have the opportunity to make other alterations to his team. With aged care set to be a mega issue after the royal commission reports in February, one thing he should do is put a heavyweight into that portfolio and elevate it to cabinet.

Thursday’s small shuffle was a side show in the major play of the week, which saw a budget with a deficit of $213.7 billion this financial year that gambles on being large enough to get the country marching to recovery.

It will take months to judge whether the government has pitched its budget well (and that’s assuming no new seismic setbacks), but it is satisfied with the immediate reception. Income tax cuts are likely to be popular even if their critics argue other measures would be better. Business can only welcome the massive incentives to invest, although many enterprises won’t survive to take advantage of them.

Labor has given its support to the huge tax concessions for business in Josh Frydenberg’s second budget.




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


This ease of passage is in sharp contrast to the company tax cuts in then treasurer Scott Morrison’s first budget, which embroiled the Turnbull government in a debilitating fight from 2016 to 2018. Even Cormann couldn’t wrangle the big business tranche of those through the Senate; it was abandoned in the final week of Malcolm Turnbull’s leadership.

The budget has come under fire on various fronts – for example, the wage subsidy for younger workers carries the risk of being rorted, and there’s criticism about the lack of assistance for older workers.

Nevertheless, it has been a difficult budget for the opposition to savage, given Labor is endorsing its core elements of income tax cuts and business concessions.

But one fertile area for the opposition has been the lack of specific assistance for women, many of whom have been particularly hard hit by the pandemic. They’re often in casual jobs, and in sectors with the biggest job losses (although Frydenberg pointed out women have been strongly represented in the restored jobs). Women have also carried a disproportionate load of home schooling.

Anthony Albanese tapped into this area of government vulnerability when he delivered his Thursday night budget reply.

The opposition leader had several imperatives to meet as he went into that speech. To produce some policy flesh. To set up an ideological difference with the government. To cut through to the public.

With possibly only a little over a year before an election, the opposition is under pressure to start rolling out detailed policies. Albanese’s promises to make child care more affordable (at a cost of $6.2 billion) and to modernise the energy grid (a $20 billion investment) were substantial commitments.

The child care policy will appeal to women in particular. The pandemic has made families, but especially women, even more aware how important child care is for them – the brief period of it being free only increased the appetite for a better system – and the budget didn’t respond.

The proposals Albanese put forward to boost skills and local manufacturing highlighted Labor’s message that it believes in using government as a driver of change, through prescriptions, procurement policy and other means.




Read more:
Albanese promises $20 billion plan to modernise electricity grid, and $6.2 billion for child care


Albanese proposes mandating that a certain proportion of workers on major government-funded projects should be apprentices and trainees. He even suggests this could be extended to government-funded sectors such as aged care – how practical that would be is debatable.

There wasn’t a detailed social housing policy but Albanese flagged Labor would invest substantially in this area – that’s spending favoured by many economists as well as necessary to improve lives.

While Albanese is at pains to argue he’d mobilise the power of government, Morrison has muddied this political water.

The budget might be heavily private-sector oriented (and from that vantage point, seen as ideological), but Morrison is also interventionist when it suits him. His so-called gas led recovery, and his identification of designated sectors in his manufacturing policy are examples.

In terms of the imperatives he was trying to meet, Albanese did produce some policy flesh but of the announcements, probably only the child care initiative is likely to achieve general “cut through”.

The danger for Albanese is that come the next election, if Morrison sees child care as a political weak spot, he’s likely to address it.

In his stress on child care and social housing, Albanese made his point that Labor had different priorities to the government’s. And we got the message about putting government in the driver’s seat.

But the picture of what an Albanese government would actually look like wasn’t clear – as it can’t be, because that remains a work-in-progress.

Nor did we get any comprehensive idea of how, if this had been a Jim Chalmers budget, Labor would be tackling the immediate crisis differently.

Albanese’s problem was that circumstances demanded too much of him in his budget reply. He had a fair crack at meeting those demands, but he couldn’t change the perception that the pandemic has made the opposition one of its victims.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.

Social housing was one hell of a missed budget opportunity, but there’s time



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Hal Pawson, UNSW

Tonight Labor will deliver its alternative budget and promise that if it was in government it would be investing A$500 million in fast-tracking repairs to social housing, and urging state governments to match it dollar for dollar.

The federal budget itself, delivered on Tuesday, offered nothing extra for social housing, even though when polled by The Conversation and the Economic Society of Australia more of Australia’s leading economists wanted money spent on social housing than any other stimulus measure.

They are right to place it above investment allowances, wage subsidies and tax cuts as a sure-fire way to boost economic activity and employment.



Conversation Economic Society of Australia survey, September 2020

Unlike those other measures, it has a track record.

The Rudd government’s social housing initiative, introduced as part of the package that staved off recession during the global financial crisis, delivered 20,000 new units on time and on budget while creating 14,000 well-paying jobs.

It was the only Commonwealth public housing or community housing initiative of any size since the Howard government effectively ended routine public home building in 1996.

Pre-tested, pre-prepared

On a per capital basis, social housing supply has halved since then.

At the same time, private rental housing has moved upmarket, making it even harder for low-income Australians to find a suitable and affordable home.

The Community Housing Industry Association put forward a $7.7 billion Social Housing Acceleration and Renovation Program (SHARP) that would have delivered an extra 30,000 homes and renovated thousands more over four years.

Calculations by SGS Economics and Planning in June suggested it would have supported between 15,500 and 18,000 full-time equivalent jobs in each of those years.




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Australia’s housing system needs a big shake-up: here’s how we can crack this


Why, in the face of this analysis, did Treasurer Josh Frydenberg turn the option down?

It’s hard to say, but the omission of social housing is consistent with the budget’s lukewarm attitude towards infrastructure investment more broadly.

Adding up everything the government is planning to spend on infrastructure over the next four years, the budget comes up with a total of $6.7 billion, which is rather small beer compared with the four-year spending plan before the crisis, which was $4.5 billion.

Lukewarm on infrastructure generally

It’s also small when compared to the business tax and other incentives, which amount to $26.7 billion.

Kick-starting the recovery via social housing or other infrastructure would have been out of kilter with a strategy focused on creating “private sector-led growth”.

The strategy, spelled out formally in the budget papers, is to, wherever possible, support markets rather than act directly.

It’s thinking that allows the government to distinguish itself from the Rudd response to the global financial crisis in 2008.




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Coronavirus lays bare 5 big housing system flaws to be fixed


But – unlike direct action, such as through social housing investment – the favoured approach relies heavily on assumptions about how market players (firms and consumers) react to incentives.

Those reactions might help bring about the post-pandemic snapback the most optimistic forecasts envisage.

There’s time

If not, there’s an opportunity to try again, even reluctantly. SHARP is ready and pre-tested.

There’ll be an opportunity in the mid-year budget update, due in December (in two months’ time), and next year’s budget (due in seven months).

Regardless, resumption of a routine national social home-building program is seriously overdue.

Australia’s housing system has become increasingly unbalanced – not just in the past six months, but over the past 20 years and more.

The crisis provides an opportunity to fix it.The Conversation

Hal Pawson, Professor of Housing Research and Policy, and Associate Director, City Futures Research Centre, UNSW

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

It’s not the size of the budget deficit that counts; it’s how you use it



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Steven Hamilton, Crawford School of Public Policy, Australian National University

In putting together his unprecedented pandemic budget, Treasurer Josh Frydenberg had two big tasks: to support the economy now, and to kick-start the next boom.

Many commentators seem to be enamoured by the size of the spend. But once you dig into the details, it’s a mixed bag.

The 2020 budget certainly delivers on boosting business investment and hiring, and the tax cuts will help lift employment and activity.

But overall it’s a bit light on direct stimulus – spending to support those who have lost their incomes and boost consumer demand. It doesn’t do enough for the economy now, when a boost is needed most. And it lacks a coherent reform narrative around driving the economy out of this crisis better than it went in.






Read more:
Budget 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts


Employment and business incentives

Let’s start with the good.

Bringing forward scheduled income tax cuts and increasing the tax offset for low-income earners is good news, despite misgivings among some economists.

They will provide some stimulus via increased spending over the next two years. They will also make it cheaper for businesses to take on workers, and more worthwhile for workers to take on more hours. Research backs this up.




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The budget’s tax cuts have their critics, but this year they make fiscal sense


Encouraging business investment is another good priority. There is strong evidence from schemes in the US that the A$27 billion allocated to enable businesses to deduct the full cost of new assets installed up to June 2022 will boost investment, driving jobs and higher wages over the next few years. Other business incentives, around hiring and R&D, are also welcome.

The budget also contains many worthy smaller measures. For example, it is great to see the government commit an extra A$101 million to double the number of Medicare-subsidised therapy sessions from 10 to 20 per year. Hopefully there will be more support to come for mental health and suicide prevention as the government delivers reviews into these areas.

Investment sleight of hand

Now on to the not-so-good.

First, the A$27 billion for instant asset write-offs is a bit of a sleight of hand. The measure allows businesses to write off investments up front instead of depreciating them over time. So businesses will pay less tax now but more later.

This is why the budget shows a reduction in tax receipts over the first three years, but an increase in year four. Expenses are brought forward to year one even for investments they were going to undertake anyway. The economic benefit – which is real, to be clear – is purely in businesses not having to wait for those tax benefits.

And it is not an investment allowance, as some have called it, which would provide a subsidy on top of allowing a business to expense the assets up front. Research suggests a true investment allowance such as the GFC Investment Tax Break given to Australian business during the Global Financial Crisis, would have boosted investment even more.


The Conversation’s Business & Economy editor Peter Martin explains the 2020 budget in three minutes.

This budget just isn’t very stimulating

Now on to the not good at all.

Though the tax cuts provide some stimulus to the economy, it will not be as much as direct cash payments. And you only receive the tax cuts – more than A$2,000 a year for many taxpayers – if you work.

The government’s main instruments for direct stimulus – the JobKeeper and JobSeeker payments – are already being wound back (with JobKeeper ending in March 2021), which will pull a massive amount of demand out of the economy.




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


US research on the effect of the US government’s US$2.2 trillion stimulus package shows government payments to households significantly boosted spending in a matter of weeks, with 25 to 40 cents in every dollar of stimulus being spent.

But this budget offers little in the way of direct cash payments. The government has committed to two modest $250 payments to certain welfare recipients, but the second won’t arrive for another five months.

The direct stimulus that is on offer will provide some support, but not nearly the volume required.



Green waste

By far the budget’s biggest snub is the almost complete absence of green stimulus – specifically, investment in carbon-reduction efforts. This spending is all the more critical in the absence of an economy-wide carbon price.

Green stimulus offers the prospect of a triple economic dividend: it generates activity and jobs today, it prevents an impending environmental calamity, and it creates the industries and jobs of the future.

Other countries are seizing COVID-19 as an opportunity to make inroads towards their emissions-reduction targets. France, for example, has devoted a third of its stimulus to green measures.




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Creative destruction: the COVID-19 economic crisis is accelerating the demise of fossil fuels


Using the most generous possible definition, only about 1% of new Australian government spending over the next four years will go to environmental initiatives. This is a tremendous missed opportunity.

So, overall, the budget is a mixed bag. There are some welcome stimulus measures, but some critical ones missing. The government has a lot more work to do to kick start a new golden era of economic growth.

Let’s hope the Treasurer delivers on that in his next budget, due in just seven months.The Conversation

Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

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

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


Danielle Wood, Grattan Institute; Kate Griffiths, Grattan Institute, and Tom Crowley, Grattan Institute

The Morrison government seems to think economic stimulus is all about high-viz vests and hard hats. It’s a narrow and dated view of the world of work.

Tuesday night’s budget included several broad measures to support business and jobs, such as its tax write-off for business investments and wage subsidy for employing young people.

These look like sensible measures, albeit ones that bet heavily on business to lead the recovery.

But when it comes to targeted policies for job creation, the 2020 budget is a sea of hard hats.

The three sectors with the most targeted support are all bloke-heavy: construction (more than A$10 billion so far through the crisis), energy (A$4 billion), and manufacturing (A$3 billion). There is also an extra A$10 billion for transport projects, another boost to construction jobs in the building phase.

The problem? That doesn’t fit the story of this crisis. Unlike past recessions, the worst fallout in the COVID-19 recession has been in services sectors.




Read more:
Budget 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts


Hospitality, the arts and administrative services have all been hit hard. These sectors are dominated by women, which is one reason women’s employment has taken a bigger hit this year.

Yet these sectors received next to nothing in the budget. They are also less likely to benefit from economy-wide supports such as instant asset write-offs because they are the least capital-intensive sectors.


Size reflects the industry share of Gross Value Added for 2019. Industry-specific stimulus excludes stimulus available to all industries, such as JobKeeper.
ABS, Grattan analysis of Government announcements to October 2020

There are many ways the federal government could have helped these sectors.

Overseas governments, and some state and local governments, have funded vouchers and discounts to encourage people back to restaurants, cafes and regional tourist destinations.

Grants or direct support to help the arts sector revive could provide a desperately needed boost to our creative recovery.

The government could have created many more jobs by directly investing in government services. Services create more jobs than infrastructure per dollar spent, and they have especially high economic multipliers right now.


Notes: Excludes expenses for ‘other economic affairs’ (which contains JobKeeper) and ‘other purposes’ (largely GST payments to the states). Total expenses growth is also calculated excluding ‘other purposes’. Source: Budget 2020-21.
Source: Budget 2020-21

The budget initiatives in education, aged care and mental health are welcome, but very small in the scheme of new spending.

Major investments in aged care and education would be a jobs boon and could have provided a more rounded vision for the recovery.

A missed opportunity for women

This week, just before the budget, the federal Minister for Women, Marise Payne, issued a statement saying:

This government recognises that women have been significantly impacted by the COVID-19 pandemic and it is critical that we focus on rebuilding their economic security as a priority.

Yet the government has left the biggest opportunity on the table. Making child care more affordable is the most effective way to reduce the gender gap in working life and retirement – directly supporting jobs and the economic recovery.




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Permanently raising the Child Care Subsidy is an economic opportunity too good to miss


The Grattan Institute has recommended a A$5-billion-a-year package that would make child care significantly cheaper and improve the workforce participation incentives for primary carers (still mainly women).

Instead, women seem to have been relegated in this budget to an afterthought in the form of a A$240 million “support package”, which offers no meaningful economic support.

The Conversation’s Business & Economy editor Peter Martin explains the 2020 budget in three minutes.

Poorly targeted stimulus

All of these omissions are even more glaring given the spending on other areas and groups with far less need for support.

Sizeable measures are targeted towards energy, agriculture and defence. Yet all of these sectors have increased their total work hours since March.




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Budget 2020: promising tax breaks, but relying on hope


Another A$3 billion is slated for manufacturing. While that sector has shed jobs during the crisis, it should bounce back more quickly than “social consumption” businesses such as hospitality, retail and personal services.

Construction spending is needed, because a future crunch in the sector is expected as housing construction slows.

But the focus on major transport infrastructure for job creation does not make so much sense. These projects are less jobs-intensive.




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


Also, states such as Victoria already have a big pipeline of large projects, so have little capacity to deliver more.

The A$3 billion for shovel-ready projects focusing on road safety and local roads are better targeted to create jobs. But it has missed the opportunity to deliver a major social housing spend, providing something desperately needed that would also help mitigate the downturn in housing construction.

To achieve its stated objective of getting unemployment well below 6% as quickly as possible, the government should be focusing on stimulating sectors where activity has fallen the most – especially services sectors.

But this budget overlooks the hard hit in favour of the hard hat. The government should check this blind spot quickly. A broad-based recovery depends on it.The Conversation

Danielle Wood, Chief executive officer, Grattan Institute; Kate Griffiths, Fellow, Grattan Institute, and Tom Crowley, Associate, Grattan Institute

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

Budget 2020: big health problems lead to big health spending


Stephen Duckett, Grattan Institute

The pandemic – and developments in health care – have forced the Commonwealth government to commit to a massive increase in spending on health care this year.

In the 2019-20 budget, the Commonwealth promised an increase of A$540 million in health spending in 2020-21. In this year’s version, delivered by Treasurer Josh Frydenberg last night, the promise is an order of magnitude greater: an uplift of $5.347 billion since the last economic statement.

During 2020-21 and 2021-22, likely to be the biggest years for the COVID-19 response, the Commonwealth is promising almost $10 billion of extra spending. Never before has the federal government opened the health purse strings to this extent.

Although there are 35 items in the health budget measures table – all detailed in a 163-page “Stakeholder Pack” – just five of them account for 94% of the increase in spending.

1. Pharmaceutical Benefits Scheme (PBS)

The government has committed to listing on the PBS all new drugs recommended as cost-effective. Even though each new drug must meet a cost-effectiveness threshold, the PBS spend is the biggest item in the health budget: $4.3 billion over the next two years, and more in the years beyond.

Although drug listings have been politicised recently, they are in fact technocratic decisions based on clinical, epidemiological and economic analysis.

The difference this year is the government is committing funds in advance for new listings, with a “PBS New Medicines Funding Guarantee”. In essence, this means Treasury has given up trying to extract savings from the health portfolio to offset the cost of new drugs. The cost of this new guarantee may be partly reduced by a price drop for medications approaching the end of their patent, with an increased price cut after 15 years.




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How to slash half a billion dollars a year from Australia’s drugs bill


2. COVID-19 vaccines

No one knows if or when a COVID-19 vaccine will be proven to work, which one of the hundreds of candidate vaccines it will be, when it can be manufactured at scale, or how it will be distributed across the world. The government seems to be banking on mid-2021 for a vaccine, with population vaccination programs to follow shortly after that.

However, the government has also made contingency plans, allocating almost $2 billion over the next two years for licensing, production and distribution of a successful vaccine. There is no allocation for 2022-23 and beyond, so the government is either hoping the coronavirus will pack its bags and go, or waiting to see whether future budget allocations will be necessary.




Read more:
The budget assumes a COVID-19 vaccine becomes available next year. Is this feasible?


3. Medicare Benefits Schedule (MBS)

The pandemic brought forward implementation of new ideas into the MBS — most notably telehealth. The government has allocated $1 billion for extending some MBS items in 2020-21.

The optimistic interpretation is that the government is already planning to extend this extra MBS funding 2020-21, and is spacing out the announcements to maximise positive publicity. The stark reality, though, is there is no budget provision for these needed items beyond this financial year.




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How the old-fashioned telephone could become a new way for some to see their doctor


4 & 5. Aged care

The budget has two large aged care items: a one-off COVID response of $733 million, and a longer-term aged-care reform package worth more than $1 billion over the next two years, which will fund additional “home care packages”, assistance to older Australians to help them stay at home rather than be admitted to residential aged care. The assistance might include nursing care, allied health, personal care or help with house cleaning.

Although 23,000 more packages are funded in the budget, that is woefully inadequate. About 75,000 older Australians are waiting for a home care package, and a further 25,000 are waiting for a higher-level package which they have been independently assessed as needing. The home care budget allocation is welcome, but doesn’t meet the enormous need.

The government has kicked into the long grass the challenge of addressing the litany of failures in residential aged care identified by the Royal Commission on Aged Care Quality and Safety. Any such decisions are deferred until the royal commission reports its findings next year – meanwhile condemning thousands of older Australians to live in facilities with demonstrably substandard staffing.




Read more:
Federal government did not prepare aged care sector adequately for COVID: royal commission


Hospitals

Outside the health portfolio, the government has allocated an extra $1.1 billion to the states as part of the 50-50 cost-sharing deal for the COVID-19 response. This pays for additional ventilators, “fever clinics” and other costs associated with meeting needs during and after the pandemic.




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‘Fever clinics’ are opening in Australia for people who think they’re infected with the coronavirus. Why?


The rest: ‘rats and mice’

There are 30 other items in the health budget measures table — many worthy, many important, too many simply the result of special pleading and successful lobbying. Each will be very welcome to the recipients. Some will yield measurable benefits and improvements in health care; and some will not.

The 2020-21 budget rightly includes a huge increase in spending responding to the pandemic. But even in these COVID-19 times, it should have also signalled the government’s commitment to fix the aged care mess with a down payment towards residential care reform, and given GPs — and their patients — more certainty about the future of telehealth.The Conversation

Stephen Duckett, Director, Health Program, Grattan Institute

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

This budget will only work if business and consumers play ball



AAP/Mick Tsikas

Michelle Grattan, University of Canberra

This is an extraordinary giveaway budget, driven by desperate circumstances that would have been inconceivable less than a year ago.

The debt and deficit numbers are predictably eye-watering – but the gamble is whether they are big enough.

The Morrison government is pleading.

In particular, it is begging business to chance its hand and invest, so that activity and jobs can be restored ASAP.




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


The incentives being handed to business are enormous. But it all comes down to that elusive necessity – confidence. It’s the old question about horses and whether they will drink when the water is shoved into the trough before them.

Equally, the government is also appealing to individuals to spend, and then spend some more.

There will be argument about whether it is making this pitch in the most effective way – the accelerated tax cuts have their critics.

They’ll certainly give many people more ready cash over coming months. The unknown is whether in these uncertain times the purse strings will be loosened.

The modest cash payments for pensioners – two lots of $250 – are also directed to boosting consumption. The first payment is December, nicely timed for some (modest) Christmas presents, to help the retail sector just when it needs assistance.




Read more:
Budget 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts


In its subsidy for businesses to hire younger unemployed people the government is acknowledging the recession will particularly hurt this generation.

It is imperative to get as many as possible of those thrown out of work back into the labour force as fast as possible.

The motive is sound, but how effective the program will be is another matter. Much will depend on whether employers feel confident enough to take on staff.

These younger people have to hope the employers respond, because the Coronavirus supplement that has enhanced JobSeeker is being wound back, and is due to end, while how much the basic JobSeeker payment will eventually be set at is a decision yet to be made.

The budget also notes women have been hard hit by the pandemic, and it includes a “women’s economic security statement”. But its $240 million in measures seems, to put it mildly, modest when compared to other initiatives.

Among the unusual features of this unique budget is the relative absence of cuts. The government has been finding ways to get money out the door, not reining in expenditures.




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Budget 2020: promising tax breaks, but relying on hope


Frydenberg reprised the messages we’ve been hearing in past months from the government, which has prepared the ground for this tsunami of debt and deficits.

The debt would be a heavy burden, but it was a necessary one to “deal with the greatest challenge of our time”.

Some Liberals might have residual nightmares about debt but it is generally accepted by economists that it is totally manageable, and not even exceptional on international comparisons even if a shock in the Australian context.

Frydenberg repeated that the government’s initial measures to cushion the economic fallout of the pandemic had been “temporary, targeted, and proportionate”.

But the economic support cannot be temporary and this budget represents the next phase of it.




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The budget’s tax cuts have their critics, but this year they make fiscal sense


JobKeeper will be wound back, despite many experts believing it should extend much longer than its planned life, but other mechanisms have to be deployed to support the economy.

The budget is attempting to make a successful transition from the direct support represented by JobKeeper to indirect support through the use of tax breaks to encourage business investment.

At some stage, the transition has to be made. That’s recognised by both sides of politics. The debate is around the timing and the mechanism for making it.

While assuring us the government has our backs, Frydenberg had a double message for Australians in his budget speech. “The road to recovery will be hard,” he said. “But there is hope.”

Among the hopeful assumptions in the budget is that “a population-wide COVID-19 vaccination program will be fully in place by late 2021”.

That’s perhaps the biggest call of all.




Read more:
The budget assumes a COVID-19 vaccine becomes available next year. Is this feasible?


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 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts



Wes Mountain/AAP

Wes Mountain, The Conversation

The budget deficit is projected to hit $213.6 billion, a record 11% of GDP, before winding back:




Instead of falling, as predicted in the last budget, debt will climb:



There’s spending and tax cuts a plenty:




It’s expected to bring about a bounce-back in economic growth:



But much depends on the assumptions, including a return to strong immigration:


The Conversation


Wes Mountain, Multimedia Editor, The Conversation

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

The budget’s tax cuts have their critics, but this year they make fiscal sense



AAP/Lukas Coch

Richard Holden, UNSW

This year’s budget is something of a play in two acts. Act one involves large economic stimulus to help plug the hole in output generated by the coronavirus pandemic. Act two tries to set Australia up for a bounce back in economic growth and employment that involves more than just waiting for the pandemic to end.

The headline figures that will rightly garner much attention are the $213.7 billion deficit for 2020-21—representing 11.0% of GDP – and the increase in net debt to 43.8% of GDP by 2023-24.

Tax receipts are down, but of course spending has rocketed up to $677.4 billion for 2020-21, compared to a projection of $514.5 billion for that period at the last budget.

The massive JobKeeper wage-subsidy program, the coronavirus supplements to various welfare payments, and a number of smaller schemes to encourage building, hiring of apprentices, and boosting manufacturing all add up to an unprecedented boost in government spending.

There is room for debate about the structure of these programs and even whether they are large enough, but they are basically sound as fiscal mitigation.

Tax cuts and their critics

Much was made in the leadup to the budget about the possibility of bringing forward the already-legislated “phase 2” and “phase 3” personal income tax cuts, due to begin on July 1 2022 and July 1 2024, respectively.

Phase 2, which involves raising the income threshold where the 37% marginal rate kicks in from $90,000 to $120,000, has been brought forward to this fiscal year. Phase 3, which abolishes the 37% bracket altogether, letting the top marginal rate of 45% kick in at a new $200,000 threshold will have to wait until 2024, as scheduled.




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Budget 2020: promising tax breaks, but relying on hope


Critics of such cuts make two main arguments. The first is that the tax cuts are “unfair” because people on higher incomes get more of them. The second is that the cuts are bad economics, because higher-income households just save the tax cuts, and what we need right now is lots of spending.

Hand-to-mouth consumers

There is, indeed, a compelling case for putting more money in the hands of those who will spend it. Household consumption accounts for nearly 60% of GDP, and during recessions such consumption takes a pounding. 2020 in Australia is no exception.

That said, there is a widespread assumption – more like an article of faith, really – that those at the lower end of the income distribution will spend any temporary income they receive. And this article of faith has a corollary: only those at the bottom of the income distribution will spend such temporary income.

This leads folks to conclude there is downward sloping relationship between income and spending of government stimulus – the lower one’s income the more one spends.

But, as an empirical matter, this just isn’t true.

As economists Greg Kaplan, Giovanni Violante and Justin Weidner have pointed out, Australia has an unusual composition of “hand-to-mouth” consumers – that is consumers who spend all of their available resources every pay period because they have relatively little liquid wealth compared to their monthly expenses.




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


First, we have many fewer such people than countries like the United States, United Kingdom, or Canada – a little under 20% of the population. Second, and more strikingly, most of the Australian hand-to-mouth consumers – 90% of them – are wealthy. That is, they have a relatively large amount of total wealth – things like real estate assets and superannuation accounts.

Only 2.7% of Australian consumers are “poor, hand-to-mouth consumers”.

Notice this shatters the idea of a downward sloping income-gradient to spending. People across the income distribution spend stimulus payment.

Now, you might not feel too bad for a household with a good amount of equity in an expensive home and solid superannuation balances, but with large expenses like a big mortgage payment and private school fees. Fair enough. But that doesn’t mean they won’t spend additional income.

The effect of the tax cuts

As it stands, those earning $40,000 a year will pay $1,060 less tax this year than in the 2018 fiscal year. Those earning $60,000 will pay $2,160 less, and those earning $100,000 and above will pay around $2,500 less.

As a stimulus measure that’s far from crazy.

And as a growth-enhancement measure the phase 2 and 3 tax cuts make a lot of sense. Taxing labour income tends to lead to people working less. That’s less economic growth, less personal income, less tax, and less spending.

The exact magnitude of this – what economist call labour-supply elasticities –varies by type of worker and on the exact nature of the tax schedule. But as Michael Keane and Richard Rogerson have noted, these effects are large in the aggregate.

Boosting the economy now and in the future

The economic problem we have been facing since March has been filling a massive drop in economic output. That will remain the central problem unless and until we have a widely-deployed vaccine.

But we cannot wait to tackle the supply side of the economy until after the immediate problems have been addressed. This budget takes a small step in that direction by bringing forward the phase 2 tax cuts. By not bringing the phase 3 cuts forward the government avoids a political fight, but risks waiting too long to begin the task of serious tax reform which is long overdue.The Conversation

Richard Holden, Professor of Economics, UNSW

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