Post-COVID, there’ll be less of a reason to cut company tax than before



Andrey Bayda/Shutterstock

Janine Dixon, Victoria University and Jason Nassios, Victoria University

They’re at it again, pushing lower company tax as a way to resuscitate the economy.

The arguments were well ventilated at the time the government pushed for company tax cuts, failed to get support in the Senate, and then abandoned them in favour of personal income tax cuts in the leadup to the last election, declaring “we’re not coming back to the company tax cuts”.

The new argument is that they’ll help get us out of recession, but in the same sense that Leo Tolstoy observed that while all happy families resemble each other, each unhappy family is unhappy in its own way, each recession is different.

This recession is the result of the forced hibernation of large parts of the economy in order to reduce the spread of COVID-19.

This recession is about households

The first priority will be household spending.

When the time is right, it will be households that hold the key to reversing the effects of hibernation.

Australian households account for 60 cents in every dollar spent in the Australian economy, and they accounted for a disproportionate share of the fall in GDP in the first half of 2020.

With shops and cafes shut, the need for investment in new facilities is low.

The first step to recovery has to be reopening the businesses that exist and are closed or are operating well below capacity.

This means getting households spending, supported by stimulus.

Company tax cuts benefit foreigners

Our modelling in 2018 showed that while a company tax cut would stimulate investment and economic activity, in both the short run and the long run the benefits would accrue to foreign investors rather than to Australians.

In theory, all investors should respond positively to a lower company tax rate, but under Australia’s system of dividend imputation local investors are shielded from company tax, meaning the cuts matter most for those overseas.

Those overseas investors would be likely to invest more in Australia after a company tax cut, boosting Australia’s capital stock (buildings and equipment) making workers more valuable, pushing up wages.




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While sold as a plus, higher wages would make it harder for locally-owned businesses. Our modelling found the biggest losers would be in the retail, health care and education industries.

With foreign investors paying less tax, the local population would bear the consequences of spending cuts or higher taxes, broadly negating the benefit of higher wage growth.

COVID makes the case weaker

As well, much of the company tax cut would be ‘wasted’ providing a windfall gain to foreign investors already in Australia.

The case for a company tax cut is now weaker, not stronger, than it was in 2018.

Budget deficits will reach new highs in 2019-20 and 2020-21. It is the right policy for the circumstances we are in, but it will leave future governments with difficult decisions about budget repair.




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When the economy is strong enough, taxpayers could face deficit repair levies, bracket creep, new taxes, and the broader application of existing ones.

It is for this reason that the International Monetary Fund warned against knee-jerk tax changes during the crisis and said:

a premium should be placed on measures that move the tax system in desirable directions – specifically: refrain from tax holidays; keep environmental taxes; do not cut corporate income tax rates

If the company tax rate was to be cut now, it would be difficult later to restore it to where it was when it was needed.

The smaller tax contribution by foreign investors would mean more of the adjustment would fall on us.

And investors may well find us increasingly attractive

Another fresh reason to be cautious about a cut in company tax is that Australia’s relative attractiveness as an investment destination might well improve.

We have suffered, but most of the world has suffered the same or worse.

Deciding where to invest their next dollars, investors might well form the view that our response to the pandemic has been better than those of other destinations such as the United States, Britain and Brazil.




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One of the benefits of being a peaceful, well-managed resource-rich Western democracy is that when things are bad elsewhere foreign investors look here.

We might continue to find (as we have in the past) that we get all the foreign investment we can handle with our company tax rate as it is.The Conversation

Janine Dixon, Economist at Centre of Policy Studies, Victoria University and Jason Nassios, Senior Research Fellow, Centre of Policy Studies, Victoria University

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

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


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

Even if the government hadn’t spent A$5.9 billion on JobKeeper and other emergency measures last financial year and wasn’t planning to spend a further $12.2 billion this financial year, its budget position would have collapsed.

The economic statement released Thursday morning shows it collected $13.2 billion less company tax than it expected last financial year, and will collect $12.1 billion less this financial year.

It collected $9.2 billion less personal income tax last financial year and will collect $26.9 billion less this financial year.

That’s assuming the present lockdown in Melbourne, the Mornington Peninsula and the Mitchell Shire lasts only six-weeks followed by a gradual return to normal and no further lockdowns.

Reality bites

Goods and services tax and excise and customs duty collections are down by $7.3 billion last financial year and down by a forecast $10.7 billion this financial year.

Tax collections from super funds held up in the financial year just ended but are expected to halve in 2020-21, collapsing from $13.2 billion to $6.4 billion.

The collapse reflects what Treasurer Josh Frydenberg called “the reality of where the economy is at”.

Business are closed, planned investment has been axed (non-mining business investment is expected to fall 19.5% this financial year after falling 9% last financial year), consumers are staying at home, and spending on housing is expected to fall 16% after falling 10%.

It has to be lived with

Most of this can’t be undone. Nor can it be offset by increasing tax rates or cutting government spending. As Finance Minister Mathias Cormann noted, that would shrink private spending further.

Net government debt, which was expected to be close to zero last financial year (0.4% of GDP) instead blew out to 24.6% of GDP and is expected to blow out to 35.7% this financial year.

The only safe way to bring it down is to ramp it up as much as is needed to ensure the economy recovers.

As Cormann put it,

the way to get on top of this debt is by growing the economy more strongly and creating more opportunity for Australians to get ahead, get into jobs, better paying jobs and get ahead, because stronger growth leads to more revenue and lower welfare payments and that is the way that we can go back to where we were

It has worked before. Australian government debt blew out to more than 100% of GDP during the second world war but then shrunk year by year in relation to GDP in the economic growth that followed.

Debt didn’t shrink in absolute terms, it shrank in relation to the government’s ability to handle it, and that’s what will happen again if economic growth can be reignited.

The government has been borrowing at annual interest rates of less than 1%. If the economy can grow by more than 1% per year, which historically it has, the payments will eat into less and less of the budget.

Finances are holding up

Next week the government’s office of financial management launches an audacious bid to lock in ultra-low borrowing rates until the middle of the century.

It will issue an unusually long-dated bond (lone) lasting 31 years. It won’t need to be repaid until 2051.

It has appointed five lead managers to sell it – ANZ, Commonwealth Bank, Deutsche Bank, JP Morgan Securities and UBS – in the hope that it can bed down low annual interest payments for a generation.

In the unlikely event the market doesn’t support it, the Reserve Bank has undertaken to step in and use created money to buy as many bonds as are needed to keep the rates low. Since it made the commitment in March it hasn’t needed to spend much at all. Government bond issues have been up to five times oversubscribed by investors desperate for the certainty of a government revenue stream and uneasy about riskier alternatives.

Best case

The forecasts for what will be required need to be seen as best case. The budget deficit is believed to have blown out from an expectation of around zero to $85.8 billion in 2019-20 and $184.5 billion in 2020-21.

Those forecasts have the unemployment rate at 8.75% by this time next year, by which time the economy will have shrunk 2.5%

Economic activity slipped 0.3% in the March quarter, is believed to have shrank 7% in the June quarter, is expected to climb back 1.5% in the September quarter and to claw its way back after that.




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That’s if restrictions aren’t reimposed, state borders are reopened and there are no further “second waves” of infections.

The treasury says its estimates take into account the effect of the Melbourne outbreak on consumer confidence and activity in the rest of Australia, but assume the outbreak does not spread.

In this way the numbers are a best case. The section in the document on risks to the outlook was unusually short – only three paragraphs.

It says the pandemic is still evolving and the outlook remains highly uncertain.

It will present a fuller assessment of the risks and four years of projections in the formal budget on October 6.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.

Budget deficit to hit $184.5B this financial year, unemployment to peak at 9.25% in December: economic statement



Lukas Coch/AAP

Michelle Grattan, University of Canberra

Treasurer Josh Frydenberg has announced massive budget deficits of $85.8 billion for the just-finished 2019-2020 financial year and $184.5 billion projected for 2020-2021.

Growth is set to be negative for last financial year and the current one. The government’s economic statement forecasts cuts of 0.25% in GDP in 2019-20 and a reduction of 2.5% in the current financial year.

Unemployment is expected to peak at about 9.25% in the December quarter.

Employment is forecast to fall by 4.4% in 2019-20, but recover by 1% in 2020-21.

The unemployment rate averaged 7% in the June quarter 2020, and is forecast to be 8.75% for the June 2021.

A table containing 'major economic parametres'

Treasury

The statement shows debt levels rising markedly in the wake of the pandemic, although the government emphasises Australia still has a low level of government debt-to-GDP compared to other countries.

Net debt is estimated to be $488.2 billion in June this year. This 24.6% of GDP.

Debt is then forecast to increase to $677.1 billion at June 30 next year, which would be a rise to 35.7% of GDP.

As the government looks to the recovery, Treasurer Josh Frydenberg said: “Our economy has taken a big hit. And there are many challenges we confront. We can see the mountain ahead and Australia begins the climb. We must remain strong. We must draw strength from our resilience as a nation and a people.”

Finance Minister Mathias Cormann said “We are in a better, stronger, more resilient position than most of other countries around the world.”

Defending the high debt level, Cormann asked “what was the alternative?”

The government admits the outlook is unpredictable, and revised numbers will come in the October budget.

“The economic and fiscal outlook remains highly uncertain,” the statement says.

One massive uncertainty is what happens in Victoria. The statement takes into account the present six weeks lockdown but this could be extended if the state does not soon get on top of the second wave of the virus.

The Victorian government on Thursday reported 403 new cases, and five deaths including a man in his 50s. There were 19 new cases in NSW.

The statement says GDP is forecast to have fallen by 7% in the June quarter, but will grow in the September quarter by 1.5%. In the calendar year of 2020, GDP is expected to fall 3.75%, but grow in calendar year 2021 by 2.5%.

Earlier this week, the government announced an extension of JobKeeper and the Coronavirus Supplement that goes with JobSeeker, although both will be scaled back after September.

Despite the government announcing these increases in support, the statement stressed the goverment’s economic response to the crisis was “temporary and targeted” with measures designed to support the economy without undermining the structural integrity of the budget.

a table containing 'budget aggregates

Treasury

Revenue is taking a major knock from the fallout of the pandemic.

Total receipts, including earnings of the Future Fund, have fallen by $33 billion in 2019-20 and $61.1 billion in 2020-21 since the budget update last December.

Since that update, tax receipts have been revised down by $31.7 billion for the just completed financial year, and $63.9 billion for the current financial year.




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“The outlook for tax receipts remains uncertain. This reflects both uncertainty around the economic outlook, and how this interacts with structural and administrative features of the tax system, such as the ability of taxpayers to carry forward losses to offset future income,” the statement says.

It says payments have increased by $187.5 billion over two years from the budget update.

They are expected to reach $550 billion for the 2019-20 year, which is 27.7% of GDP, and rise to $640 billion in the current financial year, representing 33.8% of GDP.

“This increase is as a result of the Government’s targeted responses to the COVID-19 pandemic to support Australia’s economy, as well as the impact of automatic stabilisers including the payment of unemployment benefits,” the statement says.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.

Latest $84 million cuts rip the heart out of the ABC, and our democracy



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Alexandra Wake, RMIT University and Michael Ward, University of Sydney

At the height of the coronavirus emergency, and on the back of devastating bushfires, Australia’s much awarded and trusted national broadcaster has again been forced to make major cuts to staff, services and programs. It is doing so to offset the latest $84 million budget shortfall as a result of successive cuts from the Coalition government.

In the latest cuts, wrapped up as part of the national broadcaster’s five-year plan,

  • 250 staff will lose their jobs

  • the major 7:45am news bulletin on local radio has been axed

  • ABC Life has lost staff but somehow expanded to become ABC Local

  • independent screen production has been cut by $5 million

  • ABC News Channel programming is still being reviewed.

Even the travel budget, which allows journalists and storytellers to get to places not accessible by others, has been cut by 25%.

These are just the latest in a long list of axed services, and come off the back of the federal government’s indexation freeze.

Announced in 2018, that freeze reduced the ABC budget by $84 million over three years and resulted in an ongoing reduction of $41 million per annum from 2022.




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The indexation freeze is part of ongoing reductions to ABC funding that total $783 million since 2014. In an email to staff, Managing Director David Anderson said the cut to the ABC in real terms means operational funding will be more than 10% lower in 2021–22 than it was in 2013.

To be fair, the way in which the ABC executive has chosen to execute the latest cuts does make some sense, pivoting more towards digital and on-demand services. Right now, the commuting audience that has long listened to the 7:45am bulletin is clearly changing habits. However, with widespread closures of newspapers across the nation, the need for independent and trusted news in depth, that is not online has never been more important.

ABC Life is a particular loss. It has built an extremely diverse reporting team, reaching new audiences, and winning over many ABC supporters and others who were initially sceptical. The work they produced certainly wasn’t the type commercial operators would create.

Clearly the coronavirus pandemic has slashed Australia’s commercial media advertising revenues. But the problems in the media are a result of years of globalisation, platform convergence and audience fragmentation. In such a situation, Australia’s public broadcasters should be part of the solution for ensuring a diverse, vibrant media sector. Instead, it continues to be subject to ongoing budget cuts.

Moreover, at a time when the public really cannot afford to be getting their news from Facebook or other social media outlets, cutting 250 people who contribute to some of Australia’s most reliable and quality journalism and storytelling – and literally saving lives during the bushfires – appear to be hopelessly shortsighted.

The latest Digital News Report 2020 clearly showed the ABC is the media outlet Australians trust the most.

These latest cuts join a long list of axed services in the past seven years. They include

While not everyone will miss every program or service that has gone, and even with its occasional missteps, there is no doubt the ABC is the envy of the liberal democracies that do not have publicly funded assets, particularly the United States.

Has the ABC’s budget been increased?

Communications Minister Paul Fletcher has continued to suggest the funding cuts are not real, are sustainable without service reductions for Australians, and has claimed the ABC has received “increased funding”.

The minister’s comments are not consistent with data we published last year based on the government’s own annual budget statements and the reality of the ongoing situation for the ABC.




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The government argues base or departmental funding is higher in 2020-21 than it was in 2013-14. The relevant budget papers do show that in 2013-14, the ABC was allocated $865 million for “general operational activities”. The most recent budget statement shows this has increased to $878 million in 2020-21.

So how can it be the ABC budget shows this increase when we have been arguing they are facing an overall cut?

First, we noted last year the complexity of the budget process, which means, for example, the reinstatement of short-term funding can be counted as extra funds, or the ending of such funds, while reducing an agency budget, will not appear as a reduction in allocation.

Second, the 2020-21 ABC budget reflects the inclusion of indexation for increases in CPI-related costs between 2013-14 and 2018-19. This is the funding that is being halted until at least 2021-22.

So despite statements to the contrary, nothing can change the fact the ABC has suffered massive cuts in recent years. The data published last year showed the reality of the ongoing situation for the ABC, with an annual cost to its budget in 2020-21 of $116 million. As the table below shows, taking into account actual budget allocations and adding the items cut, frozen or otherwise reduced, the ABC should have funding of approximately $1.181 billion in 2020-21, not the $1.065 billion it will receive.

It is against this background the latest funding freeze, due to a failure to meet the impact of inflation costs, occurs. While it doesn’t sound like a lot, the three year impact is $84 million, and has resulted in the cuts announced today.

But more importantly, these ongoing cuts represent an attack by the federal government on the broadcaster, its role in democracy, and in keeping Australians safe, informed and entertained.The Conversation

Alexandra Wake, Program Manager, Journalism, RMIT University and Michael Ward, PhD candidate, University of Sydney

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

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.


CC BY-ND

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.




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


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

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

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

3. The government is at odds with the Reserve Bank

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

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

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

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




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


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

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

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

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

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

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




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


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

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

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

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



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

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

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

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

Where does it leave us?

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

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

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

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

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

Surplus before spending. Frydenberg’s risky MYEFO strategy


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

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

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



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

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

Uncertainties abound

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

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

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

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

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

Housing versus households

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

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

The assumption on households

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

seems optimistic.

However the treasury acknowledges

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

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

Surplus before spending

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

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

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

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



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

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

Surplus for the sake of surplus

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

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




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


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

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



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

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

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


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

There are several gaps in the estimates of spending.

Likely costs left out

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

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




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


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

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

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

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

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

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

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

Lower growth, tiny surplus in MYEFO budget update


Michelle Grattan, University of Canberra

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

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

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

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

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



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

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

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

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

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

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

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

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

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




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


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

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

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



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

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

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

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

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

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




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


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

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

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

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

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

Michelle Grattan, Professorial Fellow, University of Canberra

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