Grattan on Friday: Is that the Coalition debt truck parked just past the election?


Michelle Grattan, University of CanberraIt was a small thing but a revealing moment during Scott Morrison’s Wednesday interview on Nine’s Today show.

Presenter Karl Stefanovic noticed Morrison seemed out of sorts, despite the government having delivered the night before a benign budget that was well received and likely to be popular.

“It is a very big budget. Josh Frydenberg had a very big smile on his face this morning. I thought you might be happier this morning, PM. Everything OK?” Stefanovic asked.

Morrison said he was “fine”. He went on: “I’ve got to tell you, Karl, the reason is this.

“I know, look, budgets are big events and that’s all fine, but I just know the fight we’re in – and the fight we’re in, and me as prime minister I’m in, is to be protecting Australians at this incredibly difficult time.

“I am very cognisant of how big those challenges are. It is with me every second of every day.”

There are a few points to be made here.




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Frydenberg spends the budget bounty to drive unemployment down to new lows


First, the government is using the budget to talk up the current threat of the pandemic to an extent it hadn’t been recently.

Morrison, in particular, had previously been anxious to emphasise the return to as much normality as possible. Now it’s more about lurking dangers.

These provide a justification for the government’s mega spending in the budget. (“Did anyone miss out? Perhaps only the beekeepers of Australia,” quipped one cynical Liberal backbencher.)

The language also indicates Morrison wants to do what state and territory leaders have done – use the pandemic to pave the path to electoral victory.

The other point highlighted by the Today exchange is that Morrison was looking somewhat ragged.

This was accentuated by the contrast with Treasurer Josh Frydenberg who, on the face of it, would have been under the greater stress.

Frydenberg’s performances in the week of his third budget were smooth and, whatever nerves he felt, he appeared unfazed.

The week reinforced the impression he is in the box seat eventually to reach the prime ministership (assuming the Coalition lasts in government).

Pre-budget, he and wife Amie were out for the cameras on a Sunday charity run in Canberra. Post-budget, his staff rang around backbenchers to ask if they’d like a picture with the treasurer.

In question time, Morrison found old problems returning to irritate him. He was pressed on the two internal inquiries into who in his office knew or did what in relation to the Brittany Higgins matter, and he had to say neither was concluded (one had been on hold before this week while the police dealt with their investigation of her rape allegation). Whatever the results of these inquiries, Morrison needs to get them cleared away as soon as possible. They are “barnacles”.

Morrison has been travelling a lot recently and may be tired (although those around him say he’s energised by being on the road). Or he may not be used to sharing the limelight. Or the endless round of everything may be just taking its toll.

Then there’s the challenge of explaining this Labor-lite budget to the hardliners in the Liberal base and among the right-wing commentariat.

The budget has made the opposition’s already formidable task of carving out room for itself more difficult, but it is also proving a hard swallow for those rusted on to the Coalition’s old “debt and deficit” preoccupation.




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View from The Hill: Frydenberg finds the money tree


Many of these critics will be reluctant to buy the proposition the big spending must continue because the pandemic is a constant threat, given they’ve thought the threat was exaggerated in the first place.

The government could attempt to deal with these critics by saying it will “snap back” into tackling debt and deficit as quickly as possible.

But facing an election soon, it doesn’t want to do this, for obvious reasons.

In the budget the timing of the next stage, fiscal consolidation, is imprecise.

The budget papers say: “Progress on the economic recovery will be reviewed at each Budget update. This phase of the Strategy will remain in place until the economic recovery is secure and the unemployment rate is back to pre-crisis levels or lower.”

While some commentary is focused on how the Coalition has done a dramatic U-turn from its old debt-and-deficit rhetoric, there’s an opportunity for Labor to run a major scare campaign claiming it’s not a U-turn at all – that the debt truck is just in the parking lot.

Remember, it can say, when Tony Abbott promised no cuts to health, education and even the ABC – and recall what happened. This time, so the argument runs, cuts and savings will be Coalition priorities again as soon as it has secured the votes.

Morrison and Frydenberg this week have been invoking John Howard’s advice, given to Frydenberg in the early days of the pandemic, that “in times of crisis there are no ideological constraints”.

The question is whether the Liberals have softened their ideology, or just put it in storage during the crisis.

While there can be no definite answer, Tim Colebatch, writing in Inside Story. makes a strong case that the Coalition “won’t dump its political tactic of branding itself as the ‘fiscally responsible’ party and Labor as the party standing for deficits. This [budget] is a short-term tack that will be reversed after the election.

“Of course no government promising $503 billion of deficits in five years can be called fiscally responsible, so it will make cuts then to reclaim the brand,” Colebatch says.

Morrison and Frydenberg are both pragmatists rather than ideologues. But opinions in the wider party are also relevant, as Malcolm Turnbull found on the climate issue.

Frydenberg has pledged there will not be “any sharp pivots towards ‘austerity’”.

Nevertheless, there must be a budgetary reset at some point. And whether a pivot is sharp or not, and what amounts to “austerity” depend in part on whether you are one of the losers.




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Politics with Michelle Grattan: Simon Birmingham and Jim Chalmers on a big spending budget


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.

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



Shutterstock

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.






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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.

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.




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


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


“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.

Vital Signs. Do deficits matter any more?


Richard Holden, UNSW

It seems that whoever wins the White House in 2020, the US federal deficit will blow up.

President Donald Trump has already signed into law massive tax cuts that are estimated to expand the deficit by at least US$1.5 trillion over the next decade.

The list of Democrats seeking their party’s presidential nomination has moved into double digits, but there aren’t many fiscal conservatives among them.

Bernie Sanders looks set to try and outdo his own 2016 campaign and its big-spending proposals that include “Medicare for all” and free public tertiary education. Other leading contenders such as senators Elizabeth Warren and Kamala Harris have announced similar plans.

And the rock star du jour of US progressive politics, Alexandria Ocasio-Cortez (or @AOC as the cool kids say), has gone even further with her “Green New Deal” — a grab bag of gigantic spending projects being presented as an environmental policy. They are estimated to cost between US$51 trillion and US$93 trillion over a decade.

The big question amid all this red ink is: does it matter?

Red ink for a return

There have generally been two schools of thought on this. On the conservative side, elected representatives and commentators have emphasised that higher spending eventually results in higher interest rates as borrowers compensate for risk, and higher taxes as a result. In short, there’s no free lunch.

The more liberal position on deficits is that it depends what the government spends the money on. Economic stimulus during a downturn, such as during the Great Recession of 2008, is a good idea provided that it is temporary. And even in ordinary economic times, there may be large investments in physical and social infrastructure that have high returns, far exceeding the government’s cost of borrowing.

If spending on early-childhood education has double-digit rates of return and the government can borrow long-term at 3%, these investments are a no-brainer.

Notice the logic in that argument. The returns need to be carefully assessed and compared to the actual government cost of borrowing.

Not red ink without reason

Various commentators on the political left – explified by Paul Krugman of the New York Times – argue that this logic is licence for serious government spending on infrastructure, but with an eye to the overall size of the spending. As Krugman puts it

Am I saying that Democrats should completely ignore budget deficits? No; if and when they’re ready to move on things like some form of Medicare for All, the sums will be so large that asking how they’ll be paid for will be crucial.

I have said repeatedly in this column and elsewhere that the same is true in Australia. We can borrow cheaply, there are high-return government investments to be made, and we are suffering from “secular stagnation” – a protracted period of lower growth.

But that doesn’t mean that @AOC’s socialist (her own term) wish list can be funded in a consequence-free way just because the US prints its own currency.

Accompanying the @AOC-Sanders-Warren agenda is a cottage industry of “heterodox” economists like Stephanie Kelton who say deficits don’t matter for countries that issue their own currencies. Why? Because they can always print more. They risk hyperinflation if they do enough of it, but heterodox economists argue that’s unlikely.

Except in Weimar Germany. And Zimbabwe. And Venezuela.

The recent tragedy in Venezuela is instructive. When the crude oil price collapsed in 2014 the government was left with a huge deficit, but still needed to pay the salaries of government workers and the military. So it printed money. With more money in the economy, but no increase in the number of things available to buy, the price of goods climbed.

That meant the government had to print still more money for the workers whose incomes bought less, which led to more inflation, more money printing, even higher prices, and pretty quickly hyperinflation of over 1,200,000%.

Just because Australia has avoided hyperinflation…

Economists who promote the idea of large deficits point out that that hasn’t happened in Australia or the United States, but one of the reasons for that is that they have avoided really large deficits.

After the next US election, who knows.

In a timely warning, Federal Reserve Chair Jerome Powell told the US Senate this week: “the idea that deficits don’t matter for countries that can borrow in their own currencies I think is just wrong”.

More importantly, the idea that deficits need not matter is dangerous.

It is a proposition with zero appeal among mainstream economists, but populist politicians are drawn to it and are increasingly keen to sell it to the public.

Let’s be clear. We should invest more in education, health, high-speed rail and child care if the numbers stack up, even if it means increasing deficits. But deficits do matter. We would be unwise to think we could do it without limit.




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Now is the time to plan how to fight the next recession


The Conversation


Richard Holden, Professor of Economics, UNSW

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

View from The Hill: Morrison’s authority deficit on show at home and abroad


Michelle Grattan, University of Canberra

When a prime minister has diminished authority, people don’t bother so
much with the niceties.

Scott Morrison admitted on Wednesday that Julia Banks had not given
him notice of her intention to announce in parliament at midday on
Tuesday that she was jumping ship. Asked by Alan Jones, “Did
she tell you?” Morrison said, “No she didn’t and of course that’s
disappointing”.

This was surprising in itself – it would have been normal courtesy to
inform the PM.

In other circumstances, however, it mightn’t have mattered – and
Morrison has a thick skin.

But to have his 11:45am news conference – which was called to put out
the date of next year’s budget – hijacked by word filtering through of
Banks’ bombshell was highly embarrassing.

It said everything about a prime minister not in touch with what was
going on in his own ranks.

Then on Wednesday it was revealed that Morrison does not have a bilateral meeting with President Trump scheduled when they’re at the G20, for which he departs on Thursday.

The official explanation from the Prime Minister’s Office was lame. A
spokesman said: “The PM will no doubt have the opportunity to touch
base [with Trump] during the G20 meetings. Given we have no pressing
bilateral issues at the moment and the PM had an extensive opportunity
with VP Pence at APEC, there is no pressing need for a formal
bilateral at this stage. The relationship is being well managed.”

There is speculation of a so-called “pull aside” – an informal meeting on the fly, but the impression is that the Americans are treating the Morrison government somewhat dismissively. It seems rather galling after all the recent talk of the government’s pivot to the Pacific and co-operation with the US in the Manus naval base.

A meeting with the Vice-President is no substitute for one with the President.

The seeming brush off can be put down to what might be expected from a
capricious president. But it was quickly seen by some as a judgement by the Americans that Morrison won’t be in office very long.

Meanwhile the Liberal party meltdown has caused Treasurer Josh
Frydenberg, who is deputy Liberal leader, to drop plans to accompany
Morrison to the G20. His place will be taken by Finance Minister
Mathias Cormann.

Pressed in Parliament about his change of plans Frydenberg could only dodge.

When Frydenberg won the deputy leadership (by an overwhelming vote,
defeating Greg Hunt and Steve Ciobo) in the August mayhem, he was
regarded as a consensus figure who commands considerable respect
across the party. He will need to draw on all that respect in the next
few months.

As if he didn’t have a big enough job getting on top of his Treasury
portfolio in the run up to the December budget update and
then an early budget, Frydenberg is finding himself strongly tested
in the deputy role, which becomes especially important in an unsettled
and fractious party.

The Liberals this week are shell-shocked and unnerved after the
Victorian rout and both the fact and implications of Banks’ desertion.

The parliamentary party is flakey on many fronts. Turnbull supporters seem to have become angrier as time has gone on. Continued talk about the Liberals’ “women problem” is undermining the government’s efforts to appeal to female voters. High profile former Liberal deputy Julie Bishop is off the leash, with provocative comments on subjects ranging from energy policy to Home Affairs Minister Peter Dutton’s parliamentary eligibility.

The Dutton issue hangs menacingly over the government. If the
opposition can muster the numbers to have him referred to the High
Court, it would be seriously destabilising.

Dutton would not have to resign from parliament while the case was
heard but to have him remain on the frontbench (as Barnaby Joyce did)
would see the government distracted by a fresh crisis.

Despite the Coalition falling further into minority government with
the loss of Banks, the opposition hasn’t this week moved against
Dutton.

He is absent from parliament after injuring his arm and Labor
would prefer, for the sake of appearances, not to act in his absence.
More to the point, however, it does not yet have the numbers locked
in.

It needs six of the now seven crossbenchers, and whether they can be
corralled appears to be a day-to-day proposition. Banks and Kerryn
Phelps, sworn in on Monday, on Tuesday discussed Dutton’s eligibility
in a meeting with Attorney-General Christian Porter.

The government has five more sitting days to struggle through before
parliament finishes for the year. It has produced a parliamentary
calendar for next year, with its April 2 budget, that provides for
only some 10 sitting days before the election is called for May 11 or
18. There are no sittings at all in March.

The minimal sittings speak volumes about a government that lacks the
numbers in the House (its position could even worsen, if rightwinger
Craig Kelly, who faces losing preselection, defected to the crossbench) and usually is at its chaotic worst when parliament is in
session.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.

Battle won. Our budget woes are behind us


Warren Hogan, University of Technology Sydney

The government’s final budget outcome for 2017-18 is a deficit of A$10.1 billion. That’s an extraordinary A$8.1 lower than the May estimate just months ago, and more than A$19 billion lower than when the 2017-18 budget was originally put together the previous May.

The deficit, a mere 0.6% of gross domestic product, is the smallest in the run of ten that began in the global financial crisis of 2008-09.

The result tells us something important about the Australian economy ten years on from the crisis.




Read more:
Budget deficit comes in at $10.1 billion, in boost for early
return to surplus



First, it’s performing better than expected.

Not only is it growing faster than most forecasters expected, it has been producing more jobs and less inflation than such growth would have produced in the past.

This has allowed much low interest rates than would have once been the case and supported investment across the economy.

Back to normal

So good is the government’s financial position that the heavy lifting has been all but been done.

A return to budget balance is entirely possible this financial year.

Indeed, for most purposes the budget is already balanced.

Federal government revenues and expenses are each about 25% of GDP. Given the complexity and natural variability of the budget and the economy, an outcome within 0.5% of GDP from balance is basically in balance.

The fact that two-thirds of the originally projected 2017-18 budget deficit has vanished due to “forecast error” makes the point.

Fiscal policy is effectively back to normal, with plenty of spending power in reserve should the economy deteriorate.

Better confidence, for now

Solid government finances will support confidence, not least among households that are used to worrying about large deficits boosting future tax burdens or eating away at government services.

That isn’t to say that everything is baked in.

The economy and government finances can go the other way. But the task of budget repair, which started years ago under Treasurer Wayne Swan, is virtually complete. Any further substantive budget tightening will produce growing surpluses rather than shrinking deficits.

More profits, less welfare

Over the past 15 months the big improvement in the government’s financial position has come in two phases.

The first surprise was a revenue windfall received last summer. This was mostly because of higher commodity prices and the boost this gave to corporate profits.

Corporate income tax receipts are 8.7% higher than originally projected, resulting in an almost A$7 billion windfall for the budget. This represents about a third of the A$19 billion budget improvement.




Read more:
Morrison’s return to surplus built on the back of higher tax – Parliamentary Budget Office


This was well known by the time of the May budget and was responsible for most of the improvement in the budget bottom line between May 2017 and May 2018.

The next phase was a substantial drop in government payments near the end of the financial year just concluded.

This was not factored into the May 2018 budget. Most of it is made up of lower welfare and social security payments, partly in response to the stronger economy, and partly due to much lower than anticipated spending on disability assistance.

Disability-related payments, both in terms of payments to states and National
Disability Insurance Scheme spending, are about A$3 billion lower than expected in May last year.

And improvement all around

The rest of the good news is spread across the board. Income tax receipts are higher due to stronger employment growth. The government has collected more duties and excise than it expected. Pension payments have been a little lower than expected, as have infrastructure-related payments to the states.

Because the presentation of the final budget outcomes does not come with any formal update of budget forecasts, the treasurer and his finance minister had very little to say about the government’s fiscal strategy other than to reinforce that its jobs, growth and budget repair strategy is on track.

They’ll say more in the midyear economic and fiscal update (also called MYEFO) in December.

Question time

Ministers Frydenberg and Cormann were asked a number of questions at their Tuesday press conference that they chose not to answer properly.

I thought I would take the liberty of doing it for them.

REPORTER: So does this outcome increase the likelihood that you will return to surplus sooner than predicted?

MY ANSWER: It most certainly it does. The better result is mainly due to a stronger-than-expected economy. At the time of the budget in May 2017 the government had forecast economic growth of 2.75% for the 2017-18 financial year. As it turned out, growth came in at 2.9% and we are taking strong momentum into 2018-19.

It won’t take much to nudge the budget into surplus this year, that is, a year earlier than forecast. Simply factoring in the better baseline performance of the budget from last year should produce a deficit for 2018-19 of around A$5-8 billion. If the recent trends of higher commodity prices, a lower Australian dollar and stronger domestic economic activity persist, as they appear to be doing, then we will easily get a surplus this year.

Complicating the picture is the political cycle. With a government well behind in the polls and an election due in the next six months or so, it will be hard to resist the temptation to spend some of this recent budget improvement.

It will become a political judgment for the new prime minister and his cabinet. Is the political benefit of presenting a budget surplus greater than the electoral impact of new spending measures?

REPORTER: And do you continue to adhere to the budget discipline that all new spending must be accompanied by savings in equal amount?

MY ANSWER: The government should be commended for keeping real spending growth to just 1.9%, the lowest in a generation. It is projecting it to fall even further, to around 1.6% over the next few years. With a tough election contest ahead, my guess is that we may see some slippage on government spending.

REPORTER: You are out by 40% to 45% on the deficit you published in May this year. That’s a wild variation in just 6 weeks. Should Treasury be doing better than that, basically?

MY ANSWER: Revenues total just under A$450 billion and expenses total just over $450 billion. The deficit figure is the result of the calculation of the small difference between those two big numbers.

Rather than thinking about an A$8 billion miss on a A$18 billion deficit we should be thinking about A$8 billion on the $450 billion revenue and expense base.

Instead of a 40% variation, the real variation is less than 2%.

Given that the Treasury only had the March quarter national accounts at its disposal when pulling together the May Budget forecasts and considering the propensity of the Bureau of Statistics to revise the national accounts, the fact that the misses are less than 2% is actually pretty amazing.

The economy is complex and ever changing.

Economic forecasting is hard. Understanding the relationship between government revenues and an economy experiencing significant industrial structural change is far from a perfect science.The Conversation

Warren Hogan, Industry Professor, University of Technology Sydney

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

Budget deficit comes in at $10.1 billion, in boost for early return to surplus


File 20180925 85755 up06mj.jpg?ixlib=rb 1.1
Estimates out, but happy. Mathias Cormann and Josh Frydenberg announce the smallest deficit in a decade.
Mick Tsikas/AAP

Michelle Grattan, University of Canberra

The budget outcome for 2017-18 shows a deficit of A$10.1 billion –
dramatically less than expected in May, and just 0.6% of GDP.

In this year’s May budget, a mere four months ago, the outcome for the last financial year was forecast to be just over A$18 billion, already revised well down on the more than A$29 billion estimate in the 2017 budget.

The drivers of the better-than-anticipated result were stronger
revenue and lower spending than earlier expected.

Treasurer Josh Frydenberg and Finance Minister Mathias Corman said in
a statement: “At A$10.1 billion, just 0.6 per cent of gross domestic
product (GDP), the underlying cash deficit is the smallest in ten
years.

“Stronger economic growth and much stronger employment growth than
anticipated at the time of the 2017-18 budget have driven increases in
personal income tax and company tax receipts, with total receipts
$13.4 billion higher than expected at the time of the budget.

“Total payments were A$6.9 billion lower than forecast at budget time,
including as a result of lower welfare payments with more Australians
in paid work. Welfare dependency for working age Australians is now at
its lowest level in 25 years and in 2017-18, there were 90,000 fewer
working age Australians on welfare,” they said.

“Real GDP in 2017-18 was stronger than anticipated in the 2017-18 budget.”

Last week Standard & Poor’s ratings agency reaffirmed Australia’s
triple A credit
rating. Frydenberg said Australia was one of only 10 countries with a AAA
credit rating from the three major agencies.

He told a news conference that the budget outcome confirmed the budget
was on the path back to balance in 2019-20.

The mid-year budget update will come in December, with the revisions
at that time setting the scene for the run into the election a few
months later, with the government making economic and fiscal
management a key plank in its campaign.

Shadow treasurer Chris Bowen said the final budget outcome “shows the
deficit came in almost four times worse than forecast in the Liberal
Party’s first budget. This is after the Liberal Party’s massive cuts
to schools, hospitals and the pension.”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 update shaves growth and wage forecasts but is brighter about the deficit


Michelle Grattan, University of Canberra

The 2017-18 budget update shows an improvement in the deficit forecast for this financial year but predicts lower economic growth and a smaller increase in wages than was expected in the May budget.

The deficit for 2017-18 is now expected to come in at A$23.6 billion, an improvement of A$5.8 billion from the May forecast, according to the Mid-Year Economic and Fiscal Outlook released by Treasurer Scott Morrison and Finance Minister Mathias Cormann.

Growth for this financial year is forecast to be 2.5% compared with the budget’s 2.75%, reflecting recent lower-than-expected growth in household consumption.

Nevertheless Morrison and Cormann said Australia’s growth story “remains a compelling one, and although real GDP growth has been slightly tempered in 2017-18, the trajectory is upward”. Real GDP is forecast to grow at 3% in 2018-19, the same as the budget number.

Budget update on wages

The update notes that wage growth “remains low by historical standards in both the public and private sectors and has been more subdued than expected since budget”.

Wages are forecast to increase by 2.25% through the year to the June quarter 2018 and 2.75% through the year to the June quarter 2019.

This is 0.25 of a percentage point lower in both years compared with the budget – vindicating the scepticism that economists expressed about the budget forecast being too optimistic.

The flat wages situation reflects a serious political pressure point for the government, as many people struggle with high power prices and other squeezes on their cost of living.

“Wage growth is forecast to lift as the economy strengthens, inflation picks up and excess capacity in the labour market is reduced,” the update says.

Budget receipts have been revised upwards by about A$3.6 billion in 2017-18 and A$2.8 billion over the forward estimates compared with budget time – driven mainly by company tax and superannuation tax. The company tax forecasts reflect increased profitability and enforcement activity by the Australian Taxation Office.

But “over the forward estimates, lower forecasts for wages and unincorporated business income are expected to weigh on individuals’ income tax receipts,” the update says.

The half yearly revised numbers confirm that the budget is on track to have a surplus in 2020-21. The projected surplus of A$10.2 billion in that year is A$2.7 billion better than estimated in May.

Savings measures on education and welfare

The government has announced in the update a new welfare crackdown to save money and also an alternative higher education savings package after it could not pass its earlier proposals.

Savings of A$1.2 billion over four years will be reaped by broadening the criteria for waiting periods for new migrants before they can get various welfare benefits.

The changes will extend the present two-year waiting period for a range of payments, such as Newstart, to three years, and introduce a consistent new three-year waiting period to apply to a further number of benefits such as Family Tax Benefit and Paid Parental Leave.

Social Services Minister Christian Porter said the measures “will reinforce the foundational principle that Australians’ expectation of newly arrived migrants is that they contribute socially and economically for a reasonable period before having access to our nation’s generous welfare system”.

The higher education package includes a freeze on total Commonwealth Grant Scheme funding from January 1, set at 2017 levels, and a combined limit for all tuition fee assistance under all HELP and VET Student Loans.

The government will also pursue an alternative set of HELP repayment thresholds from July 1 next year, with a new minimum repayment threshold of A$45,000, higher than the A$42,000 in the original plan. At present the threshold is A$55,000.

Most of the new higher education package doesn’t have to be legislated, thus avoiding the Senate hurdle. The previous higher education package was set to save A$2.7 billion over the forward estimates; the new one saves A$2.1 billion.

Real growth in payments over the budget period is expected to be an annual average of 1.9%. Compared with the budget, nominal payments are lower in every year of the forward estimates.

The payment to GDP ratio is expected to fall to 24.9% of GDP by 2020, slightly above the 30 year historical average.

Morrison told a joint news conference with Cormann: “As we push into the new year, there is still more work to be done but we are on the right track.

“Jobs and growth will continue to be our mission and our focus. Helping the lives of the thousands of Australians, millions of Australians, and their families and returning the budget back to balance.”

Cormann said: “This is a good set of numbers in all of the circumstances.”

Shadow treasurer Chris Bowen said the government remained committed to increasing the tax paid by working Australians. He said there was no mention of personal tax cuts – which Malcolm Turnbull has foreshadowed – in the update. People only got a tax rise.

He condemned the revised higher education package, saying it would particularly hit those from a lower socioeconomic background.

The ConversationThe chair of Universities Australia, Professor Margaret Gardner, said the package would leave university funding “frozen in time”. She said the blow would be hardest in areas where university attainment was lowest, such as regional areas.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

The G20’s economic leadership deficit


Adam Triggs, Australian National University

Few have heard of the Baltic Dry Index. It measures the demand for bulk shipping carriers, used for international trade. It usually attracts little attention. But nine years ago this index had the undivided attention of the 20 most powerful leaders in the world.

It was when the global financial system was on a precipice. Stock markets were crashing. Credit markets were freezing. Rolling failures across financial institutions were shattering confidence. Unable to wait for monthly trade data, the Baltic Dry Index showed in real-time what many leaders feared: global trade and commerce were grinding to a halt.

Leaders faced the real prospect of another Great Depression. But they were determined not to make the mistakes of the past. They resisted a return to protectionism. They slashed interest rates and buttressed the International Monetary Fund and development banks. Over the next three years, they implemented US$5 trillion of co-ordinated fiscal stimulus, the largest in history.

That leadership is needed again today. The risks leaders face at the latest G20 meeting in Hamburg, Germany, might not be as serious as those the leaders who met in Washington faced back in 2008. But the risks are present, and leaders are disengaging with the G20’s ever-expanding agenda. They are more likely to use the G20 for cheap political point scoring than for advancing co-operation on critical global challenges.

Australia can play a role in helping the G20 to deliver this leadership.

Economic challenges

Protectionist measures are on the rise. Protectionist rhetoric is rising faster. The World Trade Organisation shows that the stock of trade-restrictive measures is growing, up 8.5% in the 12 months to May 2017 alone.

The G20’s growth agenda from 2014 is in tatters. The G20 committed to make G20 GDP 2.1% bigger by 2018. Instead, the International Monetary Fund forecasts it to fall short by almost 6%.

A strong, effective G20 is manifestly in the interests of the global community, but particularly of Australia. Three-quarters of our merchandise trade is with G20 countries. Our banks rely on them for wholesale funding. Our tourism sector relies on them for two-thirds of our tourists. Our universities rely on them for the vast majority of their students.

Critically, the G20 is an opportunity for Australia to have a say in how global governance will be shaped in the years ahead and to be a regional champion for Asia.

Through in-depth interviews with over 40 central bank governors, ministers and officials from G20 countries, my research suggests there are practical things the G20 could do to increase its relevance. Importantly, participants see Australia as a developed economy, closely integrated in Asia and which promotes the values of the open, rules-based international order. This makes Australia well placed to push for pragmatic changes to improve the G20 process, particularly having hosted the 2014 meeting.

My interviewees warned that the G20’s agenda is too heavily dictated by the host country. In 2011, when France hosted the meeting, President Nicolas Sarkozy asked UK Prime Minister David Cameron to produce a report on reforming global governance. This instantly elevated the issue and saw substantial involvement from other leaders. Australia should push for allowing more leaders to champion the issues important to them, rather than leaving it all to the host country.

Participants similarly suggested that the G20’s peer-review process is too weak. This is the process through which countries review and give advice on each other’s policies. It’s critical to the G20’s ability to generate peer pressure, which is how a non-binding forum influences policies.

But participants saw this process as being a “tick and flick” exercise, isolated to junior officials in G20 working groups. Australia should advocate to change this, elevating the peer-review process to the level of ministers, governors and leaders. This will allow the people who have political capital to raise substantive points with one another.

For the G20 to demonstrate global leadership, participants suggest that it needs a genuine agenda for growth, with a stronger focus on making growth more inclusive. The OECD has some suggestions for this, such as investment in infrastructure, education and microeconomic reforms that lift workforce participation and create new opportunities for quality investment. The IMF shows that GDP gains can be 25% larger if structural reforms like this are co-ordinated between countries.

Participants also wanted progress on trade but warned that reaching agreement has been difficult. Recent research suggests the G20 should seek to promote consistency between the plethora of global, regional and bilateral trade agreements and develop a framework for how they can be scaled up into a global, WTO-led agreement.

The research shows that countries benefit most when trade liberalisation happens globally, but the “noodle bowl” of existing trade agreements is a nightmare for exporters to navigate. Australia, as a strong advocate for free trade, is well placed to show leadership on this issue.

Outcomes on trade are also vital for inclusive growth. Research shows that the poor can afford 63% more goods and services because of free trade, more than twice the benefit that flows to the rich.

But talk is cheap. It’s easy to commit to reforms but only half of G20 commitments are being implemented.
Australia should push for a serious accountability framework to monitor implementation and identify the countries that fall short.

The ConversationA weakening of the G20 is a weakening of Australia’s international influence. Few countries have a greater incentive to put solutions on the table.

Adam Triggs, Research fellow, Australian National University

This article was originally published on The Conversation. Read the original article.