With costs approaching $100 billion, the fires are Australia’s costliest natural disaster


Paul Read, Monash University and Richard Denniss, Crawford School of Public Policy, Australian National University

It’s hard to estimate the eventual economic cost of Australia’s 2019-20 megafires, partly because they are still underway, and partly because it is hard to know the cost to attribute to deaths and the decimation of species and habitats, but it is easy to get an idea of its significance – the cost will be unprecedented.

The deadliest bushfires in the past 200 years took place in 1851, then 1939, then 1983, 2009, now 2019-20. The years between them are shrinking rapidly. Only a remote grassfire in central Australia in 1974-75 rivalled them in terms of size, although not in biomass burnt or loss of life.

The term “megafire” is a new one, defined in the early 2000s to help describe disturbing new wildfires emerging in the United States – massive blazes, usually above 400,000 hectares, often joining up, that create more than usual destruction to life and property.




Read more:
Firestorms and flaming tornadoes: how bushfires create their own ferocious weather systems


Australia’s current fires dwarf the US fires that inspired the term.

They are 25 times the size of Australia’s deadliest bushfires, the 2009 Black Saturday fires in Victoria that directly killed 173 people, and so large and intense that they create their own weather in which winds throw embers 30 kilometres or more ahead of the front and pyro-cumulus clouds produce dry lightning that ignites new fires.

The Black Saturday fires burnt 430,000 hectares. The current fires have killed fewer people but have so far burnt 10.7 million hectares – an area the size of South Korea, or Scotland and Wales combined.

There are easy to measure costs…

The federal government has promised to put at least A$2 billion into a National Bushfire Recovery Fund, which is roughly the size of the first estimate of the cost of the fires calculated by Terry Rawnsley of SGS Economics and Planning.

He put the cost at somewhere between A$1.5 and $2.5 billion, using his firm’s modelling of the cost of the NSW Tathra fires in March 2018 as a base.

It’s the total of the lost income from farm production, tourism and the like.

It is possible to get an idea of wider costs using the findings of the 2009 Victorian Bushfires Royal Commission.


Final Report, 2019 Victorian Bushfires Royal Commission

It came up with an estimate for tangible costs of A$4.369 billion, which after inflation would be about $5 billion in today’s dollars.

…and harder-to-measure costs

Tangible costs are hose easily measured including the cost of replacing things such as destroyed homes, contents and vehicles.

They also include the human lives lost, which were valued at A$3.7 million per life (2009 dollars) in accordance with a Commonwealth standard.

The measure didn’t include the effect of injuries and shortened lives due to smoke-related stroke and cardiovascular and lung diseases, or damage to species and habitats, the loss of livestock, grain and feed, crops, orchards and national and local parks.

Also excluded were “inangibles”, among them the social costs of mental health problems and unemployment and increases in suicide, substance abuse, relationship breakdowns and domestic violence.




Read more:
Disaster recovery from Australia’s fires will be a marathon, not a sprint


The cost of inangibles can peak years after a disaster and continue to take tolls for decades, if not generations.

One attempt to estimate the cost of intangibles was made by Deloitte Access Economics, in work for the Australian Business Roundtable for Disaster Resilience & Safer Communities.

Deloitte put the tangible costs of the Black Saturday fires at A$3.1 billion in 2015 dollars and the intangible costs at more than that again: A$3.9 billion, producing a total of A$7 billion, which would be A$7.6 billion in today’s dollars.

Black Saturday is a staring point

2009 Victoria Black Saturday bushfires.
ANDREW BROWNBILL/AAP

This season’s megafires are, so far, less costly than the 2009 Victorian fires in terms of human life, roughly on par in terms of lost homes, and less costly for other structures.

But given that considerably more land has been burnt we can expect other costs to eclipse those of Black Saturday.

As of today, 25 times as much land has been burnt.

Scaling up the royal commission’s Black Saturday figures for the size of the fire and scaling them down for the fewer deaths and other things that shouldn’t be scaled up produces an estimate of tangible costs of A$103 billion in today’s dollars.

The Deloitte Access Economics ratio of intangible to tangible costs suggests a total for both types of costs of A$230 billion.

As it happens the tangible costs estimate is close to an estimate of A$100 billion prepared using methods by University of Queensland economist John Quiggin.




Read more:
We know bushfire smoke affects our health, but the long-term consequences are hazy


The reality won’t be clear for some time.

There are several weeks of fire season remaining, and we are yet to reach the usual peak season for Victoria, which is in the first week of February.

What we can safely say, with weeks left to go, is that these fires are by far Australia’s costliest natural disaster.The Conversation

Paul Read, Climate Criminologist & Senior Instructor/Lecturer, Faculty of Medicine, Monash University and Richard Denniss, Adjunct Professor, Crawford School of Public Policy, Australian National University

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

Take care when examining the economic impact of fires. GDP doesn’t tell the full story



It is possible to calculate the impact impact of fires, but not using GDP.
Shutterstock/Andrew Brownbilll/AAP

Janine Dixon, Victoria University

Estimates of the economic damage caused by the bushfires are rolling in, some of them big and some unprecedented, as is the scale of the fires themselves.

These types of estimates will be refined and used to make – or break – the case for programs to limit the impact of similar disasters in the future. Some will be used to make a case for – or against – action on climate change.

But it’s important they not be done using the conventional measure of gross domestic product (GDP).

GDP measures everything produced in any given period.

It is a good enough measure of material welfare when used to measure the impact of a tourist event or a new mine or factory or something like the national broadband network, but it can be misleading – sometimes grossly misleading – when used to measure the economic impact of a catastrophe or natural disaster.




Read more:
Beyond GDP: are there better ways to measure well-being?


That’s because it measures the positives brought about the recovery from disasters but leaves out some of the negatives caused by the destruction.

For example:

  • building a new house has a positive impact on GDP, even if the old house was burnt down

  • a military evacuation has a positive impact on GDP, even though the circumstances that make it necessary are life-threatening and traumatic

  • bushfires stimulate GDP by creating more demand for health services, even as the victims suffer from smoke inhalation, burns or post-traumatic stress disorder.

It is possible to get at the full story

Economic modelling pioneered in Australia, and used to estimate the impact of terrorism and epidemics makes it possible to prepare measures of welfare that take account of the costs of disasters.

Among the immediate costs in the first months after a bushfire disaster would be:

  • the direct cost of fire-fighting

  • the cost of temporarily relocating residents

  • health costs, such as treatment of burns and respiratory illnesses

  • loss of work days associated with firefighting, injuries, illnesses, displacement and loss of life

  • a downgrading of consumer confidence

  • destruction of assets including homes, farms, businesses and natural resources and the associated disruption of economic activity including tourism, agriculture and housing

  • the cost of replacing or rebuilding these assets

Longer term impacts would derive from:

  • health problems such as post-traumatic stress disorder leading to negative impacts on quality of life and labour supply

  • long term damage to ecosystems, including contamination of water, and extinction or severe loss of animal species including those necessary to agricultural production, such as bees

  • reputational damage leading to possible permanent downgrading of tourism activity in affected regions and in Australia more broadly

  • potential ongoing reluctance to invest in Australia

  • potential increases in cost of living in bushfire prone regions due to increases in insurance costs.

It involves going beyond GDP

The longer term impacts of disasters on a nation’s GDP are clearly negative, deriving from a decline in productive capacity (labour, capital and natural resources) which unambiguously detracts from economic welfare.

In the immediate aftermath, expenditure on reconstruction of homes and other assets can add to GDP, but the funding of these activities (whether direct or through insurance) adds to debt and can drag on household consumption, either immediately or in the future. A related measure, Gross National Income (GNI) takes this into account and is generally a better measure of economic welfare.

Bushfire-induced health expenditure stimulates both GDP and GNI but detracts from welfare.




Read more:
With costs approaching $100 billion, the fires are Australia’s costliest natural disaster


Suffering from post-traumatic stress disorder, for example, can hardly be considered an improvement in standard of living.

To offset this inappropriate “good news”, it is possible to construct an index of leisure-adjusted GNI which takes into account the downgraded quality of leisure time.

As a starting point for such estimates, the prime minister’s department sets the statistical value of a year of life free of injury, disease and disability at A$182,000 (2014 dollars).

And it depends on where you are

Aggregated measures like GDP, GNI and leisure-adjusted GNI do not show the distribution of economic impact.

An event that strips a small amount from the incomes of everybody is different from one that decimates just a few regions, yet looks the same in a nationwide measure, so it is important that any economic analysis also looks at regional impacts.

The work is yet to be done, but it is safe to say that the conventional link between GDP and economic welfare (“more is better”) breaks down when assessing tragedies, particularly ones with profound regional impacts.

When campaigning to be US president Bobby Kennedy (John F Kennedy’s brother) said that GDP measures “everything… except that which makes life worthwhile”.

It’d be wise to bear that in mind when considering the policy response to the bushfires.




Read more:
Might the bushfire crisis be the turning point on climate politics Australian needs?


The Conversation


Janine Dixon, Economist at Centre of Policy Studies, Victoria University

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

A life of long weekends is alluring, but the shorter working day may be more practical



The pressure to fit family and personal commitments into the few hours between getting home and bedtime is arguably the main source of stress today.
http://www.shutterstock.com

Anthony Veal, University of Technology Sydney

When Microsoft gave its 2,300 employees in Japan five Fridays off in a row, it found productivity jumped 40%.

When financial services company Perpetual Guardian in New Zealand trialled eight Fridays off in a row, its 240 staff reported feeling more committed, stimulated and empowered.


Perpetual Guardian trial outcomes, as measured by researchers from the University of Auckland and Auckland University of Technology.
4dayweek.com, CC BY-SA



Read more:
Working four-day weeks for five days’ pay? Research shows it pays off


Around the world there’s renewed interest in reducing the standard working week.
But a question arises. Is instituting the four-day week, while retaining the eight-hour workday, the best way to reduce working hours?

Arguably, retaining the five-day week but cutting the working day to seven or six hours is a better way to go.

Shorter days, then weeks

History highlights some of the differences between the two options.

At the height of the Industrial Revolution, in the 1850s, a 12-hour working day and a six-day working week – 72 hours in total – was common.

Mass campaigns, vigorously opposed by business owners, emerged to reduce the length of the working day, initially from 12 hours to ten, then to eight.

Building workers in Victoria, Australia, were among the first in the world to secure an eight-hour day, in 1856. For most workers in most countries, though, it did not become standard until the first decades of the 20th century.

Workers commemorate achieving an eight-hour workday in Melbourne, Australia, circa 1900, The eight-hour day was widespread in Victoria by 1860 and was commemorated with the gazetting in 1879 of a public holiday known as Labour Day.
www.wikimedia.org

The campaign for shorter working days was based largely on worker fatigue and health and safety concerns. But it was also argued that working men needed time to read and study, and would be better husbands, fathers and citizens.

Reducing the length of the working week from six days came later in the 20th century.

First it was reduced to five-and-a-half days, then to five, resulting in the creation of “the weekend”. This occurred in most of the industrialised world from the 1940s to 1960s. In Australia the 40-hour five-day working week became the law of the land in 1948. These changes occurred despite two world wars and the Great Depression.

Stalled campaign

In the 1970s, campaigns for reduced working hours ground to a halt in most industrialised countries.

As more women have joined the paid workforce, however, the total workload (paid and unpaid) for the average family increased. This led to concerns about “time squeeze” and overwork.

The issue has re-emerged over the past decade or so from a range of interests, including feminism and environmentalism.




Read more:
It’s time to put the 15-hour work week back on the agenda


Back on the agenda

A key concern is still worker fatigue, both mental and physical. This is not just from paid work but also from the growing demands of family and social life in the 21st century. It arises on a daily, weekly, annual and lifetime basis.

We seek to recover from daily fatigue during sleep and daily leisure. Some residual fatigue nevertheless accumulates over the week, which we recover from over the weekend. Over longer periods we recover during public holidays (long weekends) and annual holidays and even, over a lifetime, during retirement.

So would we be better off working fewer hours a day or having a longer weekend?

Arguably it is the pressure to fit family and personal commitments into the few hours between getting home and bedtime that is the main source of today’s time-squeeze, particularly for families. This suggests the priority should be the shorter working day rather than the four-day week.




Read more:
The ethics of the 4 day work week. It’s not just about the hours


Sociologist Cynthia Negrey is among those who suggest reducing the length of the workday, especially to mesh with children’s school days, as part of the feminist enterprise to alleviate the “sense of daily time famine” she writes about in her 2012 book, Work Time: Conflict, Control, and Change.

Historical cautions

It’s worth bearing in mind the historical fall in the working week from 72 to 40 hours was achieved at a rate of only about 3.5 hours a decade. The biggest single step – from six to five-and-half days – was a reduction of 8% in working hours. Moving to a six-hour day or a four-day week would involve a reduction of about 20% in one step. It therefore seems practical to campaign for this in a number of stages.

We should also treat with caution results of one-off, short-term, single-company experiments with the four-day week. These typically occur in organisations with leadership and work cultures willing and able to experiment with the concept. Employees are likely to see themselves as “special” and may be conscious of the need to make the experiment work. Painless economy-wide application cannot be taken for granted.The Conversation

Anthony Veal, Adjunct Professor, Business School, University of Technology Sydney

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.



CC BY-ND

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.



CC BY-ND

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).



CC BY-ND

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.


CC BY-ND

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

There are several gaps in the estimates of spending.

Likely costs left out

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

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




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


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

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

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

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

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

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

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

Lower growth, tiny surplus in MYEFO budget update


Michelle Grattan, University of Canberra

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

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

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

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

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



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

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

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

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

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

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

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

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

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




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


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

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

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



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

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

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

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

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

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




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


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

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

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

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

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

Michelle Grattan, Professorial Fellow, University of Canberra

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

Government to inject economic stimulus by accelerating infrastructure spend


Michelle Grattan, University of Canberra

The government is responding to increasing concern about the faltering economy by accelerating A$3.8 billion of infrastructure investment into the next four years, including $1.8 billion for the current and next financial years.

Scott Morrison will outline the infrastructure move in a speech to the Business Council of Australia on Wednesday night, while insisting the government is not panicking about Australia’s economic conditions.

The government’s action follows increasing calls for some stimulus, with concern the tax cuts have not flowed through strongly enough to spending.

The just-released minutes of the last Reserve Bank meeting show the bank seriously considered another rate cut at its November meeting but held off, partly because it thought that might not have the desired effect. Reserve Bank governor Philip Lowe has previously urged more spending on infrastructure.

Morrison is making appearances in various states to publicise the government’s infrastructure plans.

The infrastructure bring-forward over the coming 18 months is $1.27 billion plus $510 million in extra funding. Over the forward estimates, the bring-forward is $2.72 billion plus $1.06 billion in additional funding.

The government’s latest action means since the election it will have injected an extra $9.5 billion into the economy for 2019-20 and 2020-21. This comprises $7.2 billion in tax relief, $1.8 billion in infrastructure bring-forwards and additional projects, and $550 million in drought assistance to communities.

In his BCA speech, draft extracts of which have been released, Morrison is expected to say that “a panicked reaction to contemporary challenges would amount to a serious misdiagnosis of our economic situation”.

“A responsible and sensible government does not run the country as if it is constantly at DEFCON1 the whole time, whether on the economy or any other issue. It deals with issues practically and soberly.”




Read more:
If you want to boost the economy, big infrastructure projects won’t cut it: new Treasury boss


He will say that notwithstanding the headwinds, including the drought which has cut farm production, the economy has continued to grow, and is forecast to “gradually pick up from here” with jobs growth remaining solid.

“Against this backdrop, it would be reckless to discard the disciplined policy framework that has steered us through many difficult periods, most recently and most significantly the end of the mining investment boom, which posed an even greater threat to our economy than the GFC.”

The projected return to surplus this financial year would be a “significant achievement”.

Lauding the government’s legislated tax relief, Morrison will say. “Our response to the economic challenges our nation faces has been a structural investment in Australian aspiration, backed by responsible economic management.”




Read more:
Why we’ve the weakest economy since the global financial crisis, with few clear ways out


Morrison’s infrastructure bring-forwards follow his post election approach to the states asking for projects that could be accelerated.

As a result of this process we have been able to bring forward $3.8 billion of investment into the next four years, including $1.8 billion to be spent this year and next year alone.

This will support the economy in two ways – by accelerating construction activity and supporting jobs in the near term and by reaping longer run productivity gains sooner.

Every state and territory will benefit, with significant transport projects to be accelerated in all jurisdictions – all within the context of our $100 billion ten-year infrastructure investment plan.

This bring forward of investment is in addition to the new infrastructure commitments we have made in drought-affected rural communities since the election.

In his address Morrison is also expected to announce the first stages of the government’s latest deregulation agenda, aimed at enabling business investment projects to begin faster.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: does monetary policy work any more?


Richard Holden, UNSW

In its quarterly statement on monetary policy, released today, the Reserve Bank of Australia declared its preparedness to “ease monetary policy further if needed”.

This suggests the bank still thinks monetary policy – in this case lowering interest rates to stimulate the economy – could help “support sustainable growth in the economy, full employment and the achievement of the medium-term inflation target”.

But in the wake of the bank last month lowering the official interest rate to a record low and the current somewhat sad state of the Australian economy, many commentators have speculated that monetary policy doesn’t work any more.




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


Is that right?

There are a number of variants of the “monetary policy doesn’t work” argument. The most basic is that the Reserve Bank has this year cut rates from 1.50% to 0.75% without any improvement to the Australian economy.

This is a textbook example of one of the classic logic fallacies known as “post hoc ergo propter hoc” (from the Latin, meaning “after this, therefore because of this”). Put simply, it assumes the rate cuts have had no effect and doesn’t account for the possibility things might have been worse had there been no cuts.

Things might have been even worse. We’ll never know.

It also ignores what might have happened if the RBA had cut sooner. Again, we can’t know for sure. It is possible, though, to make an educated guess.

When to cut rates

Had the Reserve Bank acted, say, 18 months earlier to cut rates, it would have signalled that Gross Domestic Product (GDP) growth was indeed lower than desired, the sustainable rate of unemployment was more like 4.5% than 5%, and most importantly that it understood the need to act decisively.

That would have sent a powerful signal.

It would also have ameliorated the huge decline in housing credit that pushed down housing prices in Sydney and Melbourne by double digits. That, in turn, would have prevented some of the weakening in the balance sheets of the big four banks that has occurred (witness this annual general meeting season).

All of this would have pumped more liquidity into the economy and put households in a much stronger position, likely leading to stronger consumer spending than we have seen.

Bank pass through

One gripe both the Reserve Bank governor Philip Lowe and federal treasurer Josh Frydenberg have had with the banks is their failure to fully pass through the RBA cuts.




Read more:
Our leaders ought to know better: failing to pass on the full rate cut needn’t mean banks are profiteering


It is true there is a problem with banks not being able to cut deposit rates below zero, and as a result having less scope to cut mortgage rates, which are majority funded from deposits.

But there are, of course, other ways monetary policy can work. The leading example is quantitative easing (QE). This is where the central bank pushes down long-term interest rates by buying bonds. At the same time this expands the money supply, thereby adding some upward inflationary pressure.

There is little reason to believe such measures won’t work.

The power of free money

Perhaps paradoxically, the closer interest rates get to zero the more powerful those rates may end up being.

To put it bluntly, if someone shoves a pile of money into your hand and asks almost nothing in return, you’re likely to use it. In fact, you would be pretty silly not to.

Suppose your mortgage rate really goes to zero – as has happened in Europe.

You might decide to redraw that and spend the money on a home renovation or some other productive purpose. Or you might decide to buy a more expensive house.

Such spending provides an economic boost. The effect is all the more pronounced if people expect interest rates to be low for a long period of time. Aggressive cutting coupled with quantitative easing – which lowers long-term rates – signal just that.

But not only monetary policy

Just because monetary policy still has some effect at near-zero rates doesn’t mean we should pin all of our economic hopes to it.

A near consensus of economists have argued repeatedly for the use of more aggressive fiscal policy – including more infrastructure spending and more tax cuts.




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


Indeed, Philip Lowe has raised eyebrows by speaking so forthrightly on this issue. That doesn’t make him wrong, though.

There is little doubt the Reserve Bank should have acted much earlier to cut official interest rates. There is also a very good chance it will need to begin to use other measures such as quantitative easing in the relatively near future.

All of that says the Australian economy, like most advanced economies around the world, is in bad shape.

But it doesn’t mean monetary policy has completely run out of puff.The Conversation

Richard Holden, Professor of Economics, UNSW

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

Want more jobs in Australia? Cut our ore exports and make more metals at home


Trucks taking iron ore from mines in Western Australia where it will probably be shipped overseas.
Shutterstock/Inc

Michael Lord, University of Melbourne

Australia could create tens of thousands of new jobs and generate many billions of dollars in export revenues if it turned more to manufacturing metals rather than exporting ore to other countries.

That’s a finding of our report, From Mining to Making, released by the Energy Transition Hub.

As international climate action accelerates, there is a need to produce goods without the carbon emissions. The report describes opportunities for Australia to use its exceptional wind and solar resources to make zero-emissions metals.




Read more:
Australia’s hidden opportunity to cut carbon emissions, and make money in the process


The need for metal

Demand for metals is set to grow, not least because of their importance in nearly all renewable energy technologies. Wind turbines are made from steel, copper and rarer metals such as cobalt and neodymium. Solar panels and batteries use metals including silicon, lithium, manganese, nickel and titanium.

As the global economy tries to reduce carbon emissions we must change the way metals are made. Metal production is energy intensive and accounts for around 9% of global greenhouse gas emissions. Herein lies Australia’s opportunity.

Australia is already a major source of the world’s metal. It is among the top three exporters of iron ore, bauxite, lithium, manganese and rare earth metals.

A small proportion of these metals are refined domestically, but most are shipped overseas in their raw mineral form. For example, we found Australia converts less than 1% of its iron ore into steel.

By exporting raw ores, Australia is selling non-renewable resources at the lowest point of the value chain. Processed metal is worth much more than ore.

Metal needs energy

Many metals are made through electrically-driven processes so we can reduce carbon emissions by switching to cheaper renewable electricity.

One example for this approach is Sun Metals, near Townsville in Queensland. The company built a 125MW solar farm to supply a third of the energy required by its zinc refinery. It is now considering adding wind power and battery storage.

Similar opportunities exist with the production of other metals such as manganese, copper, nickel and rare earths.

Another angle for Australia is to make specialised metal products with higher profit margins. Element 25, in Western Australia, plans to produce high-value manganese metal using an energy-efficient process developed with CSIRO. The company says a 90% renewable energy mix could lower production costs and help it compete with Chinese producers.

Renewable energy could even relieve Australia’s ailing aluminium industry. The owners of three of Australia’s existing aluminium smelters said they were “not sustainable” with current electricity prices. Could cheap wind and solar energy provide a lifeline?

The usual objection is that aluminium smelters need a steady power input, not variable solar and wind energy. But, new technologies enable more flexible operation, allowing smelters to react to market conditions, while relieving pressure on the grid during peaks in demand.

Steel production presents a different kind of problem. It uses so much coal that it accounts for 7% of global emissions. But new steel can be made without coal.

Many steelmakers around the world use an alternative process, called direct reduction, fuelled by natural gas. This technique reduces emissions by about 40% and can be modified to run on pure renewable hydrogen, enabling production of near-zero emissions steel.

At least five companies in Europe are actively pursuing hydrogen-based steel production as part of their efforts to eliminate emissions. So far there are no similar plans in Australia despite this country’s unrivalled wealth of iron ore and renewable resources.

The jobs boom

Zero-emissions metals could become a major export industry. Our report explores a scenario in which Australia could double the value of its iron and steel exports to A$150 billion by converting just 18% of currently mined iron ore into steel using renewable hydrogen.

This would be a welcome boost for the national balance of trade, counteracting any reduction in coal exports due to climate and energy policies among Australia’s trading partners.

Making this amount of zero-emissions steel requires a huge amount of renewable electricity – almost double the total electricity generated in Australia in 2018.

But this demand for renewable energy is part of the point – Australia can do this, most of our competitors cannot due to their greater energy demand relative to land suitable for generating renewable energy.

A successful zero emissions metal industry would bring many thousands of steady jobs, often in regional areas with higher unemployment. It could also support towns such as Portland, in Victoria, and Gladstone, in Queensland, where metal producers are already the chief employer.

The market for zero-emissions metals is likely to be enormous. Until recently, emissions embodied in materials have been neglected. But this is changing, as hundreds of the world’s largest companies commit to reducing the emissions of their supply chains.

For example, car makers Volkswagen and Toyota are aiming for zero-carbon production.

In September the World Green Building Council challenged the global construction sector to ensure all new buildings have net-zero embodied carbon by 2050. Such public commitments are a strong signal to manufacturers everywhere.

Make it happen

Zero-emissions metals could be one of Australia’s most significant new industries of the 21st century.




Read more:
Australia has plenty of gas, but our bills are ridiculous. The market is broken


To make it happen, our report recommends governments acknowledge this opportunity by creating a National Zero-Emissions Metals strategy, committing serious resources to ensure it succeeds. This strategy should identify and evaluate Australia’s best opportunities within the metals sector.

If we don’t do something then, as South Australian Senator Rex Patrick put it, we’ll just continue to “export rocks” and let others reap the benefits from developing technologies to process them.The Conversation

Michael Lord, Zero Carbon Researcher, University of Melbourne

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