The people at highest risk of getting infected with SARS-CoV-2, the virus that causes COVID-19, are close contacts of infected cases. So tracking these close contacts, and quarantining them so they can’t infect others, is key to efficient epidemic control. Sometimes we also have to track contacts who attend venues where super-spreading occurs.
Victoria’s second wave prompted the National Cabinet to order a review into contact tracing, which became a flashpoint during the crisis.
The report, by Australian Chief Scientist Alan Finkel and released on Friday, broadly makes the following recommendations:
establish performance metrics on the speed of testing and contact tracing
states and territories should pursue their own contact tracing systems, but have a national digital data exchange mechanism
invest in technology, automation and digital systems for outbreak management
strengthen the public health workforce, training and career tracks, as well as surge capacity for outbreaks
go hard, go early and never fall behind
maintain other public health measures such as social distancing, personal hygiene and early testing; and use waste-water surveillance for early warning of community transmission
engage and communicate with communities, including those in higher risk groups and those with with diverse cultural or language needs.
We must invest in the public health workforce
The report recognises the efforts of all jurisdictions in continually improving mechanisms for control of COVID. It also recognises some of the challenges posed by confusing and inconsistent terminology, and also in differing testing protocols between jurisdictions.
It also reviews various digital technologies used to help with outbreak management across Australia, some of which are linked to pathology testing, and others to attendance at public venues, schools or workplaces. In Western Australia, for example, the G2G app enables facial recognition and mobile phone location data to help police to enforce quarantine.
Another strength of the report is the recognition of the public health workforce as a distinct and equally important part of the pandemic response as the clinical workforce.
This is actually the crux of the problem. If an epidemic grows too large, no city or state — no matter how well-resourced — will be able to keep up with contact tracing using manual methods such as whiteboards, phone calls or SMS.
What the report doesn’t make clear is the enormous human resources requirement for contact tracing, how rapidly it increases and becomes unfeasible, and the critical importance of digital contact tracing methods which will automate the identification of contacts.
Every person with COVID will have 10-20 contacts to trace, which means if you have 100 cases a day, you need to trace 1,000-2,000 contacts within 24-48 hours. If you don’t trace them rapidly, you will miss the window of opportunity to prevent them infecting others. If you don’t trace them all, you will face a growing backlog and lose control of the epidemic.
Compounding this is the exponential growth of epidemics. New cases per day can grow from 20 to 700 in a matter of weeks, as we saw in Victoria, so the task of keeping up with contact tracing becomes more and more difficult as an epidemic grows.
Even in Wuhan, the human resource capacity for contact tracing was exceeded when the outbreak reached thousands of new cases a day – equating to tens of thousands of contacts to be traced every day, and hundreds of thousands being monitored in quarantine at any one time. So authorities used digital contact tracing to keep up.
Australia should expand public health workforce and implement automated contact tracing
Of the different digital tools discussed in the report, automated contact tracing is only mentioned fleetingly, but is essential.
This could be done with QR codes and a colour-coded alert system, as was used in China. With their QR code, people receive a colour code – if they are green, they are free to move about; if orange or red, they must quarantine.
We’ve heard many stories of restaurants and entertainment venues breaching requirements for recording patron details, so that when an outbreak occurs, we have no information to enable contact tracing.
To use QR codes successfully, there has to be enforcement and substantial disincentives to noncompliance.
Australia’s COVIDSafe App, in contrast, was an opt-in app that users had to download themselves, and has had low uptake and some technical issues. Other automated methods that do not require people to actively opt in include harnessing location data from mobile phones, credit card use and other digital footprints. However, many of these raise privacy issues, which is likely why they have been used less in Western countries than in Asia.
The bottom line is that finding all cases and tracing their contacts are the most important strategies to mitigate epidemic growth. We need to have methods to scale up vastly and rapidly with both manual and digital tracing in the event of an epidemic blowout.
After weeks of pressuring the government to do more to support temporary migrants who fall outside the criteria for government support, the opposition took a surprising stance in The Age and The Sydney Morning Herald on Sunday.
Labor immigration spokesperson Kristina Keneally called for a rethink of our migration program and asked:
when we restart our migration program, do we want migrants to return to Australia in the same numbers and in the same composition as before the crisis?
To me, as an economist, the answer should be a resounding “yes”.
Keneally’s piece covered a lot of ground – in addition to making claims about whether or not permanent migrants take the jobs of local workers (they don’t) she broached the topic of reconsidering our temporary migration intake and held open the possibility of further lowering our permanent intake.
Migration is a complex often convoluted area of policy
Temporary migrants can’t just turn up
Ms Keneally’s comments imply that coming to Australia as a temporary migrant is easy.
As the following (rather long) flowchart indicates, it is anything but.
Temporary migration is uncapped: there are no in-principle limits on the number of temporary migrants who can come here. This is by design, so the program can meet the skill needs of our economy at any given time.
However, the government has a number of tools it uses to contain the program and target the right skills.
Keneally makes the point that the arrival of migrants has made it easier for businesses to ignore local talent.
But there are requirements that Australian businesses to tap into the Australian labour market before hiring from overseas.
She is right when she says unions and employers and the government should come together to identify looming skill shortages and deliver training and reskilling opportunities to Australian workers so they can fill Australian jobs.
But no matter how good our foresight and our education and training systems, we will always have needs for external expertise in areas of emerging importance.
Training local workers for projects that suddenly become important can take years, during which those projects would stall.
Permanent migrants don’t take Australian’s jobs
Keneally says Australia’s migration program has “hurt many Australian workers, contributing to unemployment, underemployment and low wage growth”.
This does not provide enough information about whether the situation is improving, stabilising or getting worse. That is why we also need to consider the number of people tested daily for COVID-19.
For example, in percentage terms there is no actual difference between getting 20 positive cases out of 1,000 tests one day and 100 positive cases out of 5,000 tests the next. Both lead to the conclusion we have 2% reported infected people of those tested.
If we are only given the number of new cases, getting 100 in a day sounds a lot worse than getting 20. The 2% percentage figure here tells us things are pretty much the same over the two days.
Curves and trends
Take Victoria, if we look at the total number of confirmed cases we see it followed an exponential trend for a while – one that was increasingly rising – and then started to divert on April 3.
In the daily number of confirmed cases we see high jumps and large fluctuations going back and forth.
When the daily number of applied tests is considered, we can calculate the actual percentage of new cases each day. Now we have a way flatter curve (below) with different fluctuations.
The peak is now on March 24 when the number of tests is included. If we just look at the daily count, the highest number of confirmed cases was on March 27. When we look at the percentage, it shows a decrease rather than an increase with more than 2,300 tests.
From the daily new cases data it looks like there is a strongly decreasing trend in the number of confirmed cases between April 2 and 6.
But we do not see the same strong downward movement in the percentage data on the number of tests. Although both figures go down, then up slightly, the percentage trend downward is not as strong as the daily trend.
This is a good example of the discrepancy between the inferences from the raw and percentage data. When we consider the number of tested people, we get a different view on the progress of the pandemic.
More tests needed
In using the number of tests to get a more reliable picture of the situation, there is an important point to consider. That’s were the purple error bars in the graph (above) come in.
They show the margin of error where each percentage estimate swings for the daily number of applied tests, so the actual number could be higher or lower but within those purple bars.
When we have a larger number of applied tests, we get a reduced margin of error, and that gives us a clearer picture of what is happening.
Since the peak on March 24 is backed up by only 500 tests, it has the largest margin of error. The figure on March 28 is based on 8,900 tests with a very small amount of error.
To get a more reliable picture of the situation, the number of applied tests has to be expanded, which it is what is happening in some states. This should reduce the margin of error.
Out in the community
After getting some signals of flattening the curve in Victoria and Australia as well, do we see an exponential increase in just the community transmission?
Community transmission is where someone has caught the virus locally, not an infected traveller who’s returned from a cruise or overseas. At the moment they are the minority of cases and authorities would like it to stay that way to contain the spread of the virus.
Again, we need to consider the number of tests to answer this question clearly. The raw numbers of community transmission in Victoria looked like they were increasing exponentially.
But the numbers as a percentage of the number tested tell a different story. Although there is some increase in the rate of community transmissions recently, it still shows a way flatter behaviour far from the exponential curve.
That is why it is important to understand the impact of the number of tests on the figures displaying the progress of the pandemic. Understanding this relationship could reassure people about new numbers.
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.
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.”
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.”
Australia’s big little economic lie was laid bare on Wednesday.
National accounts figures show that the Australian economy grew by just 0.2% in the last quarter of 2018. This disappointing result was below market expectations and official forecasts of 0.6%. It put annual growth for the year at just 2.3%.
But the shocking revelation was that Gross Domestic Product per person (a more relevant measure of living standards) actually slipped in the December quarter by 0.2%, on the back of a fall of 0.1% in the September quarter.
These are the first back-to-back quarters of negative GDP per capita growth in 13 years – since 2006.
We’re going backwards, for the first time in 13 years
The reason this is significant is that the Australian convention around what constitutes a recession is two back-to-back quarters of negative GDP growth.
Since more people in the economy mechanically increases overall GDP, you might think that measuring things on a per-person basis gives a better sense of whether we are better off or worse off.
And you would be right. Why then, do we talk so much about overall GDP?
One answer is that in a lot of advanced economies there isn’t very much population growth, so overall GDP is a good enough measure.
Population growth hides it
The more insidious answer in Australia is that, for a long time, our high population growth, fed by a high immigration rate, has masked a much less rosy picture of how we are doing. And neither side of politics has wanted to admit it.
At 1.6% a year, Australia’s population growth is roughly double the OECD average, which is perhaps why we hear politicians say things like “Australia continues to grow faster than all of the G7 nations except the United States,” as Treasurer Josh Frydenberg did this week.
The good news is that standard economic theory tells us that in the long run, immigration has very little impact on GDP per capita in either direction, unless it drives a shift in the population’s mix of skills.
But in the short term, it depresses GDP per capita because fixed capital such as buildings and machines has to be shared between more workers.
The business lobby doesn’t want us to focus on that because population provides more customers as well as more workers, allowing them to grow without growing domestic market share or exports.
Governments don’t want us to focus on it because adjusting for population growth makes GDP growth look small or, as at present, negative. Also, the tax revenue from the population growth is factored into the official budget forecasts – but the extra social spending needed isn’t always factored in.
Pro tip: watch for population growth as a fudge factor generating a return to surplus in next month’s budget.
There’s a better way of getting at the truth
That said, GDP itself – per capita or not – is not a great measure of the standard of living. That’s why in 2001, the Bureau of Statistics began also reporting real net national disposable income.
It is a measure with advantages over GDP. As the bureau points out, it takes account of changes in the prices of our exports relative to the prices of our imports – our terms of trade. If the prices of our exports were increasing much faster than the prices of our imports (as happened during the mining booms), our standard of living would climb and real net national disposable income would reflect it, where as gross domestic product would not, although it would reflect increased income from increased export volumes.
To get at living standards per person, which is what we are really interested in, the bureau also publishes real net national disposable income per capita.
The graph shows that so far the growth rate of real net national disposable income per capita hasn’t changed much, and that it has been negative for far fewer quarters than in the Coalition’s first term in office.
It bounces around with changes in the prices of imports and exports, and is generally climbing less than when export prices were really high.
A year of two halves?
The treasurer painted 2018 as a “year of two halves”.
The first half was great – the annualised GDP growth rate (what it would have been had it continued all year) was a very impressive 3.8%.
The second half was just 1%.
I’m not sure the change was that clear cut. As I wrote last September, there have been troubling signs for some time, despite the solid headline growth.
Household savings have been plummeting, real wage growth has been stagnant, housing prices have been falling in Sydney and Melbourne. Together they put significant pressure on household spending, which accounts for about 60% of GDP.
Those concerns are now mainstream. Good news on export prices has rescued tax receipts for the time being, and will probably also rescue real net national disposable income per capita.
But the fundamentals of the Australian economy are looking somewhat weak. Like the US and other advanced economies, we are living in an era of secular stagnation – a protracted period of much lower growth than we had come to expect.
And until we do something to tackle it, such as a major government investment in physical and social infrastructure, we will continue to face anaemic wage growth, shaky consumer confidence, and mediocre economic growth per person.
The Australian economy will remain healthy for long enough to enable the government to claim it as a strength in the lead-up to the May election, but the first Conversation Economic Survey points to a fairly flat outlook beyond that, with a 25% chance of a recession in the next two years.
The Conversation has assembled a forecasting team of 19 academic economists from 12 universities across six states. Among them are macroeconomists, economic modellers, former Treasury and Reserve Bank economists, and a former member of the Reserve Bank board.
Taken together their forecasts point to no recovery in the share market during 2019, no recovery in wage growth, no further improvement in the unemployment rate, further modest home price falls in Sydney and Melbourne, and to a budget deficit next financial year despite the official forecast of a surplus and Treasurer Josh Frydenberg’s commitment that the government will fight the election continuing to forecast a surplus.
Weighing heavily on Australia’s economy during 2019 will be a much weaker US economy, with what the forecasting team says is the possibility of a US recession, and weaker growth in China. Australian consumer spending is forecast to continue to grow during 2019, but no faster than it did during 2018. The best measure of living standards is forecast to advance at a crawl.
Most of the team expect the Reserve Bank to sit on its hands throughout all of 2019, leaving its cash rate unchanged at the all-time low of 1.5% for what will be a record 40 months.
The panel expects the Australian economy to grow more slowly in the year ahead, by 2.6%, down from recent annual growth of 2.8% and 3.1%. None of the panel expects growth to exceed 3%. One, Steve Keen, formerly of the University of Western Sydney and now at University College London, expects growth of only 1%.
Most of the panel expect China’s growth to continue to slow, from the annual growth of 6.7% typical over recent years to just 6.2%, the weakest growth since the 2008 global financial crisis and the weakest calendar year growth since 1990.
Former Treasury economist Nigel Stapledon now at the University of NSW nominates China as the biggest threat to Australian and global growth. He says it has a good record of stimulating its economy to get out of difficult corners but one day it might get it wrong.
The panel expects US economic growth to hold up at 2.8% during the year ahead but to weaken or go into reverse by year’s end as the “sugar hit” from the Trump tax cuts goes into reverse.
Former Treasury and International Monetary Fund economist Tony Makin points to US high public debt that will need to be rolled over, soaking up funds that could have been more productively used for investment, to higher US interest rates imposed by a central bank concerned about inflation, and to the escalating trade war with China.
ANU modeller and former Reserve Bank board member Warwick McKibbin says the US economy is “very likely” to begin to go backwards towards the end of the year. Craig Emerson, a former Australian trade minister now with Victoria University, says the US is likely to enter a recession in 2020. Former Treasury economist Mark Crosby at Monash University says if there is a US recession, it won’t hit until late 2019, with the impact greatest in 2020.
Rebecca Cassells from the Bankwest Curtin Economics Centre says a lot depends on the outcome of the US-China trade war: “The two biggest economies are going head to head, but both are almost as reliant on the other to sustain their growth trajectories,” she says.
Australia should look to other parts of the world to drive its economic growth. “India is one of them, and is rising rapidly with no downgrading of its growth trajectory of 7.75% for 2019.”
Nominal GDP, the money earned in Australia unadjusted for price changes, is forecast to grow more slowly in 2019, by 4.5%, down from recent growth in excess of 5%, reflecting weaker iron ore prices.
The best measure of living standards, real net disposable income per capita, is expected to barely grow, climbing just 1.1% over the year to December, much less than recent growth in excess of 3%, but much more than its performance in the dismal years between 2012 and 2016 when it went backwards.
Forecasts for the unemployment rate cluster around its present 5.1%, with only four below 5% and one above 6%.
Wage growth is forecast to climb no further in 2019, finishing the year at its present 2.3% instead of climbing to 2.75% on its way to 3% by mid 2020 as forecast in the budget update.
Rebecca Cassells points out that much of the increase we have had has been driven by the Fair Work Commission’s decision to lift the minimum wage 3.5% from June 2018, suggesting very low growth elsewhere. Disturbingly, she says more and more enterprise bargains are being terminated, with employees falling back on awards.
Overwhelmingly, our panel is of the view that the only thing that will lift wage growth out of its slump (and budgets have been incorrectly forecasting a bounce out of the slump for eight years now) is higher productivity: producing more per worker.
Victoria University economic modeller Janine Dixon notes that the December budget update actually downgraded its forecast of productivity growth, from 1.5% to 1%, and so is not optimistic.
She says even if productivity growth did pick up, excessive market power in some industries combined with weakness in labour market institutions means it might not easily be passed on to workers.
Tony Makin, a supporter of company tax cuts, says the best thing to lift productivity would be new (perhaps foreign) investment embodying productivity-enhancing technology.
The saving grace for workers facing yet another year of historically-low wage growth is that price increases will also remain low.
Inflation has been right at the bottom of (or below) the Reserve Bank’s 2% to 3% target band for four years now, meaning that even at the continuing low rates of wage growth forecast, wages should continue to climb just faster than prices.
The panel expects consumer spending to climb by only 2.5% in real terms in 2019, most of which will reflect population growth of 1.6%.
The average forecast for inflation is at the very bottom of the Reserve Bank’s target band. Only two panel members expect inflation to edge back up to the middle of the band. They are Warwick McKibbin and former Treasury and ANZ Bank chief economist Warren Hogan, at the University of Technology Sydney.
Interest rates and the budget
Without either a lift in inflation or a substantial weakening in the economy there is little reason for the Reserve Bank to move interest rates in either direction.
Governor Philip Lowe took the job in September 2016, just after the board cut the cash rate to a record low of 1.5%. He hasn’t moved the cash rate since, although on several occasions he has said the next move is most likely to be up.
Five of the panel do expect at least move up this year, including the two who think inflation might approach the bank’s target. Three expect cuts, taking the rate below 1.5%.
The government says it will deliver a budget surplus next financial year, of A$4.1 billion, the first surplus in a decade.
The panel doesn’t think so, all but one member predicting a lower budget surplus than the government, and seven predicting deficits. The average forecast is for a deficit of A$3.5 billion rather than a surplus of A$4.1 billion.
Monash University macroeconomist Solmaz Moslehi identifies optimistic wage growth, weaker than expected mining investment and a hit to consumer spending from the housing downturn as the biggest risks to the forecast surplus.
Julie Toth, adjunct professor at Deakin University’s Master of Business Administration program and chief economist at the Australian Industry Group, says the latest indicators suggest that neither employment nor wage growth will accelerate by as much as the government expects.
Michael O’Neil from the South Australian Centre for Economic Studies says the biggest immediate risk to the forecast surplus is thermal coal prices, given China’s efforts to cut coal imports and the shift to renewables in China and India.
The biggest long term risk is the scale of the company tax cuts and the ongoing shift of income from highly-taxed labour to more lightly-taxed capital.
Margaret McKenzie of Federation University identifies the biggest risk to the surplus as a change of government, something she says she welcomes because with extensive idle capacity and underemployment, a surplus would be unhelpful.
The panel expects Sydney home prices to fall by another 5.8% and Melbourne prices by another 5.1% in 2019, taking the slides over two years to 14.7% and 12.1%.
Only Macquarie University and former Reserve Bank economist Jeffrey Sheen expects prices to move back up throughout 2019, by 2% and 3%.
Reassuringly, none of the forecast falls are bigger than 10%. The biggest are predicted by Steve Keen, Tony Makin, Margaret Mckenzie and Craig Emerson.
The lower prices will be accompanied by much slower growth in housing investment, expected to climb only 2.1% in 2019 after climbing more than 7% in the year to September 2018.
Non-mining business investment is forecast to grow more slowly this year, by 5.7% instead of 11.4%, and mining investment is expected to keep sliding, losing a further 3.4% after losing 11.2% last year rather than climbing as the government’s budget update predicts.
Five of the team believe that mining investment to turn the corner in line with the budget forecast. Nine expect it to fall further.
The Australian share market will for practical purposes not grow not at all during 2019 according to the average forecast, which is for barely perceptible growth of 0.1%. A steady share market would come as a relief to super funds and share owners after last year’s slide of about 7%.
The range of forecasts for the ASX 200 is wide, from slides of more than 6% to gains of more than 6%.
Fortunately for a government the panel expects to need to continue to borrow more in order run continued budget deficits, what it pays for to borrow via the 10-year bond rate is expected to remain little changed at 2.6%. Only Warwick McKibbin expects a much higher bond rate, of 3.5%.
The panel’s average forecast is for an broadly unchanged Australian dollar, of around 70.5 US cents. The highest forecast is for US$0.80, the lowest for US$0.62.
The iron ore price, at present close to US$74 a tonne, is expected to fall to around US$64. Only one panelist, Warwick Mckibbin, expects it to stay near where it is, at US$75. The government itself is cautious, using a price of US$55 in its budget forecasts, a number it might lift in the April budget, allowing it to forecast more revenue.
A recession is conventionally defined as two consecutive quarters in which gross domestic product falls instead of rises. Australia hasn’t had two consecutive quarters of negative growth since 1991.
The most recent negative quarter was in September 2016. Before that there was one in March 2011, and before that in during the global financial crisis in December 2008.
Ross Guest of Griffith University makes the point that his estimate of 20% should be considered low. There will always be a risk of a recession. By itself two quarters of negative growth needn’t be a disaster. The impacts on the government and on consumer and business confidence would be more important than the downturn itself.
Guay Lim of the Melbourne Institute of Applied Economic and Social Research assigns the lowest probability of any of our panel to a recession, 5%, saying the most likely catalyst would be a global trade war.
Warren Hogan assigns the highest probability to a recession after Steve Keen, 40%, saying Australia is facing the end of a major construction boom and has heavily indebted households. It will be vulnerable to any negative shocks and especially vulnerable to higher inflation and interest rates.
Steve Keen says the only thing that has kept Australia afloat since the China boom has been the housing bubble, which the banking royal commission has been discovering was built on fragile, and in places fraudulent, foundations.
Nigel Stapledon says the biggest drag on the economy will be the collapse in the construction of residential investment units. Labor’s proposed increase in capital gains tax will make it worse, notwithstanding Labor’s decision to exempt new construction from its crackdown on negative gearing.
Rebecca Cassells says on the bright side Australia is set to become the world’s biggest exporter of liquefied natural gas, the biggest exporter of iron ore to India and the world’s biggest producer of lithium, needed for batteries.
And if there is a global economic downturn within the next few years, she says another positive is that Labor is likely to be in power, making the successful deployment of a stimulus package more likely than if the Coalition had been in office.
It’s been an extraordinary four years since wages grew by anything like the 3-5% per year they used to.
Ever since 2015, wage growth has been closer to 2% per year, moving only in a narrow band between 2.3% to 1.9% and back again. It’s the slowest sustained rate of wage growth since the 1930s great depression.
Governments themselves have deliberately held down wage growth for their own workers and encouraged companies that sell to them to do the same.
The five not-so-easy steps
There is no one solution. But in our book, we advance a five-point plan that we think might work:
End active wage suppression by governments, both for their own workers and in sectors that rely on public funding or procurement. Governments must set a lead, not just in what they pay their own employees, but in the funding they provide for others, especially in growing sectors such as aged and disability care.
Revitalise collective bargaining, including by creating paths to industry-level agreements, at least in those sectors where enterprise bargaining is not currently working.
Strengthen minimum wage regulations, by enabling the Fair Work Commission to set a “living wage”, and encouraging it to lift award wages over time while dealing with the gender pay gap.
Address the “fissuring” of work, by expanding the definition of employment and holding businesses responsible for underpayments by the subsidiaries over which they exert influence or control.
Improve compliance with minimum wage laws, including by increasing funding to the Fair Work Ombudsman, making it harder for repeat offenders to stay in business, and creating faster and cheaper redress for underpayment claims.
Not everyone will agree with these proposals.
But as the research compiled in our book illustrates, something has to be done. Australia’s once-vaunted reputation as a fair and inclusive society depends on it.
Australia has enjoyed 27 years of continuous economic growth, arguably more than any other developed country. Almost alone among developed economies, we managed to avoid a recession during the global financial crisis. Employment is at an all-time high, due mainly to a surge in the labour force participation of women, from 40% to 56% of all women over the past three decades.
This success was built on a contract – partly explicit, but mostly implicit – in which the bulk of the population agreed to support contentious reforms in exchange for a guarantee that they wouldn’t be left behind.
High employment masks high inequality and entrenched disadvantage. Although the unemployment rate has fallen from 6.5% to 5.5% since the turn of the century, underemployment (where people work fewer hours than they want to) has climbed from 6.5% to 8.5%. Since the crisis the proportion of the unemployed who have been out of work more than a year has climbed from 14% to 24%. Low-skilled men, younger Australians, women with children, and Indigenous Australians find working more challenging than the headline figure suggests.
Wages growth fell to an all time low after the economic crisis and has yet to recover.
Well-connected cities and regions
As a vast country, connectivity is critical to our prosperity. By and large, we meet the need well through investment in physical infrastructure. But rapid population growth in our big cities and political considerations have made it more difficult.
Our cities and regions offer a very high quality of life, but are evolving by default rather than design. Planning isn’t guided by a consensus about the desired pattern of economic and population growth. The result is low-density cities (far lower than comparable overseas cities) meaning long commutes and social isolation for many.
As house prices have surged, our household debt has climbed from 70% of GDP in 2000 to 120% of GDP today. Home ownership has become more difficult, with many only able to afford options that come with poor access to services and jobs. We are now vulnerable to falling house prices, rising interest rates and global uncertainty.
Dynamic but not diversified
Our open and flexible economy has benefited from dynamism offered by new people, new ideas and new investment. Strength in industries such as international education delivers not only a sizeable brain gain, but also new and important relationships, particularly in our rapidly growing region.
But these successes disguise our wider failure to diversify our economic base. Economic complexity (EC) measures the depth (sophistication) and breadth (diversity) of what a nation sells to the world. It is a strong predictor of economic prospects.
While the EC measure has limitations for a heavily resource-intensive and service-based economy, Australia’s low and deteriorating ranking, 86th in the world, is consistent with other indicators.
Our high investment in physical capital contrasts sharply with our comparatively low investment in knowledge-based capital. Knowledge-based capital encompasses not only research and development, but also software and data, design, marketing and organisational capabilities.
Australia’s business investment in R&D has fallen consistently since the crisis. We rely far more heavily than other nations on indirect R&D tax incentives, leaving less room for more direct approaches.
Innovative nations stimulate both public and private sector innovation through mission-driven approaches. With a few exceptions, Australia does not. We do not attempt to leverage our strengths in fields such as health, education and water, or to meet societal needs, such as those for reduced emissions, sustainable food, better population health or less inequality.
There’s an alternative
A more robust and resilient Australia would be built on a broader base of industries and capabilities. It would address goals that were more than merely economic and adopt as a goal a smaller environmental footprint.
Getting there would require us to develop a shared vision of what we want. We are doing well overall, and badly in places, without quite knowing what we are trying to achieve.
Transforming Australia: SDG Progress Report is an initiative of the National Sustainable Development Council to assess Australia’s progress against the UN Sustainable Development Goals.
Cutting taxes lets companies keep more of their profits, allowing them to invest in new equipment and premises for example. The company then needs to hire more workers to work with these new assets. The newly created jobs require businesses to compete for workers and this increased demand pushes up wages across the entire economy.
Suppose a retail company gets a tax cut and opens a new store. It advertises for workers, many of whom are already employed by a rival store that didn’t get the tax cut. The first company will need to offer the workers higher wages to entice them away. The rival store will need to consider matching the wages in order to keep the workers.
In other words, even workers in companies that don’t receive the tax cut should see a wage rise.
Going through the AlphaBeta report
In 2015, the federal government cut the tax rate from 30% to 28.5% for businesses with less than A$2 million in revenue. Eligible businesses saved around A$2,940 on average because of the tax cut.
AlphaBeta used transaction data from 70,000 businesses to compare businesses just below the A$2 million threshold to companies that were just above it.
The analysis looked at the differences between the two groups of firms in terms of whether they hired new workers, invested in their businesses, increased worker wages, or kept some of the cash as a reserve.
AlphaBeta chalked any differences between companies that received the tax cut and those that didn’t to the company tax cuts.
As reported in The Australian, AlphaBeta found that companies that received the tax cut increased their employee headcount by 2.6%. The companies that didn’t receive the cut increased employment by just 2.1%.
The problem is that we cannot draw any conclusions about the effect of company tax cuts on jobs or wages by studying a bunch of firms that received them and another bunch that did not, even if the firms are only slightly different.
This is because, as noted above, the effect of company tax cuts on jobs and wages take place in the entire labour market. An increase in demand for labour flows through to all business, and therefore, so do higher wages.
So we should not expect to see wages rising only in those businesses that receive the tax cuts. The finding that an increase in wages is small and insignificant is exactly what we would expect to see from this study.
Another problem is that we do not know whether the characteristics of the companies in AlphaBeta’s sample. Were some industries with particularly pronounced employment or wage increases over represented in one group but not the other, for instance?
Studying the effect of company tax cuts on employment and wages also requires a longer time period – sometimes years – and careful control of other factors affecting jobs and wages in some firms relative to others.
The analysis in this review is generally fair and reaches a sound conclusion regarding the AlphaBeta report. However, the logic behind company tax cut raising wages is somewhat simplified.
A cut in company tax lowers the costs of production and can flow to labour, capital (including equipment and buildings) and consumers. Economics tells us that who actually benefits from a tax cut depends on what is more responsive to the tax – labour, capital or output.
The lower production costs from a company tax cut can lead to greater output and lower prices as consumers buy more goods and services. This depends, of course, on how responsive consumers are to changes in price.
In the short-run labour is more mobile than capital, which is usually regarded as fixed. Therefore, in the short-run most of the benefit is borne by owners of capital (the companies) in the form of higher after-tax profits.
However, over the longer term, companies invest their after-tax profits in the business. So most of the benefit of the tax cut goes to workers though higher wages as the increased “capital stock” (such as equipment) makes labour more productive.
It follows that there is no reason to expect a significant increase in wages over a period of one or two years (as the AlphaBeta report covers). Indeed, such a result would be somewhat surprising. – Phil Lewis
In this series – Budget policy checks – we look at the government’s justifications for policies likely to be in this year’s budget and measure them up against the evidence.
In this piece we look at the need for infrastructure projects.
We look set for another infrastructure budget: big new projects that will, we’re told, boost growth, create jobs and tackle the pressures of our booming population. For example, the Turnbull government has already pledged up to A$5 billion for a rail link from Melbourne Airport to its CBD.
Infrastructure can play an important role, but behind the rhetoric some fundamental investment principles are missing.
Are investing in infrastructure and economic growth a sort of virtuous circle that feed each other?
Through a stronger economy, you can also invest in important infrastructure that again drives stronger growth in our economy … but also delivers the infrastructure that busts the congestion in cities, that makes rural and regional roads safer.
– Treasurer Scott Morrison
Yes, sometimes infrastructure spending and economic growth form a virtuous circle. In new suburbs and rapidly growing cities, infrastructure is needed to connect people to jobs and that in turn drives economic activity.
If we want to identify the best projects, a good place to start is our biggest cities. Big cities have a productivity advantage because they match workers to jobs better and faster than smaller cities and towns. Transport infrastructure is key to this matchmaking.
But in many cases, the enormous costs of construction in big cities – acquiring land, disrupting traffic, and the physical challenge of constructing in densely developed places – often makes it hard to justify the incremental increases in accessibility that a project generates.
Changes to the way we set prices for the use of roads and public transport, for example, can help us get more out of the infrastructure we already have. Charging public transport users different amounts depending on the time of day they travel can reduce peak-period overcrowding on our trains. With much lower capital costs, policies like this often deliver a bigger bang for the buck than major new investments.
Are these road and rail projects the sort of infrastructure that supports growth?
Whether it’s the Tulla Rail or the M1 up in Queensland or indeed in my home city of Sydney around Western Sydney Rail from the airport and the road infrastructure that goes around that in particular, we are making important national investments in infrastructure that will support growth, bust congestion in our cities and make our transport – rural and regional roads – safer.
– Treasurer Scott Morrison
Infrastructure undeniably plays a role in supporting the economy. But not every project will add to the productivity of our economy.
On the face of it, the economics of airport rail in Melbourne look thin. Infrastructure Victoria has said upgrading airport bus services should be investigated first, because at A$50-100 million it’s a much cheaper way to tackle the same problem. It has also said that the rail line should be delivered within 15-30 years.
The perceived urgent need for airport rail in Melbourne may stem from the slow and unreliable travel to the airport over the past 18 months. This is a byproduct of the Tullamarine Freeway widening project, which is now almost complete. Responding to a short-term pressure with a multi-billion dollar investment – in the absence of a detailed business case – is a depressing example of poor policy-making.
Does Australia need infrastructure to create jobs?
Our national economic plan for jobs and growth has been getting results…A $75 billion national infrastructure investment plan that is building the runways, railways and roads Australia needs to remain competitive, and create jobs.
– Treasurer Scott Morrison
At certain points in the economic cycle, infrastructure spending can help create jobs. New projects create jobs for workers involved in planning, building and deploying each project, as well as for the suppliers of equipment and materials needed as inputs.
And in the longer term, the Treasurer is right to say that infrastructure is essential if our cities are to remain competitive.
But again, context is everything.
Infrastructure can put people to work when there is “slack” in the labour market – when there is unemployment or underemployment, in other words. But if there is little slack in the labour market, then the workers required to get a project off the ground will be drawn from other productive activities. In that case, there may be no boost to jobs or economic growth, because one activity is merely displacing another.
This means starting with some basics: the government should not commit to expensive new infrastructure projects until it has commissioned a detailed look at the economic impacts of the investments, and it has made public the results of that analysis.
That’s how infrastructure policy would be done in an ideal world. But sadly, in a pre-election budget, we can probably expect politics to triumph over policy, yet again.