Great approach, weak execution. Economists decline to give budget top marks


Wes Mountain/The Conversation, CC BY-ND

Peter Martin, Crawford School of Public Policy, Australian National UniversityDespite overwhelmingly endorsing the general stance of the 2021 budget, only a few of the 56 leading economists surveyed by the Economic Society of Australia and The Conversation are prepared to give it top marks.

Asked to grade the budget on a scale of A to F given Treasurer Josh Frydenberg’s objective of securing Australia’s economic recovery and building for the future, only three of the 56 economists surveyed gave it an ‘A’.

But a very large 41% awarded it either an A or a B, up from 37% in last year’s October COVID budget.

The economists chosen to take part in the Economic Society of Australia survey have been recognised by their peers as Australia’s leaders in fields including macroeconomics, economic modelling, housing and budget policy.

Among them are a former head of Australia’s prime minister’s department, a former member of the Reserve Bank board, a former OECD director and two former frontbenchers, one from Labor and one from the Coalition.

Of the panel members who commented on the historic stance of the budget — expanding the size of the deficit beyond what it would have been in order to drive down unemployment — all but three offered enthusiastic endorsement.

Emeritus Professor Sue Richardson of the University of Adelaide commended the government for at last turning its back on a “debt and deficit” mantra, that was “never justified”.




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Exclusive. Top economists back budget push for an unemployment rate beginning with ‘4’


Professor Richard Holden praised the “watershed”. In due course there should be increased attention paid to the structure and quality of spending, but for now we should applaud the “Frydenberg Pivot”.

Saul Eslake said the strategy of providing further stimulus to push unemployment down to levels not seen consistently since the first half of the 1970s was the right one. It meant the Reserve Bank and the treasury would no longer be working at “cross purposes” as they had been for most of the past two decades.



The Conversation, CC BY-ND

But Eslake said the budget fell short in the A$20 billion it devoted to tax concessions for small business in the mistaken and unfounded belief it is “the engine room of the economy” and in housing measures that failed to heed warnings from history about the risks of ultra-high loan-to-valuation ratios.

Rebecca Cassells of the Bankwest Curtin Economics Centre said the claim that 60,000 jobs would flow from extending the temporary loss carry back and full expensing tax concessions was “a stretch,” with the connection quite tenuous.

Bucks, but not the biggest bang

Consultant Nicki Hutley said a bigger boost to the JobSeeker unemployment payment would have achieved much more than the $7.8 billion one-year extension of the “lamington” low and middle income tax offset.

Economic modeller Janine Dixon said while spending more to get more people into work was the “right setting for the times,” Australia had to ensure its workforce was ready to supply the extra aged care and child care and disability services it had funded by delivering the right training, especially in the absence of migration, which has traditionally been used to address workforce shortages.

Labour market specialist Elisabetta Magnani said measures to boost wages in the caring occupations could have achieved the double bonus of drawing more workers into those occupations and shrinking the gender pay gap, given that more than 80% of the workers in residential aged care are female.

Little for net-zero

Michael Keating, a former head of the prime minister’s department, said restoring high wage growth would require big investments in education and training, which sits oddly with the cuts in funding for universities. The extra funding for apprentices and trainees only makes up for past cuts.

Professor Gigi Foster said the $1.7 billion spent on childcare subsidies was only “surface-level fiddling with the sticker price”.

“Where is the supply-side intervention required to make childcare services sustainably accessible and of high quality?” she asked. “Childcare should be viewed as social infrastructure. Instead, when we heard infrastructure, it was mainly code for transportation.”




Read more:
Fewer hard hats, more soft hearts: budget pivots to women and care


Margaret Nowak of Curtin University said a budget that really “built for the future” would not have focused on the “infrastructure of the past”. Professor Richardson lamented that most of the infrastructure spending was on traditional “roads and ports” when the future was net-zero emissions.

“There is little in the budget that supports this transformation,” she said. “It is an extraordinary lost opportunity.

Nicki Hutley said retooling the economy for zero emissions would have brought forth “more jobs, higher wages, more growth and private sector co-investment”.

Some concern about debt

Former OECD director Adrian Blundell-Wignall said a much-greater investment in vaccinations would have helped “get the economy back to work and the borders opened sooner which, in turn, would have saved unemployment benefits, tourism, aviation support and the need for the extension of temporary measures”.

And he was concerned that a jump in US inflation might cause international interest rates to rise faster than expected, forcing Australia to cut its projected budget deficits in order to stabilise net debt.




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Frydenberg spends the bounty to drive unemployment to new lows


Former International Monetary Fund economist Tony Makin, a critic of government spending during the global financial crisis,
described the budget spending as a “knee-jerk primitive Keynesian reaction” to the COVID recession.

Unease about going into debt to keep and create jobs aside (and very few of the economists surveyed shared Makin’s unease) the criticisms of the economists surveyed relate to execution and details. If Frydenberg had been judged on his approach, most would have given him an A.


The Conversation

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

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

Australia: Budget 2021


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


Peter Martin, Crawford School of Public Policy, Australian National UniversityNever before has a budget spent so much to supercharge the economy after the worst of a recession has already passed.

The economy bounced back from last year’s COVID recession far more sharply than the treasury (or just about anyone else) expected.

The bounty from the higher-than-expected tax collections that flowed from more people than expected in work, a much higher-than-expected iron ore price, and lower than expected unemployment benefits, should amount to A$26.8 billion this financial year, $15.5 billion the next, and $18.6 billion the year after that.

But rather than bank those riches and improve the budget bottom line, as the Coalition’s budget strategy used to require it to do, the government has instead decided to spend the lot.



It will spend $21 billion of this year’s $26.8 billion; it will spend or give up in new tax concessions $26.9 billion — far more than next year’s $15.5 billion bounty, and so on.

Treasurer Josh Frydenberg has come good on his historic promise to keep spending way beyond the crisis, to drive the unemployment rate down below where it was when the pandemic started.




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View from The Hill: Frydenberg finds the money tree


The budget predicts an unemployment rate of 4.75% by mid-2023 and 4.5% by mid-2024.

If delivered (and the treasurer’s revised strategy published in the budget requires him to keep spending until it is), it will mark what the budget papers describe as, “the first sustained period of unemployment below 5% since before the global financial crisis, and only the second time since the early 1970s”.



In the same way as Australia emerged from the early-1990s recession with a dramatically lower inflation rate because the Reserve Bank was determined to salvage something from the carnage, Frydenberg has decided to exit the COVID recession with an ongoing lower floor under unemployment.




Read more:
Less hard hats, more soft hearts: budget pivots to women and care


Both the treasury and Reserve Bank believe Australia can sustain much lower unemployment than the 5-6% it has grown used to. The treasury’s estimate is 4.5%; the Reserve Bank’s is nearer 4%. Before COVID, the United States managed 3.5%.

If achieved, it will mean hundreds of thousands more Australians providing services, drawing paycheques, and paying tax. And no longer on benefits.



A dramatic budget graph tracking the fortunes of every Australian whose payroll was reported to the tax office throughout 2020 shows the biggest victims of the COVID recession — by far — were those without post-school education. At the deepest point of the COVID recession in May, they were almost three times as likely to have lost their jobs as Australians with degrees.

The budget provides an extra $400 million for low-fee or no-cost training for jobseekers, to be matched by the states; an extra $481 million for the transition to work employment service directed at Australians aged 24 and under; and a further $2.4 billion to the Boosting Apprenticeship Commencements program.




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Budget 2021: the floppy-V-shaped recovery


But most of what it intends to do for jobs is the indirect result of a barely precedented expansion in spending and tax concessions in all sorts of areas.

The extra $17.7 billion it is spending on aged care over four years ought to create many jobs, as should the extra $13.2 billion it is spending on the National Disability Insurance Scheme.

The $1.7 billion it is spending on making childcare more affordable should both create jobs in the sector and free up more parents to return to work.

An extra $20 billion in business tax concessions should help as well.




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Cuts, spending, debt: what you need to know about the budget at a glance


The budget’s break with the past isn’t its dramatic expansion of discretionary spending. That’s common in recessions. What’s unusual is that spending is being ramped up when we are not in recession.

In the words beloved of economists, the spending is “pro-cyclical” rather than “counter-cyclical”. It is designed to supercharge our exit from recession rather than merely bring it about.

And there’s little sign of the spending stopping.

If this government or the next achieves success in driving the unemployment rate down to 4.5%, it will want to go further. It will keep going further right up until we get inflation near the top of the Reserve Bank’s 2-3% target band and wage growth in excess of 3%, neither of which this budget foresees in forecasts going out four years.




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Budget splashes cash, with $17.7 billion for aged care and a pitch to women


Government debt, anathema to the Coalition when Labor ran it up during and after the global financial crisis, isn’t much of a constraint.

The Reserve Bank holds much of the government’s debt (it didn’t during Labor’s time) and is buying as much as it needs to to keep interest rates low. Recently, interest rates have been rising, but not for most of the government’s borrowings, which are long-term.

The budget papers show that even with net government debt at 34% of GDP and heading to 44%, interest payments on that debt are much less of a drain on the budget than they were back in the mid 1990s when net debt hit 18% of GDP.



And the times have changed. Worldwide, few nations have an aversion to government debt, especially not the United States. In Australia, the only side of politics that used to complain about debt is in currently in office.

Before COVID, the fiscal strategy spelled out in the budget as part of the Charter of Budget Honesty required the government to eliminate net debt.

Frydenberg’s revised strategy merely requires him to stabilise and then reduce net debt “as a share of the economy”.

His priority is driving down unemployment. If that helps expand the economy and so drives down net debt as a share of the economy so much the better. But he wants to do it regardless.

The Conversation

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

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

Budget splashes cash, with $17.7 billion for aged care and a pitch to women


AAP/Mick Tsikas

Michelle Grattan, University of CanberraThe Morrison government has brought down a big-spending, expansionary budget that forecasts Australia’s unemployment rate will fall to 4.75% in two years time.

But Australia’s international borders won’t be properly open for at least a year, according to the budget’s assumptions.

“Australia is coming back,” Treasurer Josh Frydenberg told parliament on Tuesday night.

“Employment is at a record high, with 75,000 more Australians in jobs than before the pandemic.

“This budget will help to create more than 250,000 jobs by the end of 2022-23,” Frydenberg said.

“This budget secures the recovery and sets Australia up for the future.”




Read more:
Frydenberg spends the budget bounty to drive unemployment down to new lows


The deficit for next financial year is expected to be A$106.6 billion, with cumulative deficits of $342.4 billion over the forward estimates.

As the government continues to spend to underpin the recovery, net debt will increase to 30% of GDP at the end of June, before peaking at 40.9% at June 30, 2025.

Aged care centrepiece

The centrepiece of Frydenberg’s third budget – which had been largely pre-announced by the government – is a $17.7 billion aged care package, spent over five years and including 80,000 extra home care packages.

Frydenberg said this would make a total of 275,000 packages available. The present waiting list is 100,000.

The aged care package is designed as long term structural reform after the royal commission found the system in a parlous state and needing a comprehensive overhaul.

“We will increase the time nurses and carers are required to spend with their patients,” Frydenberg said.

“We will make an additional payment of $10 per resident per day to enhance the viability and sustainability of the residential aged care sector.

“We will support over 33,000 new training places for personal carers, and a new Indigenous workforce.

“We will increase access for respite services for carers.

“We will strengthen the regulatory regime to monitor to monitor and enforce standards of care.”

In other major initiatives, there is $2.3 billion for mental health, while the earlier-announced adjustment to the JobSeeker rate will cost nearly $9.5 billion over the budget period.

Tax cuts and a focus on women

Some 10.2 million low and middle income earners will benefit from the extension of the tax offset for another year, at a cost of $7.8 billion.

As Morrison seeks to repair his image with women, there is a range of measures on women’s safety, economic security, health and wellbeing totalling $3.4 billion.

This includes $1.7 billion for changes to child care, $351.6 million for women’s health, and $1.1 billion for women’s safety.

There will be another $1.9 billion for the rollout of COVID vaccines.

Quizzed at his news conference on the future of Australia’s closed border, Frydenberg hedged his bets. “When it comes to international borders, it’s an imprecise business.”

The budget papers assume a gradual return of temporary and permanent migrants from mid-2022, and small arrivals of international students, starting late this year and increasing from next year.

“The rate of international arrivals will continue to be constrained by state and territory quarantine caps over 2021 and the first half of 2022, with the exception of passengers from Safe Travel Zones.

“Inbound and outbound international travel is expected to remain low through to mid-2022, after which a gradual recovery in international tourism is assumed to occur,” the papers say.




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Budget 2021: the floppy-V-shaped recovery


The budget is heavy on continued help for business, with more than $20 billion extra in support.

With the country facing a skill shortage and skilled workers not able to enter, Frydenberg said the government would create more than 170,000 new apprenticeships at a cost of $2.7 billion.

“We will help more women break into non-traditional trades, with training support for 5,000 places,” he said

There will be 2,700 places in Indigenous girls academies to help them finish school and enter the workforce.

More STEM scholarships will be provided for women.

Another 5,000 places are being made available in higher education short courses.

Housing and support for retirees

The budget’s housing package includes another 10,000 places under the New Home Guarantee for first home buyers who build or buy a newly-built home. It will also increase the amount that can be released under the First Home Super Saver Scheme.

From July 1, 10,000 guarantees will be provided over four years to single parents with dependants to build or buy a home with a deposit as low as 2%.

Retirees will benefit from a measure to encourage them to downsize.

Older people will no longer have to meet a work test before they can make voluntary contributions to superannuation. People aged over 60 will be able to contribute up to $300,000 into their superannuation if they downsize.

Given the housing shortage, this is aimed at freeing up more housing for younger people.

The government will also enhance the Pension Loan Scheme by providing immediate access to lump sums of $12,000 for single people and $18,000 for couples.

Although modest, one measure that will help women, who retire on average with much less superannuation than men, is that the government will remove the $450-a-month minimum income threshold for the superannuation guarantee.

Frydenberg said the government was committing another $15 billion over a decade to infrastructure, including roads, airports and light rail.

There is also $1.2 billion for multiple measures to promote the digital economy.

Labor says it’s ‘just more of the same’

The opposition was dismissive. Anthony Albanese said, “Australians have endured eight long years of flat wages, insecure work and skyrocketing cost of living under the Liberals and Nationals – and this budget does nothing to change that.

“It’s just more of the same from a tired old government.”

The Business Council of Australia welcomed the budget, saying it “strikes a prudent balance between growth and fiscal discipline by making sensible investments in the levers of growth”.

But the ACTU said while the Coalition’s rejection of austerity was welcome, “the government has failed to use the spending in this budget to tackle the underlying problems of low wages and insecure jobs”.

Instead, it was “handing billions of dollars to business including in the critical areas of aged care, mental health and vocational training, with little accountability or strings attached”.

The Australian Aged Care Collaboration, which represents more than 1,000 providers, congratulated the government on agreeing to implement most of the royal commission’s 148 recommendations.

AACC representative Patricia Sparrow said “after 20 government reviews in 20 years, this budget, and the government’s response to the royal commission’s recommendations, finally addressed many of the challenges facing aged care”.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.

Less hard hats, more soft hearts: budget pivots to women and care


WHYFRAME/Shutterstock

Danielle Wood, Grattan Institute and Tom Crowley, Grattan InstituteLast year’s post-budget photo ops were all heavy machinery and hard hats. But this year we can expect soft-focus shots with children and the elderly.

The big story of the budget is not just that the government is spending tens of billions more as we emerge from the recession; it is also the major shift in what the money will be spent on.

The change in fiscal strategy – from a “construction-led recovery” last year to a concerted emphasis on women and the care sector this year – is based on solid economic advice.

It has also come at the best possible time for a government that has been in the spotlight for underfunding aged care and mental health, and under pressure to do more to support women’s economic participation.

The treasurer was understandably eager to emphasise the Government’s new spending initiatives. And the shift is notable.

But while there is welcome progress, the budget falls short of delivering big structural reforms that are needed for childcare, aged care, and mental health.

Budget delivers on social spending

For childcare, the government has announced an extra $1.7 billion over three years starting from July 2022, a modest boost to the $9 billion the government spent last financial year.

We proposed a more ambitious package, which would have spurred big economic gains from higher female workforce participation.

The budget falls short of that, but it is still well targeted at the families that face the most crippling out-of-pocket childcare costs: those with two or more children under six in care.



For aged care, there is an extra $17.7 billion over four years, a significant increase to the $22.5 billion the government spent last financial year.

While not enough to deliver the Aged Care Royal Commission’s vision of a full rights-based model – where every Australian is entitled to the care they need – it still offers improvements.




Read more:
Budget splashes cash, with $17.7 billion for aged care and a pitch to women


The 80,000 new home care packages will help to reduce waiting times, and the boost to front line care minutes and the Basic Daily Fee provides additional support to those in residential care.

The accompanying focus on attracting, training, and up-skilling staff is particularly welcome given that the Royal Commission anticipates future staff shortages, although the Budget doesn’t have much specific to say about pay in the sector.




Read more:
View from The Hill: Frydenberg finds the money tree


For mental health, a sector whose problems have been laid bare by increased demand for services during the pandemic, there is an extra $2.3 billion over four years.

Funding is targeted towards expanding access to mental health services and bolstering suicide prevention, but it falls short of the system reform required.

A women-centric makeover

The budget flags $3.4 billion over four years for women’s measures (including childcare). Outside of childcare, the biggest are for women’s health ($365 million) and spending on women’s safety including and violence prevention ($1.1 billion).

These measures, particularly the increased spend on front line and response services for family violence are important and significant.

But the more significant shift for women comes with the recognition that job-creating budgets need to invest in a broader range of jobs including in services sectors. About 80% of Australians work in services (and 90% of working women), so investing in these jobs ensures a broader recovery than the previous hard-hat focus.




Read more:
Frydenberg spends the budget bounty to drive unemployment down to new lows


While last year’s Budget ran hard on infrastructure and investment tax breaks that favour capital-intensive sectors, this time around there is a stronger focus on care economy jobs through the spend on aged care, childcare and mental health.

Even the extended JobTrainer scheme receives a care-centred makeover, with an additional 33,800 low fee and free training places set aside to support future aged care workers.

Services sectors hit hard by COVID also receive some cash including the already announced $1.2 billion support package for the aviation and tourism sector and $300 million for the creative and cultural sector. Universities again miss out but private education providers also receive additional supports.

The long-term challenge

Other major measures in the Budget include the rollover of the Low and Middle Tax Offset (the ‘lamington’) for another year – delivering up to $1080 into the hands of low- and middle-income taxpayers next year – and extension of two key business tax measures: instant expensing and loss carry backs – focused on bringing forward business investment.

The challenge is that much of this increased spending is permanent.

And when combined with the impact of COVID on migration and on the size of the economy, this leaves the medium-term forecasts looking markedly different to the (probably unrealistic) ones that voters were served up before the 2019 election.



But, as the Parliamentary Budget Office suggested a fortnight ago, even with this shift, Australia’s debt levels are sustainable and are likely to remain so. Net debt is forecast to stabilise and then fall over the medium term, even with continuing deficits.

This doesn’t mean that long-term structural challenges disappear, but it does mean that there is more breathing space for the government to let voters see its softer side. As an economic as well as political strategy, it makes a lot of sense.


The Conversation

Danielle Wood, Chief executive officer, Grattan Institute and Tom Crowley, Associate, Grattan Institute

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

View from The Hill: Frydenberg finds the money tree


Wes Mountain/The Conversation

Michelle Grattan, University of CanberraJosh Frydenberg’s third budget aims to give Australia a post-pandemic soft landing, using revenue windfalls for spending and tax cuts rather than for slashing the deficit.

Its philosophy is very much gain, not pain, for a population that has endured the stress of the pandemic, albeit not the devastation experienced by so many other countries.

There are plenty of winners, and minimal direct losers in a budget that lays the ground work for an election that is still expected next year rather than this.

Hard decisions have been eschewed. Prime Minister Scott Morrison is trying to avoid offending voters.

The political prism of this budget is very much in the moment. As such, it leaves Opposition Leader Anthony Albanese little room. Excessive criticism, and he risks sounding carping. Demands for too much more, and he might be accused of irresponsibility.

The $7.8 billion extension of the low and middle income tax offset is a carrot for Labor’s core constituency. Frydenberg told reporters the recipients were “the tradies and the truckies,” and “the teachers and the nurses”.

The budget dodges major reform, with the notable exception of aged care, which the royal commission’s scathing findings made unavoidable.




Read more:
Budget splashes cash, with $17.7 billion for aged care and a pitch to women


The deficit for the coming financial year is forecast to be $106.6 billion, only marginally below the December budget update forecast of about $108 billion.

Tens of billions of dollars in windfall revenue (from the faster-than-expected economic recovery, and high iron ore prices) have been distributed, rather than going to the bottom line.

At the end of the budget period, in 2024-25, the deficit will be an estimated $57 billion. Indeed, there is no surplus in sight in a decade.

Without a policy U-turn, Frydenberg as treasurer will likely never deliver that “back in black” budget. Indeed, by the time there is a surplus, he might have served as prime minister, been in opposition, and departed politics.

But of course, after the next election, at some point there will be a change of policy, towards fiscal consolidation.

Frydenberg presents an optimistic picture for the economy in the coming financial year, with the caveat that the pandemic lurks and therefore so does uncertainty.

The budget forecasts unemployment falling to 5% next year and dropping to 4.5% by June 2024. Growth peaks at 4.25% next financial year, but slows after that.

Critics will say that given the state of the economy, and the amount of revenue, budget repair is being delayed too long. That won’t, of course, be the judgement of the public.

We can apply many measuring sticks to the budget, beyond the spending-versus-repair one.

The most obvious is its response to the aged care royal commission. The government is putting some $17.7 billion into the system, and there will be 80,000 additional home care packages (the waiting list is 100,000).

The experts will argue over the money and probably conclude it is not enough. Equally, the test must be whether the initiatives adequately address improving regulation and achieving a larger, better trained and remunerated workforce. The government makes the right noises but the judgement can only come later. The workforce issues are particularly challenging.




Read more:
Frydenberg spends the budget bounty to drive unemployment down to new lows


The size of the task is enormous, with a planned new funding model to improve quality and a goal of cultural reform. Health Minister Greg Hunt on Tuesday described it as a “once in a generation” reform. The program will take five years.

As foreshadowed, there are many initiatives for women – on safety, health and economic security. Reforms to child care benefit families, but women especially will be making comparisons with the more generous, less targeted Labor scheme.

Many individuals and businesses will be scrutinising the budget for what it says about opening Australia back to the world.

The message is that it will be a slow path.

Migrants, temporary and permanent, will gradually start to come from mid next year.

Late this year, “small phased programs” of international students will start.

Inbound and outbound travellers will remain low for the next year.

But hey – it’s assumed “a population-wide vaccination program is likely to be in place by the end of 2021”. Let’s hope this is so – but it’s only an assumption.

By the end of next year, barring a fresh assault by the pandemic, we might – just might – be looking at more normality. And then we will be facing a more “normal” budget too, with its share of nasties.


The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

Budget 2021: the floppy-V-shaped recovery


Lukas Coch/AAP

Richard Holden, UNSWI don’t often feel sorry for politicians. But having to manage a process that produces forecasts about the next four years of an economy still clawing its way out of a pandemic, and then having to publicly defend those forecasts, is no easy task.

That said, our compassion for the plight of Treasurer Josh Frydenberg shouldn’t stop us judging his budget forecasts. And, like all forecasts, those rest heavily on the assumptions that underpin them.

Core budget assumptions

The core budget assumptions about unemployment and economic growth are relatively rosy. Unemployment is forecast to be down to 4.75% by 2023-23 and 4.5% the year after – both well below pre-pandemic levels.

Real GDP growth is expected to rebound to 4.25% in 2021-22 and then settle down to about 2.5% thereafter. Given we are unlikely to have the population growth of the pre-COVID era, that’s a pretty high rate.

Taking a look graphically at actual and forecast GDP makes it clear why folks are talking about a “V-shaped recovery”. But even the fairly bullish assumptions reveal a recovery where the V isn’t really sharp enough. Call it a “floppy-V-shaped recovery.”



That’s rather disappointing, especially given Frydenberg has fundamentally shifted Liberal party fiscal strategy away from “debt and deficits” and dalliances with austerity, to one that sees government spending at more than 26% of GDP in steady state.

But what is more disappointing is that this increased spending isn’t forecast to translate into stronger employment and wages growth.




Read more:
Frydenberg spends the budget bounty to drive unemployment down to new lows


The budget forecasts an unemployment rate of 4.5% in 2023-24 and 2024-25. That’s better than pre-pandemic levels, but not all that close to the 4%-or-lower number many economists (including RBA governor Philip Lowe) think might be required to get wages growing meaningfully for the first time since 2013.

The budget forecasts reflect this, with wages growth of 2.25% in 2022-23 and 2.5% in 2023-24 both equal to forecast inflation in those years. That is, real wages growth is not even forecast to begin again until 2024-25—and even then, only barely.

Non-mining business investment is forecast to grow by 1.5% in 2021-22 and then jump by a massive 12.5% in 2022-23. That might reflect a post-COVID investment boom driven by a widely mRNA-vaccinated nation and a raft of government incentives. Or it might just be wishful thinking.




Read more:
View from The Hill: Frydenberg finds the money tree


As to immigration, we can expect our borders to be largely shut for the foreseeable future. This is reflected in the budget’s forecast population growth of “around 0.1% in 2020-21, 0.2% in 2021-22 and 0.8% in 2022-23.”

Whether immigration does actually pick up significantly in 2022-23 depends crucially on our vaccination rollout.

If we can reverse the bungled execution to date, overcome vaccine hesitancy, and secure enough Pfizer and Moderna doses (including for boosters) immigration might grow strongly again.




Read more:
Less hard hats, more soft hearts: budget pivots to women and care


But there are a number of things that have to go right for that to happen. And the government has a poor track record to date on those things.

And then there’s one notable assumption that makes news in every budget: the iron-ore price. The budget papers themselves highlight the importance of it, noting:

“The recent strength in key commodity prices, particularly iron ore, has seen a significant resurgence in Australia’s terms of trade […] As a result, nominal GDP is expected to grow by 3¾% in 2020-21, by a further 3½% in 2021-22 and by 2% in 2022-23.”

The budget assumes the iron-ore price will decline from its current level of over US$200 a tonne, to US$55 a tonne by March 2022. This incredibly pessimistic assumption basically gives the government a buffer on the headline deficit figure. If the forecast of a $99.3 billion deficit in 2022-23 is beaten significantly, it will likely be due to iron ore prices staying high.

The biggest assumption of all

The core economic assumptions discussed above underpin the budget bottom line – a number that used to receive considerably more attention when there was a question of “when” the budget might be back in surplus.

Those days are gone.

Frydenberg has engineered a remarkable shift in Liberal party economic philosophy. While maintaining their brand as “the party of lower taxes, not higher taxes”, they have jettisoned budget-balance fetishism.




Read more:
Cuts, spending, debt: what you need to know about the budget at a glance


Good. It’s about time.

But the biggest assumption of all in the out years of the budget is that the government – should it be reelected – sticks to this new strategy. If they do it holds the promise of being transformative.

It would represent a modest but welcome transformation of the economy, and a dramatic transformation of the Liberal Party brand.


The Conversation

Richard Holden, Professor of Economics, UNSW

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

Cuts, spending, debt: what you need to know about the budget at a glance


AAP/Shutterstock/The Conversation, CC BY-ND

Alexandra Hansen, The Conversation; Chynthia Wijaya, The Conversation, and Wes Mountain, The ConversationAfter twenty years of rhetoric from both sides of politics focusing on getting back to surplus, this year’s budget continues pandemic spending in the hope of getting the economy back on track as the pandemic starts to settle.

The projected deficit is $161 billion for 2021-22, but rather than tackling this in the next four years, the government’s focus is instead on payments and long-term serviceable debt.



The government is projecting a bump in real GDP growth in the next financial year, before growth settles again over the near future.



Part of the reason the government can afford to keep spending high is the low cost of international debt. This means that while net debt will continue to increase beyond the next four years the budget estimates cover, net interest payments should remain low.



And another major factor in the budget’s performance – despite the big spending – is the impact of a very high iron ore price, in the midst of a global pandemic.

The chart below shows the difference between policy decisions and other factors, generally beyond its control.



With a major focus on business and infrastructure spending to revive the economy, extensions to tax benefits and announced packages for childcare, there are many spending announcements in this year’s budget and very few cuts or savings.




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


The difference is so great that we have drawn out some of the major spending announcements and included all significant cuts in our headline figures for this year’s budget.


The Conversation

Alexandra Hansen, Deputy Editor and Chief of Staff, The Conversation; Chynthia Wijaya, Deputy Editor, Multimedia, The Conversation, and Wes Mountain, Multimedia Editor, The Conversation

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

View from The Hill: a budget for a pandemic, with next year’s election in mind


Michelle Grattan, University of CanberraTreasurer Josh Frydenberg calls this a “pandemic budget” – one to sustain the economy in times that are still uncertain – but it also has a substantial element of an election budget.

That’s not to suggest Prime Minister Scott Morrison will rush to the polls this year. But given the election has to be held by May 21, 2022, this is likely to be the last budget of the cycle. Another could be squeezed in, as in 2019, but it would have to be brought forward from the normal time.

Last year the treasurer said budget repair and debt repayment – otherwise known as the hard and unpleasant decisions – wouldn’t be undertaken before unemployment was “comfortably” below 6%.




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Now unemployment is 5.6% (the March figure) but Frydenberg has shifted the goal posts, so the emphasis remains on recovery, with more difficult reckonings a way off – beyond the election.

Given a grim COVID picture internationally and a long way to go with the vaccine program locally, that is sound – and also politically convenient.

In this budget, the government’s policy approach is firmly aligned with that of the Reserve Bank, with Frydenberg embracing the bank’s objective of pushing unemployment well below pre-pandemic levels, which means to a rate with a 4 in front of it.

Two central spending areas in the budget have been, in effect, imposed on the government.

It had to respond to the damning findings of the aged care royal commission. The fact most Australian COVID deaths occurred in aged care underlined how unfit for purpose the system is. Frydenberg told the ABC there will be more than $10 billion spending on aged care over the forward estimates.

The budget’s “women’s” focus — a sharp contrast to last year — has drivers that go beyond the urgent need to do more to combat violence against women, and other imperatives.

Morrison’s “women problem”, which exploded with the demonstrations following the high-profile allegations of rape, most obviously increased the attention on women in this budget, which will include a women’s statement with initiatives on health, safety, and economic security.

Also, Labor’s decision to make childcare one of its main policy pitches, promising a big spend, reinforced economic considerations pushing the government to produce its own childcare policy (which doesn’t start until July 2022).

Even in the middle of the pandemic last year, few would have thought that by now we’d still have no firm idea when our international borders will re-open.

Morrison is cautious about it, and judges that’s in line with the thinking of the Australians public at the moment. He can read those state electoral results as well as anyone — he knows people put health safety above all else.

“International borders will only open when it is safe to do so”, he said on Facebook at the weekend. “Australians are living like in few countries around the world today.”

On the other hand, the pressure for students to come, migration to resume and people to be allowed to travel must build sooner or later.

The budget’s assumptions will put the reopening in 2022, Frydenberg told the ABC at the weekend.




Read more:
Frydenberg promises housing breaks in ‘pandemic budget’


Economist Saul Eslake says while keeping the country closed to the outside world is obviously not sustainable in the long run, it has, in a perverse way, some short run plusses for the government’s economic objectives.

“It’s very easy to get unemployment down when the border is closed. You only need to create 5000 new jobs a month to prevent unemployment rising.

“Previously [with migrants coming] you needed 16,000 new jobs a month. Currently we’re creating 60,000 a month,” Eslake says.

Migrants stimulate growth. But so does having Australians unable to travel overseas, Eslake says. They can only spend domestically – or save – the $55 billion they would normally be spending abroad. They appear to be spending quite a deal of it on things like home equipment, furnishings, renovations, cars, and even clothing.

While fiscal repair is formally delayed, the budget will show it is gradually, to a degree, repairing itself.

The quicker-than-expected bounce back of the labour market, which reduces welfare costs and boosts tax revenue, and the similar rebound in corporate profits, help the bottom line. Frydenberg says that, despite JobKeeper coming to an end, 105,000 people came off income support in April. High iron ore prices are also a godsend to revenue.

Chris Richardson, from Deloitte Access Economics, has forecast a deficit for this financial year of about $167 billion, compared with the December budget update figure of $198 billion. For 2021-22 , the Deloitte forecast is a deficit of about $87 billion compared with the update’s forecast of $108 billion.

Still, a balanced budget will be some years off, Richardson says.

He gives four reasons: substantial structural spending on aged care, mental health, childcare, disability and the like; low wage and price inflation (inflation helps budgets); missing migrants; and interest payments on debt (helped by low interest rates but still significant).

On what we know, the budget will be safe rather than adventurous. And while budgets can always unexpectedly trip over their own feet, and inevitably have plenty of critics, this will be the sort of benign one that doesn’t go out of its way to hurt or offend voters.

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.

Upgrades for myGov and My Health Record sites in budget’s $1.2 billion digital strategy


Michelle Grattan, University of CanberraMore than $500 million of a $1.2 billion digital economy strategy in Tuesday’s budget will be spent on overhauling the federal government’s myGov and My Health Record sites.

The initiatives, to be announced by Scott Morrison on Thursday, include $200.1 million for myGov, which is the main portal for people to access government services on line.

Changes will make it easier for people to find services, from childcare providers to disaster support, as well as to manage payments and claims.

The government says the time saved by the enhancements will generate benefits across the economy worth an estimated $3.6 billion over a decade.

The package will put $301.8 million into what the government describes as the “next wave” of My Health Record, expanding the system, which has 23 million registered users. My Health Record contains summaries of people’s health information. It is managed by the Australian Digital Health Agency.

Some of this spending will assist the vaccination rollout, such as giving people alerts when vaccinations are due. There will be funds to help the move of aged care into a digital system that can link in with My Health Record to make safer and more efficient transitions between aged care and hospitals and other health facilities.

In other initiatives, $124.1 million will be provided to build Australia’s capability in Artificial Intelligence. This will include a National Artificial Intelligence Centre, to promote the adoption by business of AI technologies, supported by a network of AI and digital capability centres.

More than $100 million will go to boosting digital skills including a pilot program for work-based digital cadetships.

Business will benefit from investment incentives. There will be a digital games tax offset of 30% to help Australia obtain more of the $250 billion annual global video game development market.

The Interactive Games and Entertainment Association says Australia could generate a $1 billion games industry within a decade. In 2018-19, the Australian games sector earned $144 million.

Changes to the way businesses can claim depreciation on intangible assets such as intellectual property and in-house software, and help for small businesses to build digital capacity are also in the measures.

The government will invest $111.3 million to support the Consumer Data Right (CDR) rollout. The CDR helps consumers to compare and switch between products and services. This sharpens price and service competition between providers.

The $1.2 billion in spending on the digital strategy package is over six years.

Morrison said: “We need to keep our foot on the digital accelerator to secure our economic recovery from COVID-19”.

Treasurer Josh Frydenberg said: “Greater digital adoption will improve our competitiveness and lift our productivity – driving job creation and higher wages”.

In a pre-budget speech on Thursday opposition leader Anthony Albanese will distance himself from the big spending Labor proposed at the last election.

He will say money was tight when he was growing up and his mother taught him “the value of a dollar”.

“That’s why, when it comes to thinking about government spending, I am cautious”.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.