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


Danielle Wood, Grattan Institute and Kate Griffiths, Grattan Institute

As we come to the end of 2019, you’d be forgiven for being confused about the health of the economy.

Treasurer Josh Frydenberg regularly points out that jobs growth is strong, the budget is heading back to surplus, and Australia’s GDP growth is high by international standards.

The opposition points to sluggish wages growth, weak consumer spending and weak business investment.

Monday’s Mid-Year Economic and Fiscal Outlook (MYEFO) provides an opportunity for a pre-Christmas stock-take of treasury’s thinking.

1. Low wage growth is the new normal

Rightly grabbing the headlines is yet another downgrade to wage growth.

In the April budget, wages were forecast to grow this financial year by 2.75%. In MYEFO, the figure has been cut to 2.5%.

Three years ago, when Scott Morrison was treasurer, the forecast for this year was 3.5%.



Each time wages forecasts missed, treasury assumed future growth would be even higher, to restore the long-term trend.

Today’s MYEFO is a long-overdue admission from treasury that labour market dynamics have shifted – in other words, lower wage growth is the “new normal”.

Even by 2022-23, wages are projected to grow at only 3% (and even that would still be a substantial turnaround compared to today).




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


Of course, wages are still rising in real terms (that is, faster than inflation), a fact Finance Minister Mathias Cormann is keen to emphasise.

But Australians will have to adjust to a world of only modest growth in their living standards for the next few years.

2. Economic growth is underwhelming, especially per person

Economic growth forecasts have received a pre-Christmas trim.

Treasury now expects the economy to grow by 2.25% this financial year, down from the 2.75% it expected in April.

Particularly striking is the sluggishness of the private economy, with consumer spending expected to grow by just 1.75%, despite interest rate and tax cuts, and business investment idling at growth of 1.5%, down from the 5% forecast in April.




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


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

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

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

3. The government is at odds with the Reserve Bank

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

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

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

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




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

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

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

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

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

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




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

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

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

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



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

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

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

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

Where does it leave us?

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

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

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

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

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

Surplus before spending. Frydenberg’s risky MYEFO strategy


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

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

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



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

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

Uncertainties abound

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

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

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

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

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

Housing versus households

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

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

The assumption on households

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

seems optimistic.

However the treasury acknowledges

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

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

Surplus before spending

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

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

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

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



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

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

Surplus for the sake of surplus

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

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




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


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

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



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

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

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


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

There are several gaps in the estimates of spending.

Likely costs left out

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

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




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


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

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

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

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

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

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

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

Lower growth, tiny surplus in MYEFO budget update


Michelle Grattan, University of Canberra

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

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

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

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

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



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

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

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

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

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

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

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

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

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




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


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

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

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



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

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

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

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

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

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




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


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

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

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

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

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

Michelle Grattan, Professorial Fellow, University of Canberra

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

MYEFO reveals billions more in revenue, $9 billion in fresh election tax cuts


Peter Martin, The Conversation

Higher-than-expected company tax revenue and lower-than-expected spending have boosted the budget’s bottom line by A$15 billion over next four years, allowing it to forecast cumulative surpluses of A$30.4 billion, double what the budget predicted in May.

Modestly improved surpluses

The midyear budget update cuts the projected deficit for 2018-19 from a May estimate of A$14.5 billion to A$5.2 billion.

The surplus forecast for 2019-20 climbs from A$2.2 billion to A$4.1 billion. By 2021-22 the surplus is forecast to be A$19 billion, up from A$16.6 billion.



The surplus won’t reach the government’s long-term target of 1% of gross domestic product until 2025-26. And in projections out to 2028-29 it is not forecast to climb much above this target as the budget hits the Coalition’s self-imposed tax “speed limit” of 23.9% of GDP.



$9 billion in unannounced tax cuts

The budget boost would have been much bigger were it not for more than A$9 billion in “decisions taken but not announced”. Almost all of these are revenue decisions, presumably extra election tax cuts, worth A$2.5 billion to A$3.7 billion per year.

The budget papers say these are decisions taken since the May budget, and are either not for publication or haven’t yet been made public.




Read more:
More mirage than good management, MYEFO fails to hit its own targets


Treasurer Josh Frydenberg confirmed the government had taken decisions to do with tax, but said it would announce them at a time of its choosing rather than in the budget update.

It reserved the right to take other tax and spending decisions in the lead-up to the election. Some would be revealed in the 2019-20 budget, to be delivered in April rather than in May to allow an election in May.

Downgraded wage growth

Although the Treasury has revised up its estimates for revenue and revised down its estimates of unemployment, expecting the rate to fall to 5% by June 2019 and stay there, it has shaved 0.25 percentage points off its estimates for wage growth.

It now expects wages to grow by 2.5% in the year to June 2019 (down from 2.75%) and 3% in 2019-20 (down from 3.25%). In future years, it expects wage growth of 3.5%.



Addressing the downgrade, Mr Frydenberg said weaker-than-expected wage growth appeared to be part of a worldwide phenomenon, “not unique to us”.

Wage growth for the year to September was 2.3%, the highest since 2015. The statement said anecdotal evidence from Treasury’s business liaison program pointed to “skills shortages and wage pressures in some sectors of the economy, consistent with a tightening labour market”.

Weaker consumer spending, economic growth

Growth in consumer spending has also been revised down, from 2.75% in 2018-19 to 2.5%. It is expected to climb back to 3% in 2019-20.

The statement revises down the government’s forecast of economic growth in 2018-19 from 3% to 2.75%, in part because of the Queensland drought, but predicts growth of 3% in 2019-20, 2020-21 and 2021-22, a touch higher than the Treasury’s estimate of long-term sustainable growth.

The Treasury is expecting economic growth to weaken in China and the United States, slipping from 6.5% in China to 6% in 2019 and 2020, and from 2.75% in the US to 2.25 and then 2%.

But debt has peaked and is headed down

The update shows that net debt has already peaked as a proportion of GDP and will fall faster than previously expected, in line with higher surpluses, sliding from 18.2% of GDP to 1.5% over the decade to 2028-29.



Government receipts are expected to climb from 24.9% of GDP to 25.5% by 2021-22. Payments are expected to fall from 24.9% of GDP to 24.6%.

Mr Frydenberg said the Coalition had kept average real spending growth at 1.9% per year, well below Labor’s 4% over six years which included the global financial crisis.



Finance Minister Mathias Cormann said recurrent spending had fallen below recurrent revenue for the first time in more than a decade.

Recurrent spending excludes spending on long-term investments in things such as road and rail infrastructure.

He said all new spending since the May budget had been offset by spending cuts elsewhere.

No firm commitment on fiscal discipline

Asked whether he felt bound by a commitment in the budget papers to bank rather than spend improvements to the budget’s bottom line due to changes in the economy, Cormann said it was “a matter of balancing priorities”.

The imperative to cut tax to keep it below the government’s self-imposed speed limit might conflict with the commitment to devote extra tax takings to improving the bottom line.




Read more:
Monday’s MYEFO will look good, but it will set the budget up for awful trouble down the track


The Conversation


Peter Martin, Editor, Business and Economy, The Conversation

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

More mirage than good management, MYEFO fails to hit its own targets


Danielle Wood, Grattan Institute and Kate Griffiths, Grattan Institute

The Morrison government wants next year’s election to be about economic management.

So understandably, it’s using the improved bottom line in the Mid Year Economic and Fiscal Outlook (MYEFO) to talk up its economic credentials.

But the numbers in MYEFO show it has failed to hit many of its own targets.

Target 1: Surpluses on average over the cycle

The government’s overarching fiscal objective is to deliver budget surpluses: not just in one year but on average over the economic cycle.

MYEFO indicates the government is expecting a $5.2 billion deficit in 2018-19 (0.3% of GDP).

It will be the 11th consecutive deficit for the Commonwealth budget.

Deficits have averaged $33.2 billion (2.1% of GDP) over those 11 years.

Yes, a $4.1 billion surplus is forecast for next year, with surpluses projected to reach $19 billion (0.9% of GDP) by 2021-22.

But so big have the recent deficits been, that even if everything goes well and the fiscal position continues to improve, the budget would need to be in surplus for decades to produce a surplus on average over each year, far longer than what most economists consider a typical economic cycle.




Read more:
MYEFO reveals billions more in revenue, $9 billion in fresh election tax cuts


A related fiscal target is that budget surpluses will build to at least 1% of GDP as soon as possible.

Despite revenue windfalls from income and company taxes (discussed below), the government is still forecasting it won’t reach that 1% of GDP surplus target until 2025-26.

Policy decisions in this year’s budget and MYEFO – including income and company tax cuts, additional funding for independent and Catholic schools, and changes to the GST formula to placate Western Australia – have weakened the bottom line in 2021-22 by $10.5 billion.

Hardly the actions of a government in a hurry to deliver a sizeable surplus.

Verdict: Fail.



Target 2: Reduce the payments-to-GDP ratio

The government’s policy is also to maintain strong fiscal discipline by controlling expenditure, with a falling payments-to-GDP ratio its measure of success.

Whether it has met the target depends on the starting year. Governments payments are forecast to reach 24.9% of GDP in 2018-19, up from 23.9% in 2012-13 before the Coalition took office.

The government prefers the starting point of its first year in office 2013-14 where payments were 25.5% of GDP.

Either way, payments in 2018-19 remain above the 30-year historical average of 24.7% of GDP.




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


While the government projects that spending will fall slightly further to 24.6% of GDP by 2021-22, this relies on spending growth across the government’s major programs falling substantially compared to the previous four years – without major policy changes to help facilitate the fall.

Verdict: Debateable pass.



Target 3: Tax-to-GDP ratio below 23.9% of GDP

In last year’s budget, the government introduced a new target of capping tax collections at 23.9% of GDP.

Why 23.9%? That was the average level of tax during the final two terms of the Howard/Costello government.

While the Coalition is understandably keen to follow the lead of one of its most electorally successful governments, that was also a period where tax collections were historically high.

Tax collections are projected to reach 23.8% of GDP in 2022, on the back of stronger than forecast personal income tax and company tax receipts.

Verdict: Pass.


MYEFO Chart.


Target 4: New spending measures more than offset by reductions in spending elsewhere

Since becoming prime minister, Scott Morrison has sent mixed signals about whether his government will adhere to the longstanding budget rule that all new spending proposals be matched with budget savings.

At the MYEFO press conference, Finance Minister Matthias Cormann said it was a “matter of balancing competition priorities”.

Here’s the straight answer – the net effect of policy changes announced in MYEFO are an additional $12.2 billion in spending over four years.

In other words, the government has not offset new spending with cuts to other spending programs. The Turnbull government similarly failed to offset its new spending in 2017-18 (although it succeeded in prior years).




Read more:
Monday’s MYEFO will look good, but it will set the budget up for awful trouble down the track


There have been some reductions in spending because of improvements in the economy. The government claims these reductions offset its recent spending announcements. But genuine offsets come from policy changes, not economic good luck.

Verdict: Fail.

Target 5: Shifts due to changes in the economy banked as an improvement in budget bottom line

This objective is key to the government’s fiscal conservative credentials.

If it has some economic good luck, it commits to use the proceeds for budget repair rather than new spending or tax cuts.

This rule has been irrelevant for most of the past decade, because almost every budget had revenue collections falling short of forecast.

But the Morrison government is in the middle of a mini revenue boom – revenue collections were higher than forecast in both the 2018-19 budget and MYEFO.

Company tax collections are higher largely due to strong commodity prices. Income tax collections are up and government spending is down because of improvements in the economy.




Read more:
Labor would deliver bigger surpluses than the Coalition: Bowen


So has the government used this chance to show off its fiscal prudence?

Not exactly. It will spend around $11.8 billion of this windfall, give away another $19.3 billion in tax cuts and bank just over half of it ($35.2 billion) to the bottom line.

And in the shadow of an election, we can almost certainly expect further spending. The $9 billion in decisions taken but not announced – potentially a pre-election warchest – suggests that more tax cuts could also be on the way.

Verdict: Fail.

Our final verdict

The challenge in assessing budget management is separating good luck from good management. Governments will always seek to take credit for economic upswings that boost the bottom line.

Fiscal targets are there to keep them on the straight and narrow.

An objective assessment of the government’s performance against its own key targets suggests its good news budget is more mirage than magnificent management.The Conversation

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

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

MYEFO rips A$130 million per year from research funding despite budget surplus



File 20181217 185264 1kkui2j.jpg?ixlib=rb 1.1
The shockwaves of this cut will be felt for years to come at Australian universities.
http://www.shutterstock.com

Margaret Gardner, Monash University

Yesterday morning, the mid-year budget update unveiled research funding cuts of A$328.5 million over the next four years. This budget raid on research was more than double the size expected by the university research community.

This new freeze on growth in research funding and PhD scholarships follows last year’s freeze on funding for student places.




Read more:
Universities get an unsustainable policy for Christmas


The effect will be felt immediately by the nation’s researchers and their research projects in positions lost and projects slowed, limited or not started. But the damage done will be felt for much longer – in inventions, ideas and opportunities missed.

Why has it been done?

As yet, there has been no adequate public explanation from government, save for two paragraphs in Education Minister Dan Tehan’s media release yesterday:

The decision to pause indexation of research block grant programs for 12 months, along with adjusting growth for RSP (the Research Support Program), will allow the government to prioritise education spending, including on regional higher education.

And this further par:

We have invested over A$350 million since the 2018-19 Budget to support students in regional and remote Australia.

In truth, most of Australia’s regional universities will lose millions of dollars more under the 2017 funding freeze than will be redistributed to them via this latest research cut. And under this new research freeze, they, too, will lose scholarships for PhD students – our next generation of brilliant research talent.

Research funding also goes towards keeping the lights on in libraries and labs so researchers can complete their work.
from http://www.shutterstock.com

Nationwide, the government will fund up to 500 fewer of these scholarships for PhD candidates next year due to the research funding freeze. That’s 500 fewer people who will dedicate their talent to the creation of new knowledge in the national interest.

The education minister has tried to repair the damage inflicted by the 2017 decision of his predecessor – Simon Birmingham – only to compound the damage with this second freeze. That’s throwing bad policy after bad.

Regional universities were among those hardest hit by the 2017 MYEFO decision to cut funding for student places. And that decision continues to cut deeper each year – it will be felt more in 2019 than 2018, and more in 2020 than 2019.

How this will affect Australian research

The harm this will inflict is manifold.

First, it will cut the research funding program. This scheme enables universities to pay the salaries of researchers and technicians whose work enables ground-breaking discoveries. It also funds keeping the lights on in labs and libraries.




Read more:
Educational researchers, show us your evidence but don’t expect us to fund it


These overheads of research are not funded by competitive grants. For every A$100,000 an Australian university secures in competitive research grants, it must find an extra A$85,000 to be able to deliver that research. Where will universities find these funds?

Second, it will cut the research training program. This funds scholarships for PhD students to enable them to complete their higher degrees – a necessary first step on the way to a career in research. This is a cut into their brilliant careers, and Australia’s future research capacity.

Third, it damages Australia’s standing as a global research leader. Why would a great researcher come to or stay in Australia, when the government has sent a message that, in a time of budget surplus, it’s prepared to cut into research?

Research funding is critical to Australia’s status as a global research leader.
from http://www.shutterstock.com

Fourth, it will further undermine Australia’s position in research and development investment relative to our economic competitors. China now invests 2.1% of its GDP in research and development – while Australia’s total investment from all sectors in research and development (government, business and research institutions) is now just 1.88% of GDP. China’s economy is ten times bigger than Australia’s, but they’re investing 30 times more than we are.

Our government only spends A$10 billion on research and development each year. Only last Friday, it was revealed Australia’s government spending on research and development was already forecast to fall this year to its lowest level in four decades as a percentage of GDP – to 0.5%. This new research funding cut only worsens this situation.

With the budget in surplus, it makes no sense

University leaders knew research funding was at risk, and so jobs for researchers, technicians and researchers were at risk. But beyond these jobs are the projects they support and the Australians from all walks of life whose lives have or will be transformed by Australian research.




Read more:
Margaret Gardner: freezing university funding is out of step with the views of most Australians


Universities Australia has stories of survivors of stroke, cervical cancer and family violence speaking about how crucial university research has been in the lives of people like them at #UniResearchChangesLives.

With a government budget surplus in sight, it makes no sense to cut the research capacity that will create jobs, income and new industries for Australia.The Conversation

Margaret Gardner, President and Vice Chancellor, Monash University

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

Seven charts on the 2017 budget update


Ross Guest, Griffith University

Here’s how the budget is looking at the mid-year mark, in seven charts.


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The A$5.8 billion drop in the 2017-18 underlying cash deficit compared with the original May budget is due more to higher revenue than lower spending. Receipts are higher by A$3.6 billion and payments are lower by A$2.1 billion.

The higher receipts reflect the stronger economy, which implies higher company tax (up A$3.2 billion) and superannuation fund taxes (up A$2.1 billion).

Receipts would have been even higher if not for stubbornly weak wages growth which, despite stronger employment growth, has tended to dampen individuals’ income tax receipts. These are in fact down by A$0.5 billion.

The estimates of GST and other taxes on goods and services remain unchanged since the budget.

The lower payments of A$2.1 billion are driven by several changes having opposite effects. Some of these are:

  • A$1.2 billion (over four years) lower welfare payments to new migrants due to longer waiting times;

  • A$1 billion (over four years) lower payments to family daycare services due to more stringent compliance checking; and

  • A$1.5 billion (over four years) lower disability support payments due to lower than expected recipient numbers.

There is not much change in the net debt projections relative to those in the 2017-18 budget. Net debt is A$11.2 billion lower at A$343.8 billion in 2017-18 (around 19% of GDP). Debt stabilises in 2018-19 and starts to steadily decline thereafter to about 8% of GDP in the next ten years.

The lower deficits as a share of GDP are obviously reducing debt, but one factor tending to increase debt is student higher education loans. These are projected to increase by 32% from A$44.4 billion to A$58.8 billion over just the next four years.


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The economic outlook continues to be a puzzle. National output of goods and services, real GDP, is expected to grow slightly slower in 2017-18 than the budget forecast – 2.5% compared with 2.75%.

However this is an improvement on the 2% achieved in 2016-17. And it is expected to increase further to 3% in 2018-19.

The economy is being driven by strong global growth and strong domestic business investment. Australia’s major trading partners are forecast to grow (meaning real GDP growth) at a weighted average of 4.25% in each of the next three years.

Wages and household consumption are the puzzle – they are not growing as fast as expected from the stronger than expected employment growth (up 0.25% on the budget to 1.75%) and lower than expected unemployment rate (down 0.25% on the budget to 5.5%).

Household consumption growth is down 0.5% on the 2017-18 Budget forecast to 2.25%. This has in fact become a global phenomenon due to higher costs and job insecurity from the forces of globalisation and automation.


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Commodity prices are notoriously volatile and hard to predict, yet they are critical to the budget forecasts because they impact the revenue of resource companies which feeds into company taxes and other taxes.

Iron ore prices are assumed to remain flat at US$55 per tonne over the forecast period, as in the budget. This forecast is almost certain to be wrong because iron ore prices never stay flat for long – the problem is that we can’t say in which direction it will be wrong.

The same applies to thermal coal prices which are assumed to be flat at US$85 per tonne which is again consistent with the budget forecast.


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Australian taxpayers continue to bear most of the burden of budget repair. The government can claim with some justification that their efforts to reduce payments further have been thwarted by the Senate.

Excluding the effect of Senate decisions, new spending has been more than offset by reductions in other spending. The gap between the revenue and payment is reducing at the rate of about 0.6 percent per year.

As a share of GDP payments are expected to be 25.2% in 2017-18, falling to 24.9% of GDP by 2020-21 which is slightly above the 30-year historical average of 24.8% of GDP.


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Wage growth has been revised down from an already low 2.5% in the budget to 2.25% in MYEFO. With the Consumer Price Index forecast to grow at 2%, wages are barely keeping pace with inflation – growing in real purchasing power by only 0.25%.

This provides a meagre compensation for labour productivity growth which is implied to be about 1% in MYEFO. Wage growth is expected to pick up by 0.5% next year to 2.75%.

This is important because it underpins government revenue growth, yet it’s brave to expect the deep forces that are keeping wages down in Australia and around the world to turn around and exactly match the 0.5% growth in real GDP expected to occur next year.


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New measures since the budget have increased the deficit on both the revenue and expenditure sides of the budget. On the revenue side, for example, higher education changes reduced revenue by A$76 million and the GST by A$70 million.

The ConversationOn the expenses side, needs-based funding for schools has cost an additional A$118 million and improving access to the Pharmaceutical Benefits Scheme costs A$330 million. The roll-out of the NDIS in Western Australia adds another cost at A$109 million, and Disability Care Australia at A$362 million.

Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

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

Government budget update saved by higher than expected economic figures


Saul Eslake, University of Tasmania

The 2017-18 Mid-Year Economic and Fiscal Outlook (MYEFO) is another reminder – if one is needed – that the relationship between the budget and the economy runs in both directions. While we mostly ask the question, “how will the budget affect the economy?”, this update shows the economy can also have (and has often had) a significant impact on the the budget.

The highlights of this year’s MYEFO, as far as the government is concerned, are the A$9.3 billion improvement in the underlying cash balance over the four years to 2020-21 (compared with what had been forecast in the May budget), and the consequential A$11 billion reduction in the forecast peak in net debt (from A$366 billion to A$355 billion) in that year.

These improvements are the result of revisions to economic assumptions and other so-called “parameter variations” since the budget, which in total have improved the four-year bottom line by more than A$11 billion. The biggest of these came from reductions in payments to people with disabilities, students, single parents and age pensioners (totalling A$4.6 billion over four years) due to lower-than-expected recipient numbers.


Read more: Budget update shaves growth and wage forecasts but is brighter about the deficit


Personal income tax cuts seem possible

There is no additional detail in MYEFO regarding the government’s foreshadowed personal income tax cuts ahead of the next election. But if the forecast surplus for 2020-21 of A$10.2 billion is credible, then there’s arguably some scope for the government to fund personal income tax cuts beginning in that year.

Although the cost of more significant tax cuts would escalate substantially over the medium term, there is actually more scope for these cuts than generally realised (provided the government succeeds in keeping growth in spending under control).

That’s because the projected moderate surpluses, averaging about 0.5% of GDP out to 2027-28, incorporate an arbitrary assumption that taxation revenue will be capped at 23.9% of GDP. If that assumption wasn’t made, the projected surpluses would rise to 1.6% of GDP by 2027-28.

In dollar terms that would imply a surplus of around A$55 billion, compared with one of around A$15 billion if the surplus were only 0.5% of GDP. Over the period 2021-22 to 2027-28, relaxing the assumption that tax revenues are capped at 23.9% of GDP results in almost A$90 billion of additional budget surpluses. This is over and above what is projected with that “tax cap” in place.

Presumably, some of those “additional surpluses” are absorbed, in the government’s internal figuring, by the promised phased reduction in the company tax rate for businesses turning over more than A$50 million per annum by 2025-26 – which according to the last publicly available estimate would reduce revenues by some A$65 billion over ten years.

However, that would still leave a considerable amount “left over” to pay for personal income tax cuts, and allow the government to continue to project surpluses of around 0.5% of GDP out to the second half of the next decade.

That’s assuming, of course, that we are able to clock up 36 years of uninterrupted economic growth, and that all the other projections come to pass, including for a return to more “normal” rates of wages growth.

Economic indicators in MYEFO

Treasury has revised downwards its forecast for economic growth in the current financial year, from 2.75% to 2.5%. A large part of this revision comes from stronger growth in public spending, which is now forecast to rise by 4% in real terms in 2017-18, up from 2.5% at the time of the May budget.

This reflects faster growth in both government spending (on the NDIS) and investment (NBN and state government infrastructure investment). The forecast for business investment has also been upgraded, from flat at budget time to growth of 2%, the result of both stronger growth in non-mining business investment and a smaller decline in mining investment.

This is largely the result of a downward revision to the forecast for growth in household consumption spending which has been lowered from 2.75% to 2.25%: and this carries over into a 0.25 percentage point reduction in the forecast for 2018-19, to 2.75%. Even these require a further decline in the household saving rate.

The forecast for dwelling investment spending has turned around from 1.5% growth to a decline of 1.5%, with the “softening in dwelling investment occuring slightly earlier than expected”.

Longer term, the government is still anticipating that economic growth will average 3% per annum from 2018-19 through 2023-24, by which time all the “spare capacity” in the labour market will have been absorbed. That is, the unemployment rate will be down to 5% and underemployment (workers not being able to get enough hours at work) returned to more normal levels.

The ConversationThe longer-term projections also assume that wages growth accelerates significantly from 2019-20. This represents the greatest risk to the goverment’s promise of a return to surplus by 2020-21.

Saul Eslake, Vice-Chancellor’s Fellow, University of Tasmania

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

Budget update shaves growth and wage forecasts but is brighter about the deficit


Michelle Grattan, University of Canberra

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

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

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

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

Budget update on wages

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

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

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

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

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

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

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

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

Savings measures on education and welfare

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Michelle Grattan, Professorial Fellow, University of Canberra

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