When, in the midst of the pandemic, the Economic Society of Australia invited 150 of Australia’s keenest young thinkers to come up with “brief, specific and actionable” proposals to improve the economy, amid scores of ideas about improving job matching, changing the tax system, providing non-repayable loans to businesses and accelerating telehealth, two proposals stood out.
They were actually the same proposal, arrived at independently by two groups of “hackers” in the society’s annual (this time virtual) “hackathon”.
I was one of the judges.
The mentors who helped test and guide the proposals were some of the leading names in economics, among them Jeff Borland, John Quiggin, Gigi Foster, Deborah Cobb-Clark, Peter Abelson and John Hewson.
The proposal is to fast track the 15 or more projects already identified by the Australian Energy Market Operator as essential to meet the electricity grid’s transmission needs over the next 20 years.
Starting them immediately, when business investment is weak and there’s a need for jobs and governments can borrow at rates close to zero, will bring forward all of the benefits of being able to bring ultra-cheap power from the places it will be made to the places it will be needed as expensive fossil-fuel generators bow out or are out competed.
Judges Alison Booth, Jeremy Thorpe and I noted that policy hacks were the most useful where neither the market nor the government was getting the job done.
The proposal would help ensure renewables can connect to the grid, something “neither the market nor the government is managing to do quickly”.
A few weeks later Labor leader Anthony Albanese used his budget reply speech to propose the same thing – a Rewiring the Nation Corporation to turn the projects identified in the Energy Market Operator’s integrated system plan into reality.
Here is what is proposed in the winners’ own words:
Investment in new renewable generators in Australia sank 40% in 2019. A major factor holding them back is grid access. The best locations for wind and sun often have poor access to the cables that transport electricity to consumers.
Our near-term recommendation is to guarantee Project EnergyConnect, a 900-kilometre cable between NSW and South Australia due to begin construction next year. The network operators got approval in January, but there is now uncertainty over whether they will get the funding.
We propose that the two state governments agree to cover the shortfall between approved revenues and realised costs (up to a pre-determined limit) to ensure construction starts on time in 2021.
Medium-term, we recommend the Australian Energy Regulator conduct the regulatory investment test and revenue adjustment processes for all priority projects in parallel to condense approval timelines and that the Commonwealth and state governments underwrite priority projects’ early works.
This would allow service providers to commission new transmission lines sooner after regulatory approval.
Currently valued at A$20 billion, the Australian transmission network was designed for a centralised 20th century power mix and suffers from aging infrastructure.
The $6 billion upgrade we propose would have as its centrepiece 15 projects the Energy Market Operator has already identified as essential.
Fast-tracking these projects has the potential to generate 100,000 jobs, to bring about strong private investment in low-carbon power production, and to place downward pressure on wholesale power prices, producing $11 billion in benefits.
A national taskforce consisting of the department of energy and the market operator would oversee a project of a similar size to the Snowy Mountains scheme, which itself created more than 100,000 jobs during its lifecycle.
The government would procure the funds by issuing bonds, with recent rates indicating the yield payable will be less than the rate of inflation.
Firms that tendered for the work would be evaluated on their capacity to upscale production to meet milestones and on their plans to generate long-term, sustainable employment.
Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
Much of the focus of Opposition Leader Anthony Albanese’s budget reply speech was around Labor’s proposal to expand childcare subsidies – a policy with some flaws but which moves in the right direction.
Labor’s plan to modernise the electricity grid by setting up a “Rewiring the Nation Corporation” with A$20 billion in government support was also met with general approval.
What got less attention was the third pillar of Labor’s budget strategy – a big push toward more local manufacturing jobs.
Albanese wasn’t shy about what he meant. He lamented the loss of Australia’s car-making industry:
Australians will never forget that it was this government that drove Holden, Ford and other car makers out of Australia, taking tens of thousands of jobs in auto manufacturing, servicing and the supply chain with them.
He then announced Labor would create a “National Rail Manufacturing Plan” to expand Australia’s boutique train-building industry:
We will provide leadership to the states and work with industry to identify and optimise the opportunities to build trains here in Australia – for freight and for public transport.
The economics of pillars 1 and 2 make sense. Pillar 3 involves trying to turn back the clock on the irrepressible, tectonic forces of globalisation and automation to pretend we should make things here we shouldn’t.
Countries benefit from trade rather than seeking to produce everything they need locally. This is due to the idea of “comparative advantage”, originated by David Ricardo in his 1817 book On the Principles of Political Economy and Taxation.
One country (call it country A) might be more efficient than another (country B) in absolute terms at producing, for example, T-shirts and wine. It is tempting to think, then, that country A should produce both T-shirts and wine.
But what if country B is really inefficient at producing T-shirts but reasonable at producing wine? If country A specialises in producing T-shirts and country B specialises in producing wine, they can trade and both be better off.
Why? Because country A produces T-shirts much more efficiently than country B, and country B is only a little less efficient at producing wine. Overall, both economies get more efficient, raising living standards.
Does Australia have any comparative advantage at producing cars or trains?
With cars the evidence speaks for itself. Local manufacturing only survived for decades because of huge government subsidies. Without them Australian-made cars couldn’t compete.
Only part of that was to do with labour costs – and we should be rightly proud of our comparatively high wages and good working conditions. Germany – home of BMW, Mercedes Benz and Volkswagen – also has high wages and conditions.
What about trains? Some trains are made in Australia – by Downer EDI and Canadian multinational Bombardier. That’s good for a few thousand jobs. But the market is domestic, with the customers being state governments who buy with an eye on local jobs.
There’s not a lot to suggest it can become an export industry, competing for example with Japan, which has been making bullet trains since the early 1960s. Or France, whose train builders have sold hydrogen trains to Germany and high-speed freight trains to Italy.
With these competitors having such an edge, and the well-known phenomenon of “learning-by-doing”, are we really going to catch up?
There are many other sectors in which Australian producers are internationally competitive, such as agriculture, services and areas of high-tech manufacturing.
Building on and expanding comparative advantage in these areas makes a lot more sense.
That said, the COVID-19 pandemic has taught us how fragile certain parts of our economy are. The same logic of comparative advantage that has done so much to improve living standards has also made us vulnerable in some areas.
Having little or no manufacturing capacity in personal protective equipment or pharmaceuticals like insulin, EpiPens and antibiotics is potentially very dangerous. Importing more than 90% of our pharmaceuticals puts us in a vulnerable position if a state actor that controls important parts of the global supply chain decides to cut supply. This is what economists call the “hold-up problem”.
So it makes sense for Australia to have more presence in strategic manufacturing like pharmaceuticals and personal protective equipment, even if producing these goods locally is not as efficient as buying them from overseas.
The pandemic has taught us that we have, as a nation, moved a little too far towards the efficiencies of “just-in-time” supply chains. We need to move back somewhat, but certainly not completely, in the direction of “just-in-case” – to a little less efficiency but a little more insurance.
That should involve a push for strategic manufacturing. We should at all times be looking to build on and expand our comparative advantage.
But trying to go “Back to the Future” and build an Australian De Lorean makes no sense.
Many people who know Mathias Cormann – let us except Malcolm Turnbull – will hope he wins his bid to become secretary-general of the OECD.
Not only is he well qualified, but it would be a feather in Australia’s cap.
He’s certainly no shoo-in, however. There are already multiple candidates, the pandemic will make campaigning complicated, and Australian’s record on climate change might be a negative.
But he’ll have strong government support and, given his meticulous organisational skills and network of contacts abroad, nothing will be left undone.
Finance minister throughout the Coalition’s term, Cormann is respected across the political spectrum, which has made him effective as the government’s “wrangler” of the difficult characters in the Senate.
His dour image conceals a lighter side, seen in Wednesday’s cameo appearance on the ABC’s “Mad as Hell” as he jested with his “spokesman” Darius Horsham, a long-running character on the show.
Cormann’s October 30 parliamentary exit – the timing determined by the OECD’s process – is a significant loss for the government. But Scott Morrison was determined not to let it become a disruption.
Morrison has filled Cormann’s shoes even before his minister has stepped out of them, announcing Simon Birmingham will take over the finance portfolio and Senate leadership when Cormann goes.
The PM said he’d make no other changes at that time, but there’ll be a reshuffle at year’s end.
Birmingham will then shed his trade ministry, and Morrison will have the opportunity to make other alterations to his team. With aged care set to be a mega issue after the royal commission reports in February, one thing he should do is put a heavyweight into that portfolio and elevate it to cabinet.
Thursday’s small shuffle was a side show in the major play of the week, which saw a budget with a deficit of $213.7 billion this financial year that gambles on being large enough to get the country marching to recovery.
It will take months to judge whether the government has pitched its budget well (and that’s assuming no new seismic setbacks), but it is satisfied with the immediate reception. Income tax cuts are likely to be popular even if their critics argue other measures would be better. Business can only welcome the massive incentives to invest, although many enterprises won’t survive to take advantage of them.
Labor has given its support to the huge tax concessions for business in Josh Frydenberg’s second budget.
This ease of passage is in sharp contrast to the company tax cuts in then treasurer Scott Morrison’s first budget, which embroiled the Turnbull government in a debilitating fight from 2016 to 2018. Even Cormann couldn’t wrangle the big business tranche of those through the Senate; it was abandoned in the final week of Malcolm Turnbull’s leadership.
The budget has come under fire on various fronts – for example, the wage subsidy for younger workers carries the risk of being rorted, and there’s criticism about the lack of assistance for older workers.
Nevertheless, it has been a difficult budget for the opposition to savage, given Labor is endorsing its core elements of income tax cuts and business concessions.
But one fertile area for the opposition has been the lack of specific assistance for women, many of whom have been particularly hard hit by the pandemic. They’re often in casual jobs, and in sectors with the biggest job losses (although Frydenberg pointed out women have been strongly represented in the restored jobs). Women have also carried a disproportionate load of home schooling.
Anthony Albanese tapped into this area of government vulnerability when he delivered his Thursday night budget reply.
The opposition leader had several imperatives to meet as he went into that speech. To produce some policy flesh. To set up an ideological difference with the government. To cut through to the public.
With possibly only a little over a year before an election, the opposition is under pressure to start rolling out detailed policies. Albanese’s promises to make child care more affordable (at a cost of $6.2 billion) and to modernise the energy grid (a $20 billion investment) were substantial commitments.
The child care policy will appeal to women in particular. The pandemic has made families, but especially women, even more aware how important child care is for them – the brief period of it being free only increased the appetite for a better system – and the budget didn’t respond.
The proposals Albanese put forward to boost skills and local manufacturing highlighted Labor’s message that it believes in using government as a driver of change, through prescriptions, procurement policy and other means.
Albanese proposes mandating that a certain proportion of workers on major government-funded projects should be apprentices and trainees. He even suggests this could be extended to government-funded sectors such as aged care – how practical that would be is debatable.
There wasn’t a detailed social housing policy but Albanese flagged Labor would invest substantially in this area – that’s spending favoured by many economists as well as necessary to improve lives.
While Albanese is at pains to argue he’d mobilise the power of government, Morrison has muddied this political water.
The budget might be heavily private-sector oriented (and from that vantage point, seen as ideological), but Morrison is also interventionist when it suits him. His so-called gas led recovery, and his identification of designated sectors in his manufacturing policy are examples.
In terms of the imperatives he was trying to meet, Albanese did produce some policy flesh but of the announcements, probably only the child care initiative is likely to achieve general “cut through”.
The danger for Albanese is that come the next election, if Morrison sees child care as a political weak spot, he’s likely to address it.
In his stress on child care and social housing, Albanese made his point that Labor had different priorities to the government’s. And we got the message about putting government in the driver’s seat.
But the picture of what an Albanese government would actually look like wasn’t clear – as it can’t be, because that remains a work-in-progress.
Nor did we get any comprehensive idea of how, if this had been a Jim Chalmers budget, Labor would be tackling the immediate crisis differently.
Albanese’s problem was that circumstances demanded too much of him in his budget reply. He had a fair crack at meeting those demands, but he couldn’t change the perception that the pandemic has made the opposition one of its victims.
In putting together his unprecedented pandemic budget, Treasurer Josh Frydenberg had two big tasks: to support the economy now, and to kick-start the next boom.
Many commentators seem to be enamoured by the size of the spend. But once you dig into the details, it’s a mixed bag.
The 2020 budget certainly delivers on boosting business investment and hiring, and the tax cuts will help lift employment and activity.
But overall it’s a bit light on direct stimulus – spending to support those who have lost their incomes and boost consumer demand. It doesn’t do enough for the economy now, when a boost is needed most. And it lacks a coherent reform narrative around driving the economy out of this crisis better than it went in.
Let’s start with the good.
Bringing forward scheduled income tax cuts and increasing the tax offset for low-income earners is good news, despite misgivings among some economists.
They will provide some stimulus via increased spending over the next two years. They will also make it cheaper for businesses to take on workers, and more worthwhile for workers to take on more hours. Research backs this up.
Encouraging business investment is another good priority. There is strong evidence from schemes in the US that the A$27 billion allocated to enable businesses to deduct the full cost of new assets installed up to June 2022 will boost investment, driving jobs and higher wages over the next few years. Other business incentives, around hiring and R&D, are also welcome.
The budget also contains many worthy smaller measures. For example, it is great to see the government commit an extra A$101 million to double the number of Medicare-subsidised therapy sessions from 10 to 20 per year. Hopefully there will be more support to come for mental health and suicide prevention as the government delivers reviews into these areas.
Now on to the not-so-good.
First, the A$27 billion for instant asset write-offs is a bit of a sleight of hand. The measure allows businesses to write off investments up front instead of depreciating them over time. So businesses will pay less tax now but more later.
This is why the budget shows a reduction in tax receipts over the first three years, but an increase in year four. Expenses are brought forward to year one even for investments they were going to undertake anyway. The economic benefit – which is real, to be clear – is purely in businesses not having to wait for those tax benefits.
And it is not an investment allowance, as some have called it, which would provide a subsidy on top of allowing a business to expense the assets up front. Research suggests a true investment allowance such as the GFC Investment Tax Break given to Australian business during the Global Financial Crisis, would have boosted investment even more.
Now on to the not good at all.
Though the tax cuts provide some stimulus to the economy, it will not be as much as direct cash payments. And you only receive the tax cuts – more than A$2,000 a year for many taxpayers – if you work.
The government’s main instruments for direct stimulus – the JobKeeper and JobSeeker payments – are already being wound back (with JobKeeper ending in March 2021), which will pull a massive amount of demand out of the economy.
US research on the effect of the US government’s US$2.2 trillion stimulus package shows government payments to households significantly boosted spending in a matter of weeks, with 25 to 40 cents in every dollar of stimulus being spent.
But this budget offers little in the way of direct cash payments. The government has committed to two modest $250 payments to certain welfare recipients, but the second won’t arrive for another five months.
The direct stimulus that is on offer will provide some support, but not nearly the volume required.
By far the budget’s biggest snub is the almost complete absence of green stimulus – specifically, investment in carbon-reduction efforts. This spending is all the more critical in the absence of an economy-wide carbon price.
Green stimulus offers the prospect of a triple economic dividend: it generates activity and jobs today, it prevents an impending environmental calamity, and it creates the industries and jobs of the future.
Other countries are seizing COVID-19 as an opportunity to make inroads towards their emissions-reduction targets. France, for example, has devoted a third of its stimulus to green measures.
Using the most generous possible definition, only about 1% of new Australian government spending over the next four years will go to environmental initiatives. This is a tremendous missed opportunity.
So, overall, the budget is a mixed bag. There are some welcome stimulus measures, but some critical ones missing. The government has a lot more work to do to kick start a new golden era of economic growth.
Let’s hope the Treasurer delivers on that in his next budget, due in just seven months.
Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University
The Morrison government seems to think economic stimulus is all about high-viz vests and hard hats. It’s a narrow and dated view of the world of work.
Tuesday night’s budget included several broad measures to support business and jobs, such as its tax write-off for business investments and wage subsidy for employing young people.
These look like sensible measures, albeit ones that bet heavily on business to lead the recovery.
But when it comes to targeted policies for job creation, the 2020 budget is a sea of hard hats.
The three sectors with the most targeted support are all bloke-heavy: construction (more than A$10 billion so far through the crisis), energy (A$4 billion), and manufacturing (A$3 billion). There is also an extra A$10 billion for transport projects, another boost to construction jobs in the building phase.
The problem? That doesn’t fit the story of this crisis. Unlike past recessions, the worst fallout in the COVID-19 recession has been in services sectors.
Hospitality, the arts and administrative services have all been hit hard. These sectors are dominated by women, which is one reason women’s employment has taken a bigger hit this year.
Yet these sectors received next to nothing in the budget. They are also less likely to benefit from economy-wide supports such as instant asset write-offs because they are the least capital-intensive sectors.
There are many ways the federal government could have helped these sectors.
Overseas governments, and some state and local governments, have funded vouchers and discounts to encourage people back to restaurants, cafes and regional tourist destinations.
Grants or direct support to help the arts sector revive could provide a desperately needed boost to our creative recovery.
The government could have created many more jobs by directly investing in government services. Services create more jobs than infrastructure per dollar spent, and they have especially high economic multipliers right now.
The budget initiatives in education, aged care and mental health are welcome, but very small in the scheme of new spending.
Major investments in aged care and education would be a jobs boon and could have provided a more rounded vision for the recovery.
This week, just before the budget, the federal Minister for Women, Marise Payne, issued a statement saying:
This government recognises that women have been significantly impacted by the COVID-19 pandemic and it is critical that we focus on rebuilding their economic security as a priority.
Yet the government has left the biggest opportunity on the table. Making child care more affordable is the most effective way to reduce the gender gap in working life and retirement – directly supporting jobs and the economic recovery.
The Grattan Institute has recommended a A$5-billion-a-year package that would make child care significantly cheaper and improve the workforce participation incentives for primary carers (still mainly women).
Instead, women seem to have been relegated in this budget to an afterthought in the form of a A$240 million “support package”, which offers no meaningful economic support.
All of these omissions are even more glaring given the spending on other areas and groups with far less need for support.
Sizeable measures are targeted towards energy, agriculture and defence. Yet all of these sectors have increased their total work hours since March.
Another A$3 billion is slated for manufacturing. While that sector has shed jobs during the crisis, it should bounce back more quickly than “social consumption” businesses such as hospitality, retail and personal services.
Construction spending is needed, because a future crunch in the sector is expected as housing construction slows.
But the focus on major transport infrastructure for job creation does not make so much sense. These projects are less jobs-intensive.
Also, states such as Victoria already have a big pipeline of large projects, so have little capacity to deliver more.
The A$3 billion for shovel-ready projects focusing on road safety and local roads are better targeted to create jobs. But it has missed the opportunity to deliver a major social housing spend, providing something desperately needed that would also help mitigate the downturn in housing construction.
To achieve its stated objective of getting unemployment well below 6% as quickly as possible, the government should be focusing on stimulating sectors where activity has fallen the most – especially services sectors.
But this budget overlooks the hard hit in favour of the hard hat. The government should check this blind spot quickly. A broad-based recovery depends on it.
This is an extraordinary giveaway budget, driven by desperate circumstances that would have been inconceivable less than a year ago.
The debt and deficit numbers are predictably eye-watering – but the gamble is whether they are big enough.
The Morrison government is pleading.
In particular, it is begging business to chance its hand and invest, so that activity and jobs can be restored ASAP.
The incentives being handed to business are enormous. But it all comes down to that elusive necessity – confidence. It’s the old question about horses and whether they will drink when the water is shoved into the trough before them.
Equally, the government is also appealing to individuals to spend, and then spend some more.
There will be argument about whether it is making this pitch in the most effective way – the accelerated tax cuts have their critics.
They’ll certainly give many people more ready cash over coming months. The unknown is whether in these uncertain times the purse strings will be loosened.
The modest cash payments for pensioners – two lots of $250 – are also directed to boosting consumption. The first payment is December, nicely timed for some (modest) Christmas presents, to help the retail sector just when it needs assistance.
In its subsidy for businesses to hire younger unemployed people the government is acknowledging the recession will particularly hurt this generation.
It is imperative to get as many as possible of those thrown out of work back into the labour force as fast as possible.
The motive is sound, but how effective the program will be is another matter. Much will depend on whether employers feel confident enough to take on staff.
These younger people have to hope the employers respond, because the Coronavirus supplement that has enhanced JobSeeker is being wound back, and is due to end, while how much the basic JobSeeker payment will eventually be set at is a decision yet to be made.
The budget also notes women have been hard hit by the pandemic, and it includes a “women’s economic security statement”. But its $240 million in measures seems, to put it mildly, modest when compared to other initiatives.
Among the unusual features of this unique budget is the relative absence of cuts. The government has been finding ways to get money out the door, not reining in expenditures.
Frydenberg reprised the messages we’ve been hearing in past months from the government, which has prepared the ground for this tsunami of debt and deficits.
The debt would be a heavy burden, but it was a necessary one to “deal with the greatest challenge of our time”.
Some Liberals might have residual nightmares about debt but it is generally accepted by economists that it is totally manageable, and not even exceptional on international comparisons even if a shock in the Australian context.
Frydenberg repeated that the government’s initial measures to cushion the economic fallout of the pandemic had been “temporary, targeted, and proportionate”.
But the economic support cannot be temporary and this budget represents the next phase of it.
JobKeeper will be wound back, despite many experts believing it should extend much longer than its planned life, but other mechanisms have to be deployed to support the economy.
The budget is attempting to make a successful transition from the direct support represented by JobKeeper to indirect support through the use of tax breaks to encourage business investment.
At some stage, the transition has to be made. That’s recognised by both sides of politics. The debate is around the timing and the mechanism for making it.
While assuring us the government has our backs, Frydenberg had a double message for Australians in his budget speech. “The road to recovery will be hard,” he said. “But there is hope.”
Among the hopeful assumptions in the budget is that “a population-wide COVID-19 vaccination program will be fully in place by late 2021”.
That’s perhaps the biggest call of all.
The budget deficit is projected to hit $213.6 billion, a record 11% of GDP, before winding back:
Instead of falling, as predicted in the last budget, debt will climb:
There’s spending and tax cuts a plenty:
It’s expected to bring about a bounce-back in economic growth:
But much depends on the assumptions, including a return to strong immigration: