Vital Signs: yes, we need to make things in Australia, but not like in the past



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Richard Holden, UNSW

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.




Read more:
Albanese promises $20 billion plan to modernise electricity grid, and $6.2 billion for childcare


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.

Understanding comparative advantage

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.

Making cars and trains in Australia

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.




Read more:
Holden’s dead end shows government policy should have taken a different road


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.

The case for strategic manufacturing

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”.




Read more:
Medical supply chains are fragile in the best of times and COVID-19 will test their strength


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.

From just-in-time to just-in-case

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.The Conversation

Richard Holden, Professor of Economics, UNSW

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

Grattan on Friday: Anthony Albanese tries to climb an impossible mountain


Michelle Grattan, University of Canberra

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.




Read more:
Politics with Michelle Grattan: a budget for a pandemic


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.




Read more:
Simon Birmingham to become finance minister and Senate leader as Australia nominates Cormann for OECD


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.




Read more:
Budget 2020: Frydenberg tells Australians, ‘we have your back’


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.




Read more:
Albanese promises $20 billion plan to modernise electricity grid, and $6.2 billion for child care


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.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.

It’s not the size of the budget deficit that counts; it’s how you use it



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Steven Hamilton, Crawford School of Public Policy, Australian National University

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.






Read more:
Budget 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts


Employment and business incentives

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.




Read more:
The budget’s tax cuts have their critics, but this year they make fiscal sense


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.

Investment sleight of hand

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.


The Conversation’s Business & Economy editor Peter Martin explains the 2020 budget in three minutes.

This budget just isn’t very stimulating

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.




Read more:
Budget 2020: promising tax breaks, but relying on hope


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.



Green waste

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.




Read more:
Creative destruction: the COVID-19 economic crisis is accelerating the demise of fossil fuels


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.The Conversation

Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

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

High-viz, narrow vision: the budget overlooks the hardest hit in favour of the hardest hats


Danielle Wood, Grattan Institute; Kate Griffiths, Grattan Institute, and Tom Crowley, Grattan Institute

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.




Read more:
Budget 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts


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.


Size reflects the industry share of Gross Value Added for 2019. Industry-specific stimulus excludes stimulus available to all industries, such as JobKeeper.
ABS, Grattan analysis of Government announcements to October 2020

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.


Notes: Excludes expenses for ‘other economic affairs’ (which contains JobKeeper) and ‘other purposes’ (largely GST payments to the states). Total expenses growth is also calculated excluding ‘other purposes’. Source: Budget 2020-21.
Source: Budget 2020-21

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.

A missed opportunity for women

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.




Read more:
Permanently raising the Child Care Subsidy is an economic opportunity too good to miss


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.

The Conversation’s Business & Economy editor Peter Martin explains the 2020 budget in three minutes.

Poorly targeted stimulus

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.




Read more:
Budget 2020: promising tax breaks, but relying on hope


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.




Read more:
Top economists back boosts to JobSeeker and social housing over tax cuts in pre-budget poll


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.The Conversation

Danielle Wood, Chief executive officer, Grattan Institute; Kate Griffiths, Fellow, Grattan Institute, and Tom Crowley, Associate, Grattan Institute

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

This budget will only work if business and consumers play ball



AAP/Mick Tsikas

Michelle Grattan, University of Canberra

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.




Read more:
Budget 2020: Frydenberg tells Australians, ‘we have your back’


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.




Read more:
Budget 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts


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.




Read more:
Budget 2020: promising tax breaks, but relying on hope


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.




Read more:
The budget’s tax cuts have their critics, but this year they make fiscal sense


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.




Read more:
The budget assumes a COVID-19 vaccine becomes available next year. Is this feasible?


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 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts



Wes Mountain/AAP

Wes Mountain, The Conversation

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:


The Conversation


Wes Mountain, Multimedia Editor, The Conversation

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

Don’t worry about the debt: we need more stimulus to avoid a prolonged recession



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Danielle Wood, Grattan Institute and Tom Crowley, Grattan Institute

After two decades equating budget surpluses with good economic management, it might seem convenient that the federal government has changed its fiscal strategy just before the budget to focus on jobs over keeping the deficit in check.

But it’s the right move. The world has changed in ways that make government spending more necessary and government debt more sustainable than ever.

Debt talk still dominates newspaper headlines and many of Treasurer Josh Frydenberg’s media appearances. But it shouldn’t. Here’s why.

We are in the middle of a major economic shock

The COVID-19 recession is the biggest economic shock since the Great Depression. GDP fell 6.3% in the year to June, the worst annual result since 1929.

The federal government should use its balance sheet to spread the costs of such a large shock over time. The alternative would be to leave those who lost their jobs or businesses in poverty.

The government’s emergency response saved businesses and jobs from going under in the short term. Now, as we emerge from the crisis into the recovery phase, large-scale stimulus is needed to boost demand and create new jobs.

Debt has never been cheaper

It has never been cheaper for governments to borrow. As the next chart shows, the interest rate on 10-year Australian Government Bonds is less than 1%. If inflation stays above 1%, as the Reserve Bank and Treasury expect, the “real” interest rate the federal government pays on the bond will be negative. That is, it will effectively be paid to borrow.


Yields on 10 Year Australian Government Bonds.

Author provided

These very low interest costs change the dynamics of managing debt we accrue now. Investments that boost future growth – including spending to reduce unemployment and close the output gap – will pay for themselves.

This is the fiscal “free lunch” spoken about by the former chief economist of the International Monetary Fund, Olivier Blanchard, and the deputy governor of the Reserve Bank of Australia, Guy Debelle.

Extra stimulus won’t spook financial markets

To get the unemployment rate below 5% by the end of 2022, the Grattan Institute estimates a further A$100 billion to A$120 billion of fiscal stimulus is needed on top of what governments have already announced.




Read more:
Now we’ll need $100-$120 billion. Why the budget has to spend big to avoid scarring


This is unlikely to cause financial markets to break a sweat. Even if gross debt was to nudge 50% of GDP in the next few years, it would still be far below that of most other developed nations before the COVID crisis. At the end of 2018-19, the gross public debt in the UK was 85% of GDP, in the US 103%, and in Japan more than 200%. All have borrowed substantially more since then at very low rates.

There’s also no risk that significant government spending will cause wages or inflation to rise dramatically. In fact, Australia has the opposite problem. Wages were stagnant before the crisis and are forecast to remain so for years. Inflation has been persistently below the Reserve Bank’s inflation target and is forecast to remain so for years.

We can manage debt without austerity

Frydenberg has signalled that, as employment recovers, the government’s fiscal strategy will shift to stabilising and then reducing debt as a share of GDP. Although his stated threshold of “well under 6% unemployment” is not ambitious enough, the idea makes sense.

The good news is that with interest rates on government borrowing so low, debt as a share of GDP can be reduced without pursuing austerity in the form of deficit reduction.

The interest rate is one of three factors that affect the size of debt relative to GDP. The other two are the budget balance (the incremental contribution to debt) and nominal GDP growth, which depends on economic activity and inflation.

Even if interest rates were a little higher than now (say, 1.5%), the government can reduce debt relative to GDP even while continuing to run large deficits, provided that nominal GDP growth returns to a moderate level (say, 4.5%, as it was before the pandemic).

The next chart shows that under these circumstances the government can run deficits of up to $50 billion and still reduce debt as a share of GDP.


Gross debt-to-GDP projections based on different budget deficit scenarios.

Author provided

Different rates of GDP growth would change this story, as the next chart shows. With an even higher nominal growth rate, debt would shrink even faster relative to GDP. In a scenario of prolonged low growth, debt would increase relative to GDP a little, but remain very modest.


Gross debt-to-GDP projections based on different GDP growth scenarios

Author provided

The government can do things to boost nominal growth in areas such as tax reform, education and skills, workforce participation, energy and climate policy, and land-use planning. The Reserve Bank should also do more by boosting inflation, which would support nominal growth.

Don’t scrimp on stimulus

There are many urgent and valuable priorities for government spending right now, such as permanently raising JobSeeker, boosting child-care support and building more social housing.

More debt might impose a small cost over a very long time. But the cost of insufficient stimulus and a prolonged recession would be vastly bigger.

The choice is simple. We should not let debt panic distract us from making it.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.

Government extends assistance for first home buyers to stimulate building industry


Michelle Grattan, University of Canberra

In its latest stimulus measure, the Morrison government will extend its first home loan deposit scheme to an extra 10,000 home buyers.

But unlike existing arrangements, where people can purchase a new or existing home, these buyers will have to build a house or buy a newly-built property.

The condition is to direct maximum help to the residential building sector.

As with the existing program, the extended program allows people to buy with a deposit of as little as 5%, much less than the usual deposit of about 20%. The government guarantees the other 15% of the deposit.

The additional guarantee will run until June 30, 2021. The program has already assisted some 20,000 buyers since the start of the year.

Treasurer Josh Frydenberg said: “Helping another 10,000 first home buyers to buy a new home … will help to support all our tradies right through the supply chain including painters, builders, plumbers and electricians.

“In addition to the government’s HomeBuilder program, these measures will support residential construction activity and jobs across the industry at a time when the economy and the sector needs it most.

“At around 5% of GDP, our residential construction industry is vital to the economy and our recovery from the coronavirus crisis.”

The first home loan deposit scheme began in January, to provide up to 10,000 guarantees for the financial year to June 30, 2020. It saw strong demand in its first six months , with 9,984 out of a maximum of 10,000 guarantees offered.

Between March and June, the scheme supported one in eight of all first home buyers.

The government has announced new caps for the scheme, given newly built homes are usually more expensive than existing homes for first home buyers: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.

Too little, too late, too confusing? The funding criteria for the arts COVID package is a mess


Jo Caust, University of Melbourne

On Tuesday, seven months after the sector closed down in March, applications opened for the government’s COVID-19 arts relief package, named “Restart Investment to Sustain and Expand”, or RISE.

A$75 million will be allocated between 2020 and 2021, but a close read of the criteria for this new funding program raises more questions than it answers.

The recipients will be selected by department officials. Their proposals must be “efficient, effective, economical and ethical”.

And, perhaps most crucially, in the shadow of the “sports rorts”, the NSW “arts rorts”, and the pain felt by the sector during the Brandis era, the final say on where the grants go will be placed in the hands of the federal minister for the arts, Paul Fletcher.

An opaque process

The standard mode for delivering arts funding in Australia is through arms length funding judged by artform peers.

It has been long recognised government arts support should be kept separate from political processes, and arts knowledge – as in fields such as science, medicine or education – is a prerequisite for determining the quality of arts funding applications.

The RISE funding guidelines applications will be assessed by “experienced assessors” from the Department of Infrastructure, Transport, Regional Development and Communications – a department that dropped “arts” from its name this Feburary.

Will these “experienced assessors” have any artform knowledge or experience, or simply be experienced in assessing grants?

The document states the government assessment officials are allowed to consult more widely, including with the Australia Council or State government entities – but this does not imply any peers will be involved in the process.

Further, the officials will only be making “recommendations”, and the minister “decides which grants to approve.”

The arts have an uneasy recent history with arts ministers deciding funding.

In 2015, then minister George Brandis reallocated A$104.7 million from the Australia Council’s funding to fund his own scheme for “excellence”, later named Catalyst.

This did not end well for either the minister or the arts. Brandis lost his job under a new prime minister and Catalyst was retired.




Read more:
After the Catalyst arts funding mess, many questions remain


The Australia Council never returned to its pre-Brandis funding allocation.

In New South Wales in 2018, the ABC reported the minister for the arts had interfered in the funding decision process, overruling recommendations and redirecting money to his own favoured projects. And in the lead up to the last NSW state election, more reporting found arts grants were selectively targeted to organisations in Coalition-held seats.

Efficient, effective, economical and ethical

The funding guidelines say projects must represent “value for relevant money”, defined as “an efficient, effective, economical and ethical use of public resources”.

What is “value for money” in the context of the arts? It could be the amount of money requested, the intent of the project, the quality of the people involved, the numbers in a potential audience, or the amount of money that may be earned.

How do you determine “efficiency”? Is a play with a cast of two deemed more “efficient” than a play with a cast of four? Or is a project more “efficient” if it involves no people at all and only involves technical effects?

Is performance “effective” if it can occur over several platforms – live, in audio and in video – and so it has a broader audience impact? Or perhaps that makes it “economical”.

The meaning of “effective” here could be that a performance moves one to tears or to laughter. It has an emotional “effect” on the audience.

The term “ethical” might suggest no animals are hurt during the production – or maybe it is just another way of describing high moral values.

‘Contributing to government objectives’

The conditions for funding note:

Activities must demonstrate that there is a funding need, contribute to job creation, support Australian artists or performers (or their work), provide experiences to audiences, be of a nature that is likely to be popular with Australian audiences, and financial viability.

These are all factors which are hard to argue in an arts grant proposal. There isn’t a formula for producing popular art.

Perhaps of most concern though is that any proposal should be “contributing to government objectives”.

Many arts projects are critical of government objectives and policies. That is the nature of arts practice which takes a critical or different view of the world we live in.

This potential for public criticism by artists has a chequered recent history in Australia. In 2014, Brandis threatened to withdraw government funding from the Sydney Biennale for refusing sponsorship from Transfield due to their work in immigration detention.




Read more:
We should value the Biennale protest, not threaten arts funding


Welcome, with lingering concerns

Given the impact of the pandemic, the arts in Australia are in a dire situation and the sector needs all the help it can get. But it is important the process for making decisions in arts funding is transparent, ethical, and not subject to any political preferencing or rorting.

While this package is welcome – if not long overdue – the selection criteria suggests an approach that does not serve arts practice well and in fact suggests that, once again, a minister for the arts is exercising his personal largesse and judgement.

The Brandis era resulted in a senate inquiry, a divided arts sector and a significant loss in arts funding.

Let’s hope history isn’t doomed to repeat.


Correction: an earlier version of this article misnamed the refused sponsor of the 2014 Sydney Biennale, the sponsor was Transfield.The Conversation

Jo Caust, Associate Professor and Principal Fellow (Hon), School of Culture and Communication, University of Melbourne

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

HomeBuilder only makes sense as a nod to Morrison’s home-owning voter base


Lisa Adkins, University of Sydney; Gareth Bryant, University of Sydney, and Martijn Konings, University of Sydney

HomeBuilder grants of A$25,000 are being offered to build or renovate a home as part of the Australian government’s emergency economic response to the coronavirus pandemic. Critics note that the program, framed as stimulus for residential construction, benefits already well-off households. It ignores the realities of the housing market, especially the affordability crisis, with housing stress affecting precarious renters, the homeless and those struggling with bloated mortgage payments.

Homebuilder appears to be a bewildering policy. It’s likely to support construction work that would have occurred anyway while failing to meet real housing needs.

However, to criticise HomeBuilder simply as bad policy made on the run is to miss a broader picture. HomeBuilder begins to make a lot more sense when understood as a response to the role of housing assets in shaping both economic inequality and electoral politics.




Read more:
Scott Morrison’s HomeBuilder scheme is classic retail politics but lousy economics


The rise of the ‘asset economy’

We describe this dynamic as the “asset economy”: our socio-economic positions are defined less and less by employment income and more and more by our holdings of wealth-generating assets, especially housing.

The government has touted HomeBuilder as boosting construction jobs through a “tradie-led” recovery. House-price inflation has made the economy particularly dependent on construction jobs. Construction is the third-biggest employer in Australia and the only industry outside the services sector to have had significant job growth in recent years.

However, the government could have boosted construction jobs at least as much, if not more, by investing in social housing or energy-efficient housing. Why then did it choose to make the already well-off even better off by paying owners to add value to their homes?




Read more:
Why the focus of stimulus plans has to be construction that puts social housing first


A long history of looking after home owners

It’s no coincidence that, beyond the initial emergency responses to support household and business incomes, the first substantive stimulus the Coalition government announced went to residential property owners.

The rise of the asset economy has occurred in parallel with a shift in voting patterns. The 2019 Australian Election Study observed a move “away from occupation-based voting and towards asset-based voting”. Voters who own housing – owner-occupiers and investors – strongly favour the Liberal and National parties.

Our research on the asset economy reveals the long-term drivers of Australia’s asset-based politics. HomeBuilder is the latest in a long line of Australian government policies over the past four decades to encourage, prop up and reward residential property ownership. These policies have included selling off public housing, tax incentives (especially negative gearing and capital gains tax exemption for the family home) and promoting home ownership as an alternative to welfare programs such as public pensions.




Read more:
Fall in ageing Australians’ home-ownership rates looms as seismic shock for housing policy


These policies have not simply encouraged home ownership – they have transformed it. Nowadays the home is a financial asset, an investment financed by growing debt that is supposed to generate capital gains.

Property price increases, driven by the liberalisation of credit and low interest rates, came to be seen as a key route to economic security for households in an economy with stagnant wages and precarious employment. Credit-driven home ownership expanded and property prices grew. Many property-owning households saw major gains in their wealth portfolios.




Read more:
HomeBuilder might be the most-complex least-equitable construction jobs program ever devised


Housing is now a driver of inequality

Credit-driven home purchases pushed prices to heights where it became increasingly difficult for people to enter the market. In Australia as well as in other Anglo-capitalist countries ― including the United Kingdom, the United States and Canada ― rates of home ownership show the same pattern from 1980 to 2020: increases followed by decreases.

In large cities such as Sydney and Melbourne price inflation over time has made it virtually impossible to buy a house on the basis of an average wage alone. As a result, private rental markets have expanded, rents have soared and new modes of occupancy have emerged, including multigenerational and shared living. These renters are not simply locked out of home ownership but also out of the wealth it generates.

Graph showing changes in rates of home ownership and rental by households from 1994-95 to 2017-18

Source: AIHW. Data: ABS 2019, CC BY

These trends have opened up a rift between those with and without housing assets. This entails not just major differences in levels and patterns of wealth accumulation, but also in life chances. The asset economy has fundamentally reworked the social structure, or what sociologists study as patterns of “class” or “stratification”.

This means even when people have similar jobs or earn the same wages, deep inequalities can exist between those who own assets and those who do not.

These trends are particularly notable among younger generations, giving rise to stark new forms of inequality. Those who are set to inherit housing assets or whose access to parental wealth offers a route into home ownership have a distinct advantage. They can benefit from property-based asset inflation and capital gains.




Read more:
The housing boom propelled inequality, but a coronavirus housing bust will skyrocket it


Shoring up the base in a crisis

HomeBuilder is a product of the electoral politics that emerged out of this asset economy. Asset owners vote with their feet and resist any changes that would jeopardise the long-lived advantages that asset ownership gives them. The result of the 2019 federal election, when Labor’s policy was to reduce the benefits available from negative gearing and the capital gains tax discount, showed this.

The government knows as long as it keeps in place the advantages that flow to home owners, residential property investors and the “bank of mum and dad”, they form a powerful core of the Coalition’s electoral base. It’s offering a stimulus measure directed specifically at this constituency, adding yet more value to their assets at a time of economic uncertainty. HomeBuilder is an asset owner’s policy aimed at appeasing and shoring up the Liberal-National party’s electoral base.

As home ownership rates decline and asset-based inequalities increase, just how long such tactics can produce electoral success remains a critical question.The Conversation

Lisa Adkins, Professor of Sociology and Head of School of Social and Political Sciences, University of Sydney; Gareth Bryant, Senior Lecturer in Political Economy, University of Sydney, and Martijn Konings, Professor of Political Economy and Social Theory, University of Sydney

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