ESA National Economic Panel Polls
Does the budget rebuild our economy and create jobs?
'Could do better': top Australian economists award the budget a cautious pass
Peter Martin, Crawford School of Public Policy, Australian National University
Australia’s leading economists have struggled to grade this month’s budget.
Challenged by the Economic Society of Australia and The Conversation to rate it on a scale of A to F when judged by its stated aims of rebuilding the economy and creating jobs, none of the 43 economists who responded gave it the lowest grades of E or F.
But most who gave it a pass were unhappy.
Financial markets expert Kevin Davis praised “the willingness of a conservative government to adopt needed large deficit spending at variance with its ideology”.
Economic modeller and former Reserve Bank board member Warwick McKibbin said he would give it an A for scale.
But Davis said tax cuts “to the better-off employed” weren’t the best way of achieving desired outcomes, and McKibbin said the composition could have been much better designed.
It's not the size of the budget deficit that counts; it's how you use it
“There was an opportunity to invest in green infrastructure as part of a fiscal response and a climate/energy policy response that would have longer-term economic and environmental payoffs,” McKibbin said.
“For spending support, transfers to low income households rather than income tax cuts would have given a bigger bang for the buck. Greater support of childcare would support incomes and labour supply.”
Bob Breunig said the design of the childcare benefit created a well-documented income cliff for second earners making it difficult for them to work more hours. It was a known problem and would have been easy to fix.
Hard hats instead of soft skills
The Grattan Institute’s Danielle Wood said it was “absolutely the right call to change course on fiscal strategy and recognise the need for sizeable stimulus, so marks for that”.
But the budget “very much bet the house on a private sector-led recovery”.
Where it had spent money directly it mostly went to “hard-hat” professions such as infrastructure, construction, manufacturing, defence, utilities and energy.
High-viz, narrow vision: the budget overlooks the hardest hit in favour of the hardest hats
“Some of these sectors haven’t even seen job losses during COVID,” Wood said, and there is already a healthy pipeline of work for transport infrastructure projects, so why spend your stimulus dollars here?“
Renee Fry McKibbin noted that the burden of COVID-19 falls on front-line workers in health, caring industries, hospitality, tourism, arts and education, yet she said the budget focused on sectors "traditionally dominated by men”.
Climate change overlooked
Wood said the price of those blindspots would be a weaker recovery than otherwise, unemployment higher for longer than it could have been, and women’s economic disadvantage entrenched.
Labour market specialist Sue Richardson said relying on incentives such as instant asset write-offs and hiring subsidies was risky because the private sector might not respond in the way that had been hoped.
What direct spending there was seemed “intended largely to recreate the economy of the past, rather than invest in the economy of the future”.
Budget 2020: promising tax breaks, but relying on hope
“The economy of the future will, among other things, need to have much lower greenhouse gas emissions and much greater ability to cope with the unavoidable damage arising from climate change.”
How we handle the recovery will either set us on a path towards net-zero emissions or lock us into a fossil fuel system from which it will be hard to escape.
Saul Eslake gave the government “great credit for being willing, explicitly, to recalibrate its budget strategy” and run up what (for Australia) were large amounts of debt.
On average, a bare pass
But he said the measures chosen would be less effective in delivering jobs and recovery than others available including vouchers for spending in sectors hard-hit sectors and spending on social housing and childcare.
All but one of the 43 economists who responded to the survey also responded to the pre-budget survey which nominated spending on social housing, education and training and permanently boosting JobSeeker as the top budget priorities.
Assessing the budget, 16 of the 43 (37%) awarded it either an A or a B. Almost half (49%) awarded it a C, or “bare pass”. Six (14%) gave it a D.
Some of the economists who awarded a B said it was really a “B-minus”
One of them, Lata Gangadharan, said when it came to opportunities for women (those worst affected by the downturn) the budget “failed miserably” and would attract a D.
James Morley said he might have been “too easy of a marker” by awarding a B, but that it was “possible to lose the forest for the trees when only evaluating the budget on its specifics”.
‘B’ reflects the big picture, not the details
The big picture was that deficit-financed stimulus was needed and that the budget provided much more than might have been expected given the previous positions of the treasury and the Morrison government.
He said the forward guidance that put off “budget repair” until after the unemployment rate fell below 6% was welcome, even if one could ask why the threshold of 6% number had been chosen.
The more one looks at the details, the more one wants to significantly mark down the grade for budget. But I will still give it a “B” because the big picture is on the right track and I will just hope the Treasurer somehow becomes an “A” student in the future.
Rana Roy said he would have to grade the budget a C rather than an A or B, “more in sorrow than in anger”.
While he approved of the deficits and the tax cuts and the focus on infrastructure, he strongly suspected the measures would not be enough.
“For example, in an immediate sense it is likely that the negative impact of tapering and terminating JobKeeper will overpower the positive impact of the new wage subsidies for new hires.”
Top economists back boosts to JobSeeker and social housing over tax cuts in pre-budget poll
Two of those surveyed awarded the budget a B primarily because it had shown restraint. Tony Makin said too much spending would have pushed up the dollar and drawn resources away from the private sector. Geoffrey Kingston said it was important to avoid “maxing out the national credit card”.
Chris Edmond awarded it a C primarily because its assumptions relied on hope.
By simply assuming a widespread effective vaccine will be available next year and not otherwise thinking hard about how to beat the pandemic, the government is being very optimistic.
Others said it had ignored the one thing recommended by most economists, which was to invest in social housing to make housing affordable and create jobs.
A permanent increase JobSeeker would have given a million Australian confidence in the leadup to Christmas. Higher education, a major export earner with a direct impact on productivity, was being left to shrink.
John Quiggin said the budget pursued “cultural/ideological vendettas against perceived enemies like renewable energy and the university sector”.
But he said it was still worth a C. The government was right to budget for a large deficit, and deserved continuing credit for JobSeeker and JobKeeper.
Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
The budget broadly met the government's rebuild economy / jobs objectives, though more support for child care would have helped these objectives more. But it could also have met these economy / job objectives with more empathy and social equity with greater support for social housing, aged care support and job seeker assistance as well as child care.
Acceptance of the need for deficit spending to keep the economy from slipping into depression is good, but the jobs impact is diminished by the choice of tax cuts and investment incentives over expenditure that would lead more directly to employment , such as social housing and enhanced access to child care. With the economy operating well below capacity, any increase in investment may be biased towards saving on costs rather than increasing output capacity. The largest cost for most businesses is labour, so incentives for increasing investment can have the unintended side effect of decreasing employment. There is also the longer term problem that tax cuts financed by large deficits mean more saving by wealthy individuals, further aggravating inequality in wealth and income going forward.
The budget contained some sensible measures (such as tax write-offs for business investments and wage subsidies for young people), but there are some major omissions and a real lack of imagination. In particular, the budget largely ignored investment in the renewable energy sector as a way to boost the economy, and it chose not to consider incentives to boost clean energy technology. The budget also largely ignored sectors of the economy that have been hardest-hit by the pandemic (which are predominantly female), and neglected to consider affordable childcare, higher education, the arts and admin sectors and permanently boosting jobseeker payments, all of which would potentially boost the economy.
Overall, the budget is balanced and non-ideological. It pushes required stimulus into the economy and shows a genuine concern for getting the economy going again. On the downside, wage subsidies are generally a poor way to generate additional employment and this one has several poor design features. The cap on total child care benefit receipt creates a well-documented cliff for second earners (mostly women) which makes it difficult for some people to achieve their desired working hours. This is a known problem and an easy fix. The Australian economy is in need of structural reform in order to create better conditions for growth and prosperity. This is particularly true in the tax area. This is not necessarily something that is appropriate for the current budget, but I would like to see the government signal its intention to tackle this issue in the medium-term.
The budget provides substantial benefits to businesses and is reliant to a large extent on businesses responding to these incentives to restart economic growth. It is not clear to what extent this is likely. Similarly, the budget provides generous tax cuts and relies on these tax cuts to stimulate spending and the economy. Again, it is unclear whether people will choose to spend or to save. If either of these mechanisms proves ineffective then the budget will have expended a lot of resources with little to show for it. This budget was an opportunity to build a positive legacy. With the normal concerns about deficits put to one side because of the consensus on the need to stimulate the economy to emerge from the effects of the pandemic, there was an opportunity to spend big on projects that are difficult to fund in normal political times. Social housing and the aged care sector are obviously in need of some budget attention and were largely ignored. This opportunity has now been lost. Investment in these sectors would have created infrastructure that would benefit vulnerable Australians while also likely stimulating the economy to a greater extent than the measures taken. Focus on aged care would also stimulate employment growth in a female-dominated sector. Female workers have been disproportionately negatively affected by the pandemic as they are clustered in the service sector which is the sector of the economy most adversely affected. Further, older women are over-represented in the ranks of the unemployed and now will find it even harder to find jobs as they will be competing with younger workers for whom the government is now providing wage subsidies. To add insult to injury, the government also elected not to commit to a permanent increase in Jobseeker payments in the budget. This budget is gender blind i.e. the government did not look to assess whether its budget differentially affected men and women, it most definitely is not gender neutral.
The budget provided a rescue package to the economy, which is what is needed in the current context. However, this package failed to address some of the key needs of the economy. I would have liked to see more focus on social housing, an increase in jobseeker, and - for the long-term - a broader framework to support innovation. Some more targeted support to female employment (possibly by redirecting some of the planned investment in/support to construction) would have also been beneficial. I am also concerned that the income tax cuts that have been brought forward are designed in such a way to reduce progressivity at a time when lower-income individuals and households are likely to suffer the most from the recession.
My overall rating is Average. There are a lot of missed opportunities to target job growth more directly. It's not clear how much of the tax cut will actually be spent rather than saved given the general uncertainty around COVID-19.
The willingness of a conservative government to adopt needed large deficit spending, at variance with their ideology, at the current time is a plus. But tax cuts to the better-off employed is not the best way of achieving desired outcomes. The carry-back of losses, particularly combined with immediate write-off of capital expenditures could have a significant effect (since such expenditures now can create current losses and release rebates of tax paid on past profits). But a concern must be with how much of such business expenditures will leak to imports. How quickly (if ever) much of the announced direct government expenditure will occur is another concern. My main criticism is with the lack of focus on appropriate distributional objectives and lasting changes to improve the economic and social conditions of the less sell-off.
The government has rightly abandoned fiscal restraint in this budget. Whether it has chosen to spend in the right areas remains to be seen. Much of the recovery strategy is about infrastructure investment, yet infrastructure wasn't badly affected by the pandemic, and more infrastructure isn't necessarily what we need to bring us out of it. A better economic strategy would have been to really guarantee a return to strong labour force participation by investing more in the care sector. Of course, creating better care conditions for the elderly, disabled and children not only makes economic sense - it also improves individual welfare which is sadly lacking in many institutional care settings.
No question, the COVID response looms larger over this budget and the government sees the need to help the economy on its recovery. This makes it to me more of a pass than better. I feel more could have been done to use this budget to get the economy future ready. Instead of investing in coal, we should be thinking about the energies of the future. With infrastructure, I feel the investments proposed lack the important aspect of creating jobs fast (when jobkeeper runs out) - as planning is often needed - as well as being investments in our future. As an example, investing money in the NBN is a good idea - but why not replacing the last mile of copper - that would create jobs at the same time getting the NBN to full potential.
Overall this is a disappointing budget, but it could have been much worse. The budget fails to think strategically about the economic situation confronting Australia right now. First, there can be no proper recovery unless we beat the pandemic. Because of that, one of the things the budget should be doing is facilitating massive investment in public health, in particular investment in testing and tracing capacity. By simply assuming a widespread effective vaccine will be available next year and not otherwise thinking hard about how to beat the pandemic, the government is being very optimistic. Second, while it is good to see the government no longer shy about running large deficits in an effort to prevent further economic collapse, the instruments being used are not the most effective forms of stimulus. (eg if you just want spending, cash transfers to households, especially low-income households, would be more effective than tax incentives for businesses) but more importantly the stimulus is not well targeted given the unusual nature of this recession. In particular, the brunt of this recession is being felt disproportionately by women and in service sectors, especially tourism and hospitality and higher education. It is disappointing to see little in the way of targeted assistance to those sectors and households most hurt by the economic collapse.
Aggregate fiscal support is strong but uncertainty about the future of JobKeeper and Jobseeker is economically and socially damaging. Government and RBA insistence on repayment of every dollar of the debt is damaging to expectations of a successful recovery. The budget turned down an opportunity to reform the Child Care Subsidy to boost both productivity and workforce participation. Not much forward signalling of productivity-raising reform, making achievement of even trend GDP growth of 2.75% on a sustainable basis unlikely. Much stronger growth than that would be needed to pay down the debt if it is all to be repaid as the Government is insisting.
B-minus really. What I liked: Bringing forward the personal income tax cuts for low and middle-income earners; some higher funding for social housing, mental health, and local infrastructure; development of the YourSuper tool to compare fees and returns of superannuation packages; some attempts to kickstart investment by small and medium-sized businesses (asset write-offs, loss carrybacks). What I didn't like: Not even an attempt to move in the direction of universal childcare provision. Out-of-pocket childcare costs are a tax on working, and free childcare is therefore a massive stimulus to young workers. Fully-funded, high-quality, accessible childcare offers a triple benefit for Australia: it releases labour and raises welfare today, it creates jobs everywhere (including in the regions), and it creates a more productive, happier, healthier next generation. I also didn't see enough support for aged care in the budget. In general, going forward we need to move away from quick and easy stimulus policies (like JobKeeper, the asset write-offs, and the JobMaker subsidies for hiring young workers), avoid the well-worn trap of funneling money into boondoggle infrastructure projects that mainly serve to enrich large, well-connected companies, and move towards longer-term, sustainable support to release supply and demand from SMEs and everyday Australians that will help lift the economy back up over the next few years. Some options include a revenue-contingent loan scheme for small and medium-sized businesses, an income-contingent loan scheme for individuals, and the re-establishment of a national bank to make Australians less dependent for their everyday banking needs on the rent-seeking commercial banks and also make it easier to deliver stimulus (like income-contingent loans!) quickly when needed now or in future recessions. Like establishing universal child care, none of these options is a 'stroke of the pen' initiative: they take time, thought, and resources up-front to ensure good design and good implementation.
The budget builds on short term stimulus to aggregate demand and employment and to improve equity in response to the COVID-19 shock, but it missed an opportunity to develop and implement necessary structural reforms for greater productivity, participation and growth over the medium and long term. For the next year or two, budget measures will phase out many of the initial stimuli, including JobKeeper, withdrawal of superannuation funds, and replaces them with support for increased private sector demand and choice of investment and jobs in a rapidly evolving economy, including JobMaker, business tax concessions, additional infrastructure outlays and return of bracket creep. Clearly, there are pro and con views about the aggregate demand and equity benefits of the specific programs versus alternatives. Appropriately, the government recognises extreme uncertainty and flags willingness to revise the budget in the light of forthcoming information. Importantly, most of the tax and expenditure changes in the budget do not grab the opportunity for structural reforms required to reverse Australia's low productivity growth over the last decade. A larger and more productive economy is key to higher living standards and to reducing the debt and its repayment. Overdue required structural reforms include: the tax system; interaction of the tax and social security systems; commonwealth/state financial relations, including simplifying and clarifying the expenditure roles and responsibilities of each level of government to reduce the overlaps, waste, duplication, blame shifting and lack of accountability.
The Treasury didn't do the one thing recommended by most economists, which is to start a social housing program to make housing affordable and create jobs. Instead, it basically gave out lots of money to the rich that it didnt have. So debt will sky-rocket with few jobs created since the continued covid-related restrictions mean production and commerce remain repressed. The budget is hence like pushing the gas pedal and the brake at the same time, which just means loss of fuel and spent breaks. There was also no long-run orientation in this budget. No plans to overhaul the tax system to ensure a return to surplus and no plans to improve education and training. It was just about boosting demand and pleasing supporters. A waste.
The budget does not attempt to provide a safety net to those most vulnerable to the economic destruction of COVID-19. The burden of COVID-19 falls on front-line workers in health, caring industries, hospitality, tourism, arts and education, yet the budget measures focus on sectors traditionally dominated by men, such as construction. The young will bear the future debt burden, so it would be sensible to invest in alleviating climate change to benefit the now young in the future. Excluding women over 35 from the jobmaker scheme will have long-term adverse effects on the economic security of women. Women already have superannuation balances of almost 47% less than men and are the fastest-growing group becoming homeless. Raising the difficultly for older women to reenter the workforce relative to every other demographic, combined with no expenditure directed to expanding social housing, not improving the affordability of childcare and focusing the budget measures on industries dominated by men, will only exacerbate this gap. Investing in correcting climate change, improving social housing, and improving childcare access would be an employment boost. We also know that a healthy, well-educated and equitable (including intergenerationally) workforce is essential for productivity growth and harmonious society.
The focus on getting young people employed is a good part of the budget. The budget did very little to improve opportunities for women though, on this aspect I would say it failed miserably, I would give it a D on that. I would have also liked to see some initiatives for a green recovery. The current budget is a missed opportunity in that respect as well. The promise of recovery via tax cuts seems too optimistic. Overall I would grade the budget as a B minus.
The pathways to jobs are oblique. While a lot of money has been committed the strategy relies on business to have the confidence to invest and employ - this is an important and probably difficult transition from where Government was directly funding about 25% of the workforce via JobKeeper, and much "cushioning" business coming to an end. Given no idea of the "efficiency" of spending, in sense of jobs created per $1m of spending in different industries. BThe budget also assumes households will spend rather than save or reduce debt.Budget failed to seize the opportunity of COVID Recovery to initiate genuine reform in so many areas - tax, childcare, aged care, transition to a low carbon Australia, and many more.
The budget largely failed to address the economic issues we had before COVID-19. The tax measures were half-hearted, there was no childcare plan, and even infrastructure spending was more-or-less "business as usual".
The budget was pretty good, including for jobs and growth. It raises outlays while generally seeking to avoid permanent spending rises. Likewise, there were not big, permanent changes in the tax scales. Accordingly, the budget did not trigger warnings of credit downgrades by the major ratings agencies. The budget plans fiscal deficits to the extent that federal net public debt will max out at 43.8% of GDP in mid 2024. Our all-time record for net public debt seems to have been set back in 1945, when it hit 125%. The plan for a ratio of 43.8% strikes me as judicious, given that we need to retain some fiscal space for contingencies such as third waves, spikes in interest rates and heightened geopolitical tensions to our north. Also, the fact that the household saving ratio stands at 20% indicates that growth in tax revenues may be even weaker over the next few years than what the budget suggests. This is a further reason for not maxing out the national credit card at this time, even as we do add substantially to it.
This was not just an annual budget . Perhaps for the first time since Chifley's plan for post war recovery, this was a multi year economic plan. The government has used the extra half a year since May to build this cohesive plan . The components are mutually supportive . Fortunately the government also avoided multi-year social welfare entitlements which after 2008,so hampered the the eventual return to fiscal balance.
Fiscal policy has to be more active in stimulating the economic recovery in an environment where monetary policy is operating at close to the zero-lower bound. This budget did that by including a range of fiscal stimulus measures to support jobs and to promote economic growth.
The private sector has overwhelmingly shouldered the economic burden of the COVID19 crisis. My grade of B therefore reflects endorsement of the predominant supply-side focus of the budget via investment incentives and direct temporary assistance for private sector employment. The direct government spend on infrastructure was thankfully less than it could have been because more direct government spending to create jobs would have been counterproductive for micro and macro reasons. On the micro front because (i) as restrictions are lifted and international travel resumes (hopefully sooner rather than later) private sector jobs will eventually return, possibly before any temporary infrastructure jobs are actually created, given the lags associated with infrastructure (ii) infrastructure spending is less labour-intensive than in industries most affected (tourism, hospitality etc) (iii) the skills of workers who lost their jobs in locked-down industries would not match skills required. On the macro front, more government spending would (i) push up the dollar according to the GFC precedent (Makin 2019) (ii) require even more unconventional monetary policy to prevent exchange rate appreciation (ie quantitative easing, negative interest rates perhaps) which is already inequitably fuelling asset price inflation and will likely lead to a surprise spike in inflation down the track (iii) draw inputs away from the tradable sector, further worsening Australia's competitiveness. See Makin and Ratnasiri (2015). Another plus from the budget was deferral of income tax cuts for high income earners. This would have been (i) unaffordable given the already huge budget deficit and escalation of public debt and (ii) inequitable because it would have mostly benefitted those largely unaffected by the crisis, including well paid public sector employees, who would have saved the cuts in any case. Finally, although not a popular option, company tax cuts should have been included in the budget as they would have made now-waning foreign investment in Australia more attractive. Foreign investment has traditionally been a driver of Australia's economic growth and given the right tax incentives could play a significant role in building niche manufacturing as proposed in the budget.
The scale of the deficit was appropriate given the needed response of fiscal policy to the COVID-19 recession (I would give an A for scale). The composition could have been much better designed. There was an opportunity to invest in green infrastructure as part of a fiscal response and a climate/energy policy response that would have longer-term economic and environmental payoffs. For spending support, transfers to low income households rather than income tax cuts would have given a bigger bang for the buck. Greater support of childcare would support incomes and labour supply. Also a greater use of income contingent loans for households and revenue contingent loans for small businesses would have given a much bigger stimulus for less long term fiscal deterioration. Job keeper should have been universally applied but through a revenue contingent loan.
The budget delivers on supporting the economy (jobs and investment) in the short-run, but it lacks a vision for the post-pandemic world. In particular, it lacks a more ambitious reform of business taxation (e.g., moving to an Allowance for Corporate Equity system) and a a commitment to climate action through green stimulus.
Maybe I'm too easy of a marker by giving a "B", but I think it is also possible to lose the forest for the trees when only evaluating the budget on its specifics. The big picture is that deficit-financed fiscal stimulus was needed given constraints on conventional monetary policy and this budget provided deficit-financed stimulus much more than might have been expected given the ideological predilections of the Treasury and the "Morrison Government" he kept referring to in his speech. Empirical evidence, including from my own research with US data, suggests both spending and tax cuts can be effective stimulus when there is a lot of economic slack. This budget delivers on the stimulus. I also think the forward guidance that puts off "budget repair" until after the unemployment rate falls below 6% is a strong feature of this budget, even if one could ask why the "6%" number in particular. This type of forward guidance makes it clear that the stimulus will be sustained and should make it much more effective than if households and firms thought measures could be quickly reversed. Of course, the government may have to learn the importance for reputation of sticking to its commitments given that the unemployment rate could take much longer than expected to come back down (although the apparent robust recovery in China is likely good news for Australia, even give current political tensions). The details of the budget are much less inspiring than the big picture and, indeed, it was clearly a tin-eared "blokey" budget that was not well targeted given that Australia is an largely urban/services-based economy and the crisis hit the service sector and women particularly hard. The specific initiatives (like the $61m to an expanded chaplaincy program, just to take an example) seem much more a "partisan targeting/rewarding particular voters" budget than a "visionary/governing-the-whole-country" budget to deal with what is hopefully a once-in-a-lifetime global pandemic/economic crisis. The more one looks at the details, the more one wants to significantly mark down the grade for budget. But I will still give it a "B" because the big picture is on the right track and I will just hope the Treasurer somehow becomes an "A" student in the future.
On the basis that the budget did provide expansionary spending I cannot give it a fail. However, overall there was a very poor selection of spending initiatives given the budget objective. The capital expenditure write off could have been better targeted to ensure that expenditure be productivity enhancing. If targeted at things like energy saving expenditure, electric vehicles, productivity enhancement in agriculture, new products to market ... , more complex to administer but also with long term benefit. I expect to see the measure as it stands result in more imports, especially in the areas of motor vehicles and computer equipment,(thus contributing to international recovery perhaps) but having little impact on productivity and employment growth in Australia. The measures to encourage apprentices are valuable but should be focused on new apprentices with safeguards to ensure that existing apprenticeships are completed. The subsidy for taking on new employees in the age groups up to 35, while well intended, seems likely to lead to some severe unintended effects for older workers who lost long term jobs as Covid hit or even those currently on jobseeker once jobseeker ends. More focused support for those areas most severely hit by Covid close downs, especially in that arts, entertainment areas, would have a more immediate impact on employment and thus support for domestic expenditure. And I fail to understand why an industry which has been a major export winner for Australia , which encourages also tourism related visits, which through world class research builds the opportunity for future productivity and employment growth and which ensures that we have a highly valued skilled and educated workers with direct impact on productivity, has been left in the position where it needs to severely contract employment at a time when we need to support employment and productivity growth. It's higher education of course.
The government was correct to budget for a large deficit, and deserves continuing credit for Jobseeker and Jobkeeper. But the priorities reflected in the budget were those of cutting taxes for high income earners, pushing large scale infrastructure and pursuing cultural/ideological vendettas against perceived enemies like renewable energy and the university sector. The budget fails to address the need for strong action on climate, revealed by the bushfire catastrophe, and a range of unmet needs, such as social housing shown up by pandemic. Except for Jobseeker and Jobkeeper, it looks much as it would have done if the fires and pandemic had never happened.
The level of deficit spending was probably commensurate with the size of the macro-economic task. But it is risky, because it is relying on the private sector and households to do the job creation, by responding in the hoped for way to the economic incentives in the budget. Further, the very high levels of government spending seem to be intended largely to recreate the economy of the past, rather than invest in the economy of the future. The economy of the future will, among other things, need to have much lower greenhouse gas emissions and much greater ability to cope with the unavoidable damage arising from climate change. As a recent paper from Oxford University concludes: "The recovery package can either set the global economy on a pathway towards net-zero emissions--or lock us into a fossil fuel system from which it will be nearly impossible to escape." It goes on to conclude that there is a higher short run employment multiplier from renewable energy investments, and from energy-efficiency projects, than from traditional forms of stimulus. [C Hepburn, J Stiglitz et al, Oxford Review of Economic Policy 36 (S1) May 2020]
First, I should make it clear that I applaud the Government's decision to run large budget deficits to counteract the contraction in output and the rise in unemployment And I support the above-stated objective to "rebuild our economy and create jobs". Moreover, I would defend the Government's tax cuts against those of my fellow-economists who have adopted what I consider to be a counter-Keynesian, pro-cyclical policy stance of opposing all reductions in income tax, including the reduction of the tax rate applying to incomes between $37,000 and $45,000 per annum as well as the reduction in the marginal rate applying to incomes above $90,000 per annum. A final point in praise of the Budget: I fully support the focus on infrastructure and also the new focus on manufacturing. The macroeconomic multiplier effects and the social returns available here more than justify investments in these sectors in preference to simply adding more numbers to the public-sector payroll, one by one. It is therefore very much as 'critical friend', 'in sorrow not in anger', that I grade the Budget at a modest C rather than an A or a B. I do so because I strongly suspect that the counter-cyclical measures announced in the Budget will prove to be insufficient to meet the Government's own stated objectives. For example: in an immediate sense, it is likely that the negative impact of tapering and terminating the Jobkeeper scheme will overpower the positive impact of the new wage subsidies for new hires and that the net effect will be pro- rather than counter-cyclical. A larger plan was required to replace Jobkeeper: as I suggested in my pre-Budget comments, something like the IMF-recommended German Kurzarbeit scheme. And although I applaud the change in the depreciation regime, a change that was long overdue, it is likely to prove, in the present macro-economic context, insufficient to jump-start investment. As a counter-cyclical measure, and as a corrective to the decades-long bias against investment, what was required was the permanent introduction of 100% depreciation with a temporary allowance for depreciation at a rate greater than 100%. More importantly, the budget fails to recognise, let alone to address, the future contractionary effects of the massive redistribution that is now proceeding apace: a redistribution of wealth, incomes, market shares, employment shares, and life-chances. In my pre-budget comments, I had drawn attention to the "elephant in the room" that has gone virtually unremarked in the public debate: the 25 richest Australians have added $25 billion to their combined wealth during the COVID-19 pandemic, with Australia's richest person adding $6 billion over this period to take her total wealth up to $22.25 billion (see The Weekend Australian Business Review, September 19-20, 2020). Subsequently, in a data-rich speech on 15 October, Reserve Bank Governor Philip Lowe drew attention to the observable redistribution in employment: (1) from the young to the old, though every age cohort suffered job losses; (2) from most private-sector industries, which shed jobs, to public administration and finance, which actually added jobs; (3) from the first four income quintiles, which lost jobs, to the highest quintile, which gained jobs; and (4) from small firms to big firms, though both shed jobs. The likely result of these trends is just as Adam Creighton described it in his commentary on Governor Lowe's speech (see The Australian, October 16, 2020): a new, top-heavy distribution of income and "an economy more dominated by government, bureaucracy, ticket-clipping, and oligopolies". Now quite apart from its deleterious impacts on the general welfare, on social cohesion, on the future dynamism of the economy, and so on, this enlargement of the pre-existing and already-large inequalities in wealth and incomes is likely to defeat the stated objectives of monetary and fiscal policies aimed at reviving growth and employment -- a point demonstrated with some care in the March 2020 paper, Indebted Demand, by Atif Mian, Ludwig Straub, and Amir Sufi, of Princeton, Harvard, and Chicago Booth. Therefore, if the Australian Government wishes to succeed in its aim of reviving growth and employment, and if it wishes to secure a future for a market economy free of monopoly, it would be well-advised to prepare bolder policies than it has tabled to date, including in particular a permanent shift in the revenue base from the taxation of wages and competitive profits to the taxation of unearned privileges, that is, the taxation of estates, the taxation of economic rents, and the taxation of externalities.
I would have liked to see more nation-building investment projects and more support for women, in particular working moms, who bore the brunt of the lockdown and other consequences of the pandemic.
The budget fails to provide any real analysis of the COVID-19 recession which it seeks to address. As a result, its key measures do not address the specific character of this recession (in which demand is constrained by restrictions rather than by income) nor the groups most affected by it (eg service industries, part-time and casual workers, young people and older workers, temporary residents). Thus while the budget is a big spending one, which will certainly stimulate demand, many of its programs will be ineffective in its central goal of creating jobs. The tax cuts will primarily benefit full-time workers and will be largely saved, given that aggregate household income is strong after the JobSeeker and other programs. The instant write-off of depreciation will generate more imports but few new jobs, and support many investments that would have taken place anyway. While the enhanced apprentice wage subsidy is welcome, the JobMaker hiring credit may create problems for those outside the specified age group. In my view the budget is a wasted opportunity to address the real impacts of the COVID-19 recession, and to assist those most heavily affected by it.
The overall budget is sufficiently generous given the crisis circumstances. The government has made a notable effort to support the economy through these difficult times. However too much reliance has been placed on ($50bn) income tax cuts, most of which will be saved because few believe the cuts are permanent and of course, wealthier households don't need them. Notwithstanding JobKeeper, there is insufficient targeted support for those service sectors particularly affected by the crisis - for example: education, tourism and entertainment. This is a time to find creative ways to pick and better support winners that are suffering for no fault of their own. Funds to make education and training much more accessible is a far better alternative to youth unemployment in a big recession like this.
I think that is a very good budget overall. Although, the funding for education (as % of GDP) still low compared to other OECD countries. Education is critical for long term growth and to reduce long term unemployment.
The most important response to a severe negative economic event is for a government to support aggregate demand and the federal government has certainly done this. It was the lack of demand stimulus, and a desire to balance the budget, that cause the 1929 stock market crash to turn into a depression. The Government and opposition should be commended for abandoning a destructive budget surplus target. But we should not waste an opportunity. Spending should be on activities that promote a strong civil society and underpin long-run improvement in well-being. The Government has gone some way towards encouraging businesses to upgrade their technological capacity via the Modern Manufacturing Strategy but the funding is only about $400m a year. Spread over many priority areas, it is not a lot. We expect to see a large increase in demand for higher education as young people defer labour market entry, but an additional 12,000 places is small compared with a national student population of 1.3 million. Lack of spending on social housing is a missed opportunity given the declining rates of public housing over past decades and the concerning number of homelessness.
It was absolutely the right call to change course on fiscal strategy and recognise the need for sizeable stimulus so marks for that. But I don't think the mix of policies was right to provide the biggest economic kick. The government has very much bet the house on a private sector-led recovery. The biggest measures are tax incentives for business investment and personal income tax cuts. I have no doubt they will somewhat boost activity, but tend to be less effective as stimulus. I like the wage subsidy for young people. While there are (valid) questions about why this doesn't apply to older workers and whether the subsidy is big enough, I was happy to see something that created a direct incentive for businesses to employ. If it can be implemented well, it is a policy with a high economic return. The worst part of the budget is the opportunities for better stimulus that were ignored. There are so many choices that deliver the double-dividend of good stimulus and high social returns: spending on age care, childcare services, education, social housing, sustainability retrofits for public buildings. Also missing was boosting the permanent rate of JobSeeker. Everyone knows the payment can't go back to $40/day and the people without work in the middle of a recession need certainty about where that payment will land post-December. Some of the direct industry stimulus was very strange indeed. It all flows to the 'hard-hat professions': infrastructure, construction, manufacturing, defence, utilities and energy. Some of these sectors haven't even seen job losses during COVID. And there is already a healthy pipeline of work for transport infrastructure projects. Why spend your stimulus dollars here? This is a services-led recession but there were no direct supports for hospitality or the arts that have taken the hardest hits. Alongside the lack of spending on job-creating government services - like aged care, childcare or education services - it looks like a strange blindspot. This is also what sits behind the suggestion by many (including me) that this was a 'blokey' budget. The price of these blindspots is the recovery will be weaker than it could have been, unemployment will be too high for too long, and women's economic disadvantage will be further entrenched.