Ian McAuley. Ignored Budget issues.

​Lobby groups and community organizations have provided their take on the Budget – some with a “what’s in it for me” approach, others with a more analytical line.  My contribution from the stands is to draw attention to a few aspects which aren’t getting a great deal of attention.

1.  Pension indexation.

I’m surprised that this hasn’t been the subject to outrage. Perhaps people don’t appreciate the difference between indexation to average earnings and indexation to consumer prices.

As a rule of thumb, earnings rise about one percent faster than inflation. That’s why, over the last 50 years, our material living standards have more than doubled.

Currently the two person age pension is held to around 42 per cent of average male earnings. If real earnings continue to grow as they have in the past, while pensions are held to CPI, in 30 years time the age pension will be only around 30 per cent of earnings. Someone now 40, contemplating retiring at age 67, and who holds only a small superannuation balance, has suddenly been told his or her retirement living standards will fall by almost a third from what was expected.

The notion that relative standards don’t matter is bunkum. Social inclusion is about not being left behind.  If you’re old enough, or if you know someone who can recall the 1950s, ask yourself how you would enjoy what in the 1950s was a reasonable standard of living.

2. Inequality.

As so many are pointing out, this budget entrenches and extends inequality. Besides the moral aspect of inequality there is a problem well-understood by hard-nosed economists.

In a few words, if people do not see that the rewards from economic activity are being shared fairly, they will reject the economic system. That rejection won’t be a 1917 revolution – we live in a democracy and people have to be driven to starvation levels before they storm the Winter Palace or the mansions of Mosman.  But the reaction won’t be a move to sensible public policy either, particularly when we have a Labor Party lacking an economic vision and  a Green Party which just cannot understand the needs of anyone living more than a train stop away from the CBD. The reaction will be a move to populist policies – protectionist, anti-enterprise, anti structural change (ironically leading to economic stagnation and therefore worsening inequality).

3.  Wages.

The government is determined to get more people into the labour force. Hockey says it’s about getting people into work, but it’s really about getting people into the labour force.  There’s a difference between being in the labour force and having a job – just ask someone who’s unemployed. This policy is on three fronts – making it much harder for young people and people with disabilities to get government benefits, restricting  family tax benefit  B (thereby encouraging women to re-enter the labour force), and incentives (carrots and sticks) for older people to stay in the labour force.

Unless there is a corresponding demand for labour, the inevitable consequence of an increase in labour supply is a compression of wages.

If that support for participation were accompanied by investment in skills and education, it would provide a sound path to future prosperity, because while there are few jobs for the unskilled, there is an economy-wide shortage of skilled labour, and as our receipts from coal and iron ore fall away, we will need to rely more on our human capital as a source of competitive strength. But the budget measures, in increasing the burden on young people seeking either trades or university qualifications, and its foreshadowed cuts to school funding, go in the opposite direction. The only compelling explanation for this policy combination is that it is a response to those businesses which see their interests in terms of suppressing wages rather than in innovating and improving productivity.

4. Foreign aid

By cutting foreign aid we’re reducing flows to poor foreigners, but in abolishing the mining tax we’re being generous to rich foreigners.

5. Bulk billing

The $7 medical co-payment isn’t just about $7. It’s also about removing any incentive for medical practitioners to use direct billing (disparagingly called “bulk billing”).  The attraction of direct billing is that it removes the cost of handling and accounting for cash transactions.  Even a dollar co-payment removes that attraction.

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