How does the 2020-21 Budget stack up?

The budget deserves a “pass”, but the government is favouring tax cuts which may not all be spent. Also much of the assistance appears to be poorly targeted to the areas which have most suffered a loss of jobs.

Is there sufficient fiscal stimulus?

The widely anticipated headline news is that the budget deficit this year will be a record $213.7 bn – equivalent to 11 per cent of GDP and much more than any budget since the Second World War. The government’s total support since the onset of the pandemic amounts to $507 bn., over half of which is direct economic support.

I think that we all welcome the Morrison Government’s pragmatism and its willingness to abandon its past ideological railing against debt and deficits, and to take this necessary action to support the economy through this Covid-caused recession.

Nevertheless, given the present uncertainties, it is difficult to be sure whether the amount of this fiscal support is sufficient or not. Most importantly, we cannot be sure whether coronavirus will be suppressed and the lockdown eased according to the timetable assumed, nor can we be certain about how well consumers and business will respond to the various measures in this budget.

In this regard, I estimate that the additional stimulus in this budget, beyond what was already in place at the time of the previous budget update in July, amounts to only another $74.8 bn. This is quite a lot less than the extra $100-$120 bn. recommended by the highly respected independent analysts at the Grattan Institute, and which in response to the budget has now recommended a further fiscal injection of $50 bn. by the end of 2022.

Given these exceptional uncertainties, the government should be prepared to review and if necessary increase the fiscal support for the economy if that proves necessary as events unfold.

Is the fiscal stimulus well directed?

What is of greater concern than the amount of fiscal stimulus (as measured by the size of the budget deficit), is how effective will the various measures prove to be.

Tax relief

In fact, the government has not jettisoned all its ideology. While to date, the government’s fiscal stimulus has largely been expenditure based, the budget shows that the government will now be relying more on various forms of tax relief and less on government spending to support the economic recovery from here on. Thus, I estimate that tax relief accounts for as much as 56 per cent of the total cost over this year and the next of all new initiatives since July, as reported in this budget.

The instant asset write-off for new investment is the most expensive initiative at an estimated cost of $26.7 bn. Generally, businesses will not invest unless they can be confident that there will be a demand for their extra product, and this means that incentives aiming to increase investment are usually ineffective. However, because this instant asset write-off is limited to investment prior to the end of 2021-22, it may have some effect, although it is still doubtful whether it represents good value relative to its fiscal cost.

The second most expensive tax initiative is the bringing forward of Stage 2 of the personal tax cuts. A major concern about this proposal in the lead-up to the budget was that it would not help low and middle income taxpayers much at all. This was because if fully implemented, Stage 2 involved removal of the low and middle income tax offset (LMITO), but this change has now been postponed by one year. The LMITO is worth $1080 for an individual and $2160 for a couple, and with this additional income, the income tax relief for this financial year is roughly proportionate across the income range (see Table 1 below) . However, next year there will be an increase in the income tax rate for low and middle income earners, which will add to doubts about how effective this form of stimulus is.

Furthermore, even though more people are now going to get a tax cut than the pre-budget speculation suggested, there are continuing doubts about how much will be saved and not spent. An alternative form of assistance to households proposed by a number of economists, which arguably would therefore be much more effective, would be to provide households with time-limited vouchers. Spending using these vouchers could be targeted at spending in areas still affected by government restrictions, such as tourism and the arts, and areas that would help get people back into work, such as training/retraining and childcare.

Table 1. Savings from change in tax 2020-21 as a proportion of taxable income

Annual level of income Savings as proportion of income %
Minimum wage around $40,000 1.45
Median wage around $60,000 1.80
Average earnings around $85,000 1.27
High income earner $120,000 2.03
Top income earner $200,000 1.22

Infrastructure investment

Another major ideological predilection of this government, and especially the pork-barrelling Nationals, is their support for more infrastructure investment. True to form, the budget announced a further addition of $10 bn. to the government’s infrastructure pipeline, taking it to $110 bn to be spent over the next 10 years. The total infrastructure spend on transport and communications over the four years of the forward estimates is now shown as averaging $14.4 bn. per year; almost double the $7.3 bn spent by the Australian government in 2019-20.

What the government doesn’t seem to appreciate is that:

· The infrastructure construction industry has been booming, with government real expenditure increasing at an average annual rate of 8.5 per cent over the last four years, and earlier this year COAG ministers expressed their concern about cost over-runs caused by excess demand.

· Most of the money is going to be spent on mega infrastructure projects costing $5 bn. or more, but these projects employ relatively little labour and that labour is mostly males with specialised skills. However,this recession, unlike all previous recessions, has mainly hit women and young people who are not going to get jobs on these projects.

· The vast majority of these infrastructure projects do not have business cases when the governments commit to them. The choice is dominated by politics, and the reason for no business case is because most do not represent value for money.

On the other hand, there is a real concern that the inner-city housing market is collapsing, partly in response to the fall in new migrants. Support for the construction of high-rise residential buildings would help to maintain jobs, and instead of so many major infrastructure projects it would have been much better to finance a substantial increase in social housing, where there is a real need.

Support for jobs

The JobKeeper program has provided a lifeline for many businesses and their employees. The budget provides another $15.6 bn for this program in the light of additional restrictions in Victoria and some changes in eligibility.

The JobKeeper program is, however, scheduled to be terminated at the end of next March, although the impact of that on employment is uncertain, to say the least. At present, the government plans to replace the JobKeeper program with a JobMaker Hiring Credit, at a cost of $4 bn, which it hopes will give businesses the incentive to take on new employees. This program, which is a new element of the government’s $74 bn. JobMaker Plan, should help, however, it is limited to only young people, who are aged 16 to 35 years old. In addition, young people will benefit from a new 50 per cent wage subsidy to support 100,000 new apprentices and trainees, at a cost of $1.2 bn.

If support for hiring all older workers aged more than 35 (more of whom are women) finishes next March, then they will be on their own. Furthermore, most of the assistance in the budget to business is directed to heavily capital-intensive industries which employ mostly men, so women’s future employment will be particularly at risk.

In these circumstances, and given the much greater impact of this recession on women, the provision of $240 m. announced in the budget through the Women’s Economic Security Statement, might well seem derisory. Whether women and other older workers will be able to keep their jobs when JobKeeper winds up only time will tell, but the government may need to consider additional employment assistance in future.

Support for essential services

Once again in this budget the government repeated its commitment to funding essential services. However, the government’s actual track record shows that this commitment has not always been met, with critical shortfalls in the following services in particular:

· Aged care: The shortfalls in the provision of aged care have hit the headlines during this pandemic with widespread recognition that aged care is under-funded and under-regulated. The Morrison government has announced $1.6 bn. for 23,000 additional home care packages in this Budget. This is a welcome addition, but it will not make great inroads into reducing the waiting list of 100,000.

· Universities: The universities claim that their future funding will involve a drop in the funds available per student, and also the funding for research seems destined to fall, given the extent that it was cross-subsidised by foreign students who are no longer coming. In addition, the government has determined to more than double the fees for the humanities and significantly increase the fees for other social sciences. The alleged justification is that these increased fees can be used to drop the cost of degrees in what the government alleges are degrees that better meet the needs of the labour market. However, not a shred of evidence has or can be produced to sustain this hypothesis.

· Vocational and technical education: The government has announced a welcome increase in funds for apprenticeships and in the number of training places. But again all is not as they would like you to believe. Although spending on vocational education is budgeted to peak at $2229 m. in the current fiscal year, it is then programmed to fall to $1598 m. in 2022-23 – a fall of almost 30 per cent and less than the expenditure prior to Covid of $1675 m in 2018-19.

· Arts and Culture: The revenue of arts and cultural institutions has been especially hit by the Covid lockdown, and they have had to lay off staff. However, the funding provided in the budget shows no real increase over the next four years compared to the pre-Covid level of funding, so it is difficult to see how these institutions can return to their former level of activity and service provision.

Finally, it is disappointing, but the budget has ignored some important areas where present levels of assistance are inadequate and policy needs to change, including:

JobSeeker assistance: There is close to universal agreement that the level of assistance to unemployed people should not return to $40 per day, as it was under NewStart. However, the government says that it will only review the level of future assistance towards the end of this year. That seems to imply that they want to take account of the state of the labour market before making their decision, but really this is irrelevant. Instead the level of assistance should be the amount that unemployed people need to enjoy an austere but reasonable standard of living, having regard to community values, and that means that the government should permanently lock-in the present level of assistance under JobSeeker now.

Rental Assistance: It is widely recognised that low-income people who are renting are distinctly worse off financially than people on the same income who own their homes. Accordingly there is considerable support for an increase in the rental allowance, but again these people do not seem to figure among this government’s priorities.

Childcare: Reducing the cost and increasing the provision of childcare is likely to significantly increase female workforce participation. Thus it will largely pay for itself, and especially given the lack of other support for working women in this budget, it should have been a priority.

Conclusion

While Morrison’s pragmatism has resulted in a better budget than many of us would have anticipated a year ago, Morrison appears to be returning to his core beliefs in lower taxes and smaller government, plus a bias in favour of business-welfare. This presents risks for both the economy and our society.

Instead of targeting so much of the new money in this budget to business, there are a number of other policy areas that need reform and more money, and they have largely been neglected in this budget. Furthermore, many of these areas that need more money, such as aged care, childcare, the arts and culture, and targeted vouchers for hospitality and tourism, are areas that employ women who have most suffered in this recession.

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Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations.  He is presently a visiting fellow at the Australian National University. 

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