The Budget – possible additional measures

Sep 22, 2020

Yesterday I considered the economic outlook and concluded that on present policies the pace of the recovery post-Covid is likely to be too slow. Today’s article discusses what extra stimulus should be incorporated in the Budget in two weeks, and what form that stimulus should take.

In the lead-up to the forthcoming October Budget the government has encouraged speculation that its future support for economic recovery will mainly rely on:

  • the already-announced extension of the JobKeeper and JobSeeker assistance,
  • increased investment in infrastructure – by both the Australian and State Governments, and
  • bringing forward stages 2 and 3 of its already legislated income tax cuts.

But the critical question addressed in this article is how effective these measures will be or whether there are other better ways to restore the economy and promote future economic and jobs growth.

The extension of JobKeeper and JobSeeker

There has been near unanimous support for the Government decision to extend JobKeeper to the end of next March and JobSeeker to the end of this year. The reductions in the rates of assistance have also been largely accepted – in some cases the previous rates did look excessive, with for example, some part-time workers getting more money under JobKeeper than they previously earned.

As regards JobSeeker assistance there are, however, concerns that:

  • JobSeeker assistance will end in three months. Almost everybody outside this government thinks that a return to $40 per day at the end of December will not be enough to live on, and that the rate of assistance to unemployed people should be raised permanently.
  • Modelling by Deloitte Access Economics suggests that the reduction in demand after returning to the old rate of assistance will cost as many as 145,000 jobs.
  • If instead, the rate of assistance under JobSeeker were permanently maintained at the new level of $815.70 per fortnight, that will apply over the three months remaining for this year, researchers at the ANU Centre for Social Research and Methods have calculated that would be just sufficient to ensure that these people do not fall back into poverty.

In the case of JobKeeper, the principal concerns at present are:

  • It may well prove desirable to further extend JobKeeper beyond March 2021 if the pace of economic recovery is less than the government appears to be anticipating. But equally, there is no case for making JobKeeper permanent, as zombie firms that will never recover should not be supported indefinitely. That would undermine the economy’s longer run potential and come at a cost to people retraining and getting permanent jobs.
  • From the start there have been understandable criticisms that certain people and industries were excluded from JobKeeper for no good reason. Given the savings that will be realised by lowering the rates of assistance, the opportunity should be taken to extend JobKeeper to casual workers, temporary migrants, and universities, all of whom contribute to the economy and who have been unfairly excluded so far.

Infrastructure investment

Like JobKeeper and JobSeeker assistance, one of the great advantages of stimulating the economy by additional infrastructure investment is that in principle this form of stimulus can be wound back as the economy recovers and there is no longer any need for government fiscal support.

In addition, it is popularly assumed that new infrastructure investment is needed and will add to the economy’s capacity. To the extent that this is true, additional infrastructure investment makes a lot of sense when attempting to stimulate the economy, but far too often, and perhaps especially now, there are problems with this form of stimulus:

  1. Many and even most infrastructure investments are not warranted economically, and this is especially true of large projects that capture the popular imagination. For example, analysis by the Grattan Institute found that of the 71 projects which the Coalition committed to in the last Federal election, all but one had no business case approved by Infrastructure Australia (IA – the approval authority), and almost half were not even on IA’s priority list. (Incidentally, Labor’s promises were no better.)
  2. In addition, infrastructure investment has been increasing strongly already, with general government gross capital formation growing at an average annual rate of 8.5 per cent in real terms over the last four financial years – far faster than the economy. This further raises the question about how many other worthwhile projects there are which are not being funded already, especially now when the rate of population growth has dramatically declined because of lower migration and many more people are working from home because of Covid, possibly leading to permanent changes in working patterns and the demand for transport.
  3. The bigger (and more glamorous) the project, the longer the necessary planning takes and thus the longer the delays before it starts, to the point where past experience shows that much of the infrastructure commissioned in response to recessions has hardly started before the recession is over.
  4. Unlike all previous recessions, this recession is not a “tradies recession”. Instead, in contrast to past recessions, goods production has held up pretty well, and this recession has mainly impacted employment in some service industries – hospitality, travel, entertainment, and some specialised retailing. Consequently, it is mainly women and young people who have been disadvantaged and additional infrastructure investment is not going to help get them a job, or at least not directly.

In particular, the Prime Minister’s embrace of what he calls “a gas-led recovery”, built and financed by the government, is the last thing that Australia needs. Morrison argues that gas-fired electricity generation is necessary to provide system reliability when the sun does not shine, and the wind does not blow. However, according to the electricity energy market operator AEMO, there is no reliability problem with the current electricity system for at least the next few years. Indeed, an audit of Australia’s energy emissions found that gas-fired electricity plants only ran at 30 per cent capacity over the last 18 months. And AEMO’s road map for the electricity market in 2040 does not include gas in its top five list of potential sources of dispatchable power.

As Liberal Governments used to understand, if there were a looming problem that required additional gas-fired dispatchable electricity, we can be reasonably confident that private operators would have already moved to fill the gap. There is therefore no need for the government to undertake this function that has usually been left to the private market. The reality is that we do not need a large new gas-fired power station, nor with an excess supply of low-priced gas should the government intervene to open a new high-priced gas field, on economic grounds alone.

Instead, as Ross Garnaut has shown in his book, Superpower, because of our comparative advantage in the production of renewable energy there is an enormous opportunity for Australia to become a world leader in energy-intensive manufactures and also the export of energy, in the form of hydrogen. Scott Morrison should get behind those initiatives if he is seriously concerned about Australia’s longer-run economic future. But while highly worthwhile, these initiatives based on renewables are unlikely to come on stream quickly enough to be the main response to the present recession.

Accordingly, any additional infrastructure investment in the next year or so to support the economic recovery should focus on smaller projects that can be undertaken quickly and for which there is a real need, such as

  • road maintenance, which is widespread geographically, and
  • social housing where this form of construction could readily replace the construction of multi-story dwellings for private rental, which has been especially hard hit by the collapse in migration and the number of foreign students.

Bringing forward the legislated tax cuts

Unlike labour market programs and infrastructure investment, the normal disadvantage of trying to stimulate the economy through tax cuts is that they are permanent, and it is difficult politically to wind them back as the economy recovers. However, as these particular tax cuts have already been legislated, they are going to happen anyway, and consequently there is an unusually good case for advancing their implementation in present circumstances.

On the other hand, many commentators have drawn attention to how biased these tax cuts are in favour of high-income people. Indeed, research by the Australia Institute shows that ‘if both stage 2 and stage 3 [of the government’s legislated tax cuts] are brought forward  to 2020-21, 79% of the benefit goes to the top 20% while only 3% goes to the bottom half of taxpayers’. But the high-income people who pocket most of the benefits can be expected to save much of their extra income, and therefore these tax cuts are unlikely to achieve much economic stimulation.

Ideally, to the extent that the government wants to rely on lower taxation to stimulate economic recovery, it would be better to recast these tax cuts. But arguably it would be better still to adopt alternative spending measures. Even middle-income households have substantially increased their savings recently, and they too may not spend their tax cuts. While on the other hand, Australia is a low tax country compared to its peers, and there are areas of unmet need for additional public spending that arguably would do more for public welfare as well as better stimulating the economy.

What other spending is needed?

Although the government has extended JobKeeper and Jobseeker, the rates of assistance are lower after the end of this month, and the Grattan Institute estimates that emergency income support will fall from $16 bn a month in the September quarter to $6 bn a month in the December quarter. Other support measures, such as loan repayment holidays for distressed businesses and households will also soon come to an end.

This is part of the reason for the only slow rate of recovery forecast, with the RBA forecasting that unemployment will still be as high as 7 per cent at the end of 2022.  The big question for the Budget is how much additional stimulus will be necessary to ensure the return to full-employment as quickly as possible.

The Secretary of the Treasury, Steven Kennedy, has acknowledged that more fiscal stimulus will be required, but to date the Government has been very coy about how much, if any. The most authoritative analysis presently available is by the Grattan Institute, which estimates that additional stimulus of about $100 bn to $120 bn will be needed if we want to get back close to full employment (about a 5% unemployment rate) by the end of 2022.

There is a strong case for directing this additional expenditure to services that the government has squeezed and under-funded in recent years, such as:

  • aged care and mental health services
  • labour market programs and vocational education and training to help disadvantaged people catch up and learn new skills to give them their best chance of being job-ready when the economy recovers.
  • universities which are presently laying off staff in response to the loss of international student revenue, but whose graduates and research are vital to the future growth of the economy
  • reducing the cost of childcare to parents which would increase female workforce participation as well
  • increasing the amount of rent assistance which along with the low rate of unemployment assistance represents the greatest area of need among low income people
  • the arts, including the ABC and public galleries and museums, which will find it especially difficult to recover without additional funding
  • targeted help for the hospitality industries, such as the provision of vouchers

It is acknowledged that much of this proposed additional expenditure would not be temporary and would continue after the recession is over. But these proposals are also biased in favour of service industries that have taken the greatest hit in this recession. Academic research reported in a recent CEDA publication further suggests that the boost to employment per dollar spent in the care industries is up to five times greater than a dollar spent on construction. Finally, additional expenditure on these services would respond to the greatest areas of need and much of this expenditure on social infrastructure will promote the longer-term growth of economic potential, and at least as well as even the best investment in physical infrastructure.

Share and Enjoy !

Subscribe to John Menadue's Newsletter
Subscribe to John Menadue's Newsletter


How often?

Thank you for subscribing!

Subscribe to John Menadue's Newsletter
Subscribe to John Menadue's Newsletter


How often?

Thank you for subscribing!