Labor’s criticism of yesterday’s budget update is that it identifies a problem but doesn’t offer a plan. That’s a little unfair — the “plan” will come in the delayed budget in October. There’s a fair criticism to be made that the government is waiting too long to explain its strategy for dealing with the crisis, but the budget update was never about that.
What it does indicate, though, is both the extent of the challenge the government faces and the lack of options for dealing with it.
The update sees unemployment reaching 9.25% at the end of the year, and only decline to 8.75% by the following June. GDP is starting to grow again now, but even by June next year will still be smaller than in 2019-20 (if you’re wondering how that can be the case, as we were yesterday, it reflects that total GDP for 2019-20 will be bigger than total GDP across all four quarters of 2020-21, even if there’s growth in each quarter — the colossal fall in GDP in the June 2020 quarter means the economy won’t grow enough in the coming year to return to the same level of output as it managed in total in 2019-20, half of which was pre-pandemic).
The combined $270 billion in deficit spending, then, will only get us back to the middle of a severe contraction. How do we get unemployment down to 8%, 7%, then 6%, then 5%? The update shows how hard that will be.
Take that stalwart of Australian employment, construction. Dwelling investment is forecast to fall 10% in 2019-20 and then by 16% this financial year despite the government’s construction stimulus package, meaning one of our biggest employing sectors will be shedding large numbers of workers — possibly a hundred thousand — into an already large army of unemployed.
Business investment overall will fall over 12% this year on top of a 6% fall last financial year (investment was already weak — December’s MYEFO forecast just 1.5% growth for 2019-20). But that disguises that non-mining investment is expected to fall nearly 20%; mining investment will surge nearly 10%, but mining employs next to nobody.
The business community and its media cheerleaders, as usual, are clamouring for a company tax cut (funded by an increase in the GST), which they claim will encourage investment, but the US experience shows that even large company tax cuts don’t spur investment, just deliver a windfall for shareholders and executives. An investment allowance, as proposed by Labor at the last election, is far more likely to help soften the collapse in investment.
Business also says industrial relations deregulation is needed to encourage investment and lift Australia’s flagging productivity. But according to the Productivity Commission, there’s “little evidence” of “productivity effects from WR reform”. What evidence there is suggests that the Howard government’s two major rounds of industrial relations deregulation led to falls in the rate of labour productivity growth, while Labor’s re-regulation of IR led to productivity growth gains.
But ultimately, business won’t start spending again unless there’s a significant boost in household consumption.
There’s bad news there too. Wages growth is estimated to be 1.75% for 2019-20 and just 1.25% this year (the same as inflation), which will lead to a slide in household consumption: having fallen 2.5% by June this year, it will fall 1.25% this financial year. Even if consumer confidence recovers and people are willing to spend, their ability to do so will be constrained by wage cuts and job losses, especially as JobKeeper and JobSeeker taper off.
And don’t forget that there are $269 billion worth of loans that the banks have agreed to defer. Once the borrowers are required to start repayments, that will put more downward pressure on household incomes, spending and domestic demand and consumption.
That’s why there’s a push for the government to bring forward its 2022 tax cuts, which the government isn’t ruling out. “We’re the party of lower taxes,” Josh Frydenberg says in response to such arguments, with the media happily repeating the claim.
Except, that’s a lie. The Coalition is Australia’s party of high taxation — so much so that even during a global crisis, at a time when business and personal tax revenues are collapsing, the government still plans on taking more tax out of the economy than in any year when Labor was in government.
But the problem with tax cuts is that a smaller proportion of tax cuts end up being spent than direct payments — though the government plans to cut back direct payments in the December and March quarters. The tax cuts last year produced no increase in spending by households at all. And because the government’s next round of tax cuts will primarily benefit high income earners, even less of them will be spent than any support directed at low-income earners.
Indeed, much of the “reform” agenda being put forward, the evidence shows, won’t encourage growth. Lower company taxes don’t increase investment. Personal tax cuts won’t flow through to consumption. Increasing the GST to pay for that will deter household consumption. Industrial relations reform will lower productivity, reduce wages, thus reducing household consumption and increase precarious employment in the name of “flexibility”, which also undermines consumption (and helps COVID-19 spread more effectively).
What the government can do is try to strengthen household consumption, which will in turn encourage business investment, spur job creation and lift economic growth. And it can do that by encouraging wages growth (it can start by ending its pay freeze for public servants). It can restore penalty rates slashed in recent years in a failed attempt to increase employment. It can make permanent an increase in the JobSeeker allowance rather than continually threatening to cut it back to far below the poverty line.
It can pump money directly into dwelling investment by funding a major program of social housing construction — the biggest no-brainer policy of this recession — supporting one of our biggest employment sectors. And it can facilitate the investment greater household spending will produce with an investment allowance.
Without households, the government can huff and puff in an effort to boost investment and growth all it likes, and the result will still be stagnation — albeit stagnation at a much higher level of unemployment than before. The October budget should be about going hard and going households.
Where does the government go from here? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication in Crikey’s Your Say section.
But of course they won’t do this but will continue to look after their mates while ignoring the rest, just like in the sports rort disgrace and identical to the US’ actions.
Is there a more pointless statistic than the tax receipts as a percentage of GDP?
Utterly meaningless, except perhaps to point out that the LNP is having a lend. Get your hand off it Josh.
What is worthwhile is a higher taxing government that pumps the revenue into worthwhile projects, like not for paying big 4 accounting firms half a billion dollars for dubious reports to prop up their political agenda.
Worst use of money ever – giving tax cuts to business and high income owners. Lower company tax rates can only help to prop up businesses that probably should fail, and all the rest is just windfall gain. It actually makes them lazier and less efficient, as do calls for IR reform.
I suggest that companies, like humans, are anti-fragile (see Taleb). The easier you make it for them, the weaker they get.
Social housing investment – yes, a no brainer. Keeps the industry going but also has the strange and unanticipated side effect of giving people shelter. Just don’t tell the punishers and the straiteners.
I second the Taleb citation.
When all you have in your toolbox is a hammer (IR & Taxes) then everything ends up looking like a nail. No wonder this mob are so scared to re-open parliament.
BK identifies the key issue here that the “reform” items are not reform in any sense and certainly not a recovery plan. Unsaid is that the “reforms” are basically a series of proposed changes that will have the effect of 1. Exacerbating wealth disparity and 2. Remove workers rights and therefore adversely effecting workers welfare. This is the Shock Doctrine at work. It is truly extraordinary that with all that is going on and with all the policy options available and the carnage wrought to irk, homes and families that Frydenbergs number 1 priority is IR reform. Number 2 priority is tax cuts for the well off.
The frightening aspect is that the coalition might actually believe this stuff. If it comes off then they will be the first government in history to tax cut their way to growth and a surplus and the first to increase base level demand by pulling the rug from under workers feet.
A much more likely scenario is that blind ideology will turn a significant downturn not a depression.
Bernard, haven’t you heard? It will be a business-led recovery. Not a household led recovery. They are also already signalling austerity (for households ofcourse, not business). How good is capitalism!
Funny that they want government to get out of the way so they can innovate and save the economy.
Don’t remember too much innovating from the private sector before the pandemic, and definitely not during it.
Funny they want the government to get out of the way but they want the government to save them. And reduce company tax, but increase GST and do IR reform so the workers end up paying for the companies increased profits? Huh? (And I’m a businessman!) Why is nobody saying the wealthy need to pay more tax?
‘Why is nobody saying the wealthy need to pay more tax?’ Really?? Is this a real puzzle to you??
Well the answer is self evident:
One reason is because to do so is to invite the ultimate neo-liberal insult – you are guilty of the ‘politics of envy’ this is far worse than the COVID19 virus.
Two, why should our ‘lifters and movers’ be punished for ‘growing’ the economy. Far from it they should be rewarded for carrying all the ‘leaners’, that is those who sponge off others or as Morrison aka ‘the fool in the baseball cap’ says these are the people who seek to bring others down so that they may make illegitimate claims on those who by virtue of merit and effort have justly (legally) acquired their wealth.
What you dare to propose what borders on socialism (quick reach for the garlic). By what right does a government have to tax (steal???) income and wealth justly acquired and to which the possessor has rights to give to someone else? All income. wealth and resources come attached to rightful owners and so belongs to such persons as a right.
So what don’t you get here???.
Its what Australians voted for last May. So I shed no tears now for those who will pay the price of our recovery.
Thanks brave “Lionheart” whoever you are, for pointing all that out in your insulting manner. I get all that, but thought somebody would be saying it, discussing the idea.