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The corona-budget: heroic assumptions and phantom fears

Australians have seen this before. Budgets that outline such grim scenarios are followed by budgets that impose spending cuts. The only question is when. The answer is usually after the next election.

This is not a cause for alarm but a way to measure the staggering cost, over a generation, of the measures to safeguard health through social distancing, border closures and company shutdowns.

“The classic mistake would be to pull back too soon and get lost in phantom fears about the deficit,” said Deloitte Access Economics director Chris Richardson.

“At some stage there is a budget repair task. It is much, much smaller than people think.

“The government measures have been overwhelmingly short-term, and what that tells you is that if the economy recovers, the budget recovers.”

In a recession caused by government edict, made necessary by contagion, leaders have a moral duty to help those who are hurt.

Hard rain: Josh Frydenberg and Prime Minister Scott Morrison in Canberra.

Hard rain: Josh Frydenberg and Prime Minister Scott Morrison in Canberra.Credit:Alex Ellinghausen

Have they done enough? Is there a nation-saving vision around that $1.7 trillion mountain?

“While this is an extraordinary budget, it’s not inspiring,” wrote Ernst & Young Oceania chief economist Jo Masters.

The Committee for Economic Development of Australia, a policy forum founded in 1960, liked the main budget measures but warned about the omissions.

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CEDA chief Melinda Cilento, a former director at Woodside Petroleum and commissioner at the Productivity Commission, said she had been expecting more measures to help women as well as more investment in social housing and infrastructure.

“It was also disappointing that the government once again failed to permanently increase the rate of the JobSeeker unemployment benefit,” she said. “This is a glaring omission during Australia’s first recession in 30 years.”

In a moment of national crisis, in a pandemic not seen for a century, there was a sense of a challenge yet to be met. There was no blueprint for an Australia permanently changed by catastrophe.

This was a spending package, not a reform budget. What will Australia look like after this recession? It is too soon to know.

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Prime Minister Scott Morrison and Treasurer Josh Frydenberg send different messages about reform. Morrison emphasises temporary spending, while Frydenberg claims reform on lending rules and insolvency changes.

This is a difference in tone, not tune. The reality is that structural changes to the economy are being left for another day.

Only when the immediate crisis passes will there be time to survey the damage. This assumes most Australians are vaccinated by the end of 2021. Everything changes if that assumption is wrong.

The result? This budget will always look inadequate when judged on its own. Yet it is only one peak in a series of waves. There was more spending before it; there will be more afterwards.

The stimulus before this week was worth $179.7 billion, including the extension to JobKeeper in July. The revenue measures revealed on Tuesday cost another $51.4 billion including faster personal tax cuts, a business investment incentive, loss carryback for small employers and incentives for research and development.

In a moment of national crisis, in a pandemic not seen for a century, there was a sense of a challenge yet to be met.

The new spending measures are worth about $25 billion including the JobMaker hiring credit, more road and rail projects, home care places for older Australians, two more payments (worth $250 each) for aged pensioners, an apprenticeship wage subsidy and a manufacturing policy.

Another spending package will be released before Christmas to offer a permanent increase in the JobSeeker allowance, currently $815 per fortnight including a temporary supplement.

After the money spent this week, the demands for generous income support will only grow louder. Economists are agreed that payments made to those on lower incomes have the best chance of being passed on in spending.

The next budget, due in May, offers Morrison and Frydenberg a likely moment to revitalise the aged care system by acting on the final report from the aged care royal commission.

The tests for this week’s budget are whether the huge outlays are fair and effective.

On fairness, the government made a fundamental call. It focused on the young – the generation that starts with less money, earns less in a devastated jobs market and comes of age when the debt mountain makes future budget largesse much harder.

Opposition Leader Anthony Albanese delivers the budget reply.

Opposition Leader Anthony Albanese delivers the budget reply.Credit:Alex Ellinghausen

This is the justification for spending $4 billion on a wage subsidy worth $200 per week for workers under 30 and $100 for those between 30 and 35 when they are hired from the ranks of the unemployed. It ends this time next year.

Frydenberg argued the younger workers needed additional help because they have been hit especially hard.

“They don’t necessarily have the same experience or the skill sets that some of the senior workers have and so, therefore, giving them this helping hand now is very important,” he told the National Press Club on Wednesday.

Frydenberg used a time-worn phrase for the way unemployment has soared quickly but will fall slowly: it “goes up the elevator and comes down the stairs”. This is catchier than calling it hystoresis, the lag effect, but the key point is that young workers could suffer the most.

The crisis forces hardship across age groups, across gender and across geography, but Treasury has compiled figures for Frydenberg on the disproportionate pain for the young. The numbers show 333,000 workers aged 15 to 24 lost their jobs from March to May. This amounts to 38 per cent of the jobs lost, even though that age group only makes up 15 per cent of the labour force.

While things have recovered, the youth unemployment rate remains 14.3 per cent compared to the national rate of 6.8 per cent in August.

Over the months from March to August, the number of hours worked by those aged 15 to 34 has fallen by 8.5 per cent, but only 2.3 per cent for those aged over 35.

But the government bungled its message. After months of concern about a “pink recession” that hurts women, it glossed over a huge social and economic issue with a package for women worth $240.4 million over five years.

The budget papers are littered with bigger programs than that, like an $801.3 million public service boost across the Treasury portfolio, or $300.2 million for the Australian Federal Police.

With the government exposed, Labor leader Anthony Albanese seized the moment. He promised a $6.2 billion increase in childcare funding. This is a 15 per cent increase on the government’s funding forecast over the next four years, so it stopped far short of what some wanted: free childcare.

Even so, it meant only one side of politics had a compelling new message this week about helping women stay in or return to the workforce.

Older workers gained no special treatment this week, but the government was on stronger ground than it looked.

The message for those over 50 and out of work is to call on existing measures like Restart, worth $10,000 over six months if employers hire someone over that age from the ranks of the unemployed.

That is more than the new hiring credit for the young.

The other flashpoint on both fairness and effectiveness is the income tax package, which is worth $17.8 billion over four years but is delivered in two components that both take time to reach salaries and tax returns.

While the change to tax rates should be reflected in pay packets by Christmas, the tax offset of up to $1,080 can only be paid at the end of this financial year, when it flows into tax refunds.

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The analysis from the University of Canberra is that the benefits are greatest for those on higher incomes.

“The less households earn, the less they gain from this budget,” says the university’s National Centre for Social and Economic Modelling.

“High income households gain the most from tax cuts – up to nearly $5,000 per year for a household with two high income couples and no children, compared to $500 per year for a house with an unemployed person and a person on the minimum wage and no children.”

Tax cuts are always bigger by value for those on higher incomes, unless a government includes an offset to favour those with less. So NATSEM’s Robert Tanton suggests a different design that benefits those who are most likely to spend the tax cuts rather than save them.

“This sort of strategy could be achieved by a higher Low Income Tax Offset than is in the current tax cuts, in conjunction with an increased payment to the unemployed,” says Tanton.

This will be fundamental to the budget debates of the future, given a third stage of tax cuts will start in 2024 and will benefit wealthier workers most. Morrison and Frydenberg chose not to bring those forward, a wise political move, but their decision only postpones the argument over whether the future cuts are worthwhile.

With a $1.7 trillion debt on the horizon, every policy will be subject to stricter tests over time. Is it worth it? Is it fair? Is it effective?

Australia can afford the debt at a time of record low interest rates. This calculation changes, however, if the vaccine does not arrive as soon as hoped and the economy does not rebound as fast as forecast.

The earliest date for the next election, as a standard half-Senate election, is August 7, 2021, according to the Parliamentary Library. The latest date is May 21, 2022.

So this budget clears the way for Morrison to call a Spring election next year. Workers will be better off from the tax cuts and tax offsets, while employers will have gained from the spending surge.

It may take until after that election for the future to become clearer. That may be the time for reform – or reckoning.

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