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No ‘bang for buck’: Budget is big on political correctness, weak on job creation

First, give tax breaks and incentives to businesses, in the hope that this will induce them to expand their operations, spending more on capital equipment and new employees.

Second, give tax cuts (or maybe one-off cash grants) to individual taxpayers or welfare recipients, in the hope that they will spend most of the money and thereby generate economic activity and jobs.

Those two categories involve the government making “transfer payments” from itself to households or firms. The third category is the government spending money directly by paying someone to build a house or an expressway or to work for the government and perform some service.

As a rule, economists expect direct spending to yield a greater stimulus (and thus have a higher “multiplier” effect) than transfer payments. That’s because all the government’s spending adds to demand for goods and services in the “first round”, whereas some of the money you transfer to a firm or individual may be saved rather than spent, even in the first round.

Economists consider saving a “leakage” from the various rounds of the “circular flow of income” round and round the economy. Other leakages occur if the money is spent on imports rather than locally made goods and services.

Still on direct spending, if your primary goal is not so much to add to the production of goods and services (real gross domestic product) as to increase employment, you’d be better off directing your government spending to a labour-intensive purpose (employing an extra uni tutor or aged-care nurse, for instance), rather than a capital-intensive purpose, such as a new expressway.

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Credit:Illustration: Matt Davidson

Now let’s look at how the budget’s main measures fit these three categories. Its temporary measure to allow firms an immediate write-off of the cost of new equipment (costing the revenue $26.7 billion over four years), its temporary measure allowing firms to carry back current losses for tax purposes ($4.9 billion), its research and development tax incentive ($2 billion) and its temporary JobMaker “hiring credit” – wage subsidy – ($4 billion) add up to total revenue forgone under the first category of tax breaks to businesses of almost $38 billion.

This is far bigger than the money going to individual taxpayers and welfare recipients in the second category: personal tax cuts ($17.8 billion over four years) and “economic support payments” to pensioners ($2.5 billion), a total of just over $20 billion.

Under the third category, direct government spending on goods and services, the main measures are various infrastructure programs – mostly via grants to state governments – worth more than $10 billion over four years.

So you see how much the budget’s fiscal stimulus measures have been affected by the government’s “core values”. No less than $38 billion goes as tax breaks to business, three-quarters of the $20 billion in transfers to individuals comes as tax cuts, leaving about $10 billion in direct spending going to the least labour-intensive purpose – transport infrastructure.

Liberal "core values" over "bang for buck": Prime Minister Scott Morrison and Treasurer Josh Frydenberg before the budget announcement.

Liberal “core values” over “bang for buck”: Prime Minister Scott Morrison and Treasurer Josh Frydenberg before the budget announcement.

Now, according to the budget papers – or according to the budget “glossies” fudged up by ministerial staffers with lots of colour photos of good-looking punters – the government and its minions have estimated the number of jobs the top programs are expected to create.

The immediate asset write-off and loss carry-back for businesses is expected to create about 50,000 jobs. Is that a lot? Well, remembering we have a labour force of 13.5 million, it doesn’t seem much. And dividing the 50,000 into the budgetary cost of $31.6 billion gives a cost of $632,000 per job.

That’s infinitely more than any of those extra workers are likely to be paid, of course, and absolutely pathetic bang per buck. Giving money to business in the hope it will do wonders for “jobs and growth” is a classic example of “trickle-down economics”. Clearly, a lot of the money doesn’t.

But, when you think about it, it’s not so surprising that so much money produces so few extra jobs. Why not? Because almost all the capital equipment Australian firms buy is imported. And because firms get the concession even if they don’t buy any more equipment than they would have done.

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Next, the budget documents imply that the personal tax cuts worth $17.8 billion will create a further 50,000 jobs. That works out at $356,000 per job – still terrible bang per buck. Why so high? Too much of the tax cut is likely to be saved.

Finally, the budget documents tell us the $4 billion cost of the JobMaker hiring credit will yield “around 450,000 positions for young Australians”. That’s a much better – but still high – $8900 per “position” – which I take to mean that a lot of the jobs won’t be lasting or full time.

So, what measures would have yielded better job-creation value? The ones rejected as politically incorrect: big spending on social housing, a permanent increase in the JobSeeker unemployment benefit – or even just employing more childcare workers.

Ross Gittins is the Herald’s economics editor.

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