Saturday, May 7, 2016

Just where are all the jobs and growth in the budget?

As you may have heard Scott Morrison mention a time or two this week, this isn't an ordinary budget, it's an economic plan for "jobs and growth". Sorry, Scott, that's what they all say.

Jobs and growth – without worsening inflation – are the objective of what economists call "macro-economic management".

And, along with monetary policy (the manipulation of interest rates), budgets (fiscal policy) are the instruments they use.

The obvious and quickest way a budget can attempt to boost growth and jobs is to use increased government spending or cuts in taxes to "stimulate" the economy and make it grow faster.

Is that what Morrison has done? No, not really. The short-cut way the econocrats assess a budget's likely effect on the economy is to examine the direction and size of the expected change in the budget balance.

This shows the net effect of the government's spending (which puts money into the economy) and its revenue-raising (which takes money out).

Morrison is expecting a budget deficit of $40 billion in the present financial year, which should fall to $37 billion in the coming year, 2016-17.

That expected fall in the deficit of just under $3 billion may sound big, but relative to the value of the nation's expected production of goods and services – nominal gross domestic product – of $1.7 trillion, it's equivalent to less than 0.2 per cent.

So, though the expected fall in the deficit suggests the budget will be working to inhibit the economy from growing and creating extra jobs, the effect is so tiny it doesn't count.

An alternative, more textbook Keynesian way of making that assessment is to focus only on the policy changes announced in the budget and the combined effect they are likely to have on the economy's growth and job creation.

The budget papers reveal that, in the coming financial year, the measures announced should reduce budget revenue by $1.7 billion and increase government spending by $1.4 billion.

So, judging it this way implies the budget will stimulate growth rather than work against it – that is, have a "contractionary" effect. But, again, the size of the net effect – $3.1 billion – is too tiny to matter.

Thus, at the macro – economy-wide – level, there's no evidence to support Morrison's claim that the budget will do great things for growth and jobs.

This conclusion is supported by the budget's forecasts that the economy (real GDP) will grow no faster in the coming financial year than it's expected to grow this year – by a below-potential 2.5 per cent a year – and improve just a little to 3 per cent in 2017-18.

But that's not the end of the story. What can we say about the budget if we switch from examining its likely effects at the short-term, macro level to viewing it as an exercise in using longer-term, micro measures to foster growth and jobs?

"Micro-economic reform" is about making changes to the way the government intervenes in particular markets, or is affecting people's incentives, with the objective of improving the economy's ability to grow (and create more jobs in the process).

Morrison offered a list of things the government has been doing to encourage growth.

But his chief exhibit is his new "10-year enterprise plan" to support growth and jobs. The plan involves cutting the rate of company tax from 30 per cent to 25 per cent over the 10 years to 2026-27, biasing the phase-in towards small and medium-size businesses, so big business's tax rate doesn't start to phase down until 2023-24, as well as widening access to accelerated depreciation by about 90,000 medium-size companies.

These reforms, Morrison assures us, will boost business investment and make Australia more competitive as a destination for foreign investment, thereby leading to "more job opportunities, more secure jobs and higher real wages".

And get this: Morrison has Treasury modelling to prove it. Delivering tax cuts for companies is expected to "permanently expand the economy by just over 1 per cent over the long term".

Impressed? Don't be. The Treasury modelling has been summarised and separately released. First, it's not an annual increase in real GDP of 1 per cent. It's saying that, by the end of the long term, the level of real GDP would be 1 per cent higher than otherwise.

In econospeak, "long term" means about 20 years. Divide 1 per cent by 20 and you get an annual increase too small to see.

Second, Treasury didn't actually model the government's complicated 10-year phase-down with priority to smaller companies. Econometric models are far too simplified to measure real-world policy changes.

It modelled a simple cut in the rate from 30 per cent to 25 per cent. So it could take even longer than 20 years for the full benefits to flow through.

Third, Treasury has accepted that, particularly because much of the benefit from a cut in company tax would go to foreign shareholders in Aussie companies and much of the new investment would be funded by foreigners, for Australians the change in real GDP exaggerates the benefits of the move.

A better measure is the change in real gross national income, which reduces the expected long-term level increase from 1.1 per cent to 0.7 per cent.

The modelling says much of this benefit would show up as an ultimate long-term increase in the level of real, after-tax wages of 0.8 per cent.

But note this: the ultimate long-term increase in the level of employment would be 0.2 per cent. So, even on the government's own modelling, the increase in growth would be small and the increase in jobs would be trivial.

To be fair, many economists believe that cutting the rate of company tax is the biggest and most obvious thing to do to improve our economic performance.

Sorry, but I can't see it.