Privatisation crusade is core business for tribal Libs

Critics of this year’s strange budget, which claims to be “all about jobs” but is really about helping some people and not helping others, accuse Scott Morrison and his faithful Treasurer of being “ideological”. That’s not a sensible criticism.

To accuse someone you disagree with of being “ideological” is dishonest and hypocritical. It misuses the word, turning it into a meaningless term of abuse. It implies that you’re being ideological, but I’m not.

To be ideological is to hold to a system of beliefs about how the world works and how it should work. So every adult who hasn’t wasted too much of their life watching reality television rather than thinking has an ideology — some better thought through than others.

When I accuse you of being “ideological”, what I’m really saying is that your ideology differs from my ideology and I think yours is wrong.

But I object to the term also because it’s an attempt to intellectualise and dignify a motivation far less noble: our deeply evolutionary instinct to form ourselves into tribes. My side, your side. Us and them. Good guys versus bad guys.

In politics, partisanship leads to polarisation and polarisation to policy gridlock and impotence. For example, look at the dis-United States. The richest, smartest big country in the world has been hopeless at coping with the pandemic, with many, many deaths. The Democrats and Republicans refuse to co-operate on anything. They’ve even turned mask wearing into a partisan issue.

It’s not so surprising that Morrison and Josh Frydenberg have been happy to justify their widely criticised budget choices by reference to their own ideology, saying the budget strategy “is consistent with the government’s core values of lower taxes and containing the size of government, guaranteeing the provision of essential services, and ensuring budget and balance sheet discipline”.

These “core values” are elaborated on the Liberal Party website. “We work towards a lean government that minimises interference in our daily lives, and maximises individual and private sector initiative.”

“We believe ... in government that nurtures and encourages its citizens through incentive, rather than putting limits on people through the punishing disincentives of burdensome taxes and the stifling structures of Labor’s corporate state and bureaucratic red tape.”

“We believe ... that businesses and individuals — not government — are the true creators of wealth and employment.”

To summarise, the individual is good, the collective is bad. Private good, public bad. Government is, at best, a necessary evil, to be kept to an absolute minimum.

Sorry, but this is just tribalism — the Liberal private tribe versus the Labor public tribe — masquerading as eternal truth. It’s phoney party-political product differentiation. Vote Liberal for low taxes; vote Labor for high taxes. Really? I hadn’t noticed much difference.

Private good/public bad makes no more sense than its left-wing opposite, public good/private bad. Both are a false dichotomy. It takes little thought to realise that the two sectors of the economy have different and complementary roles to play. One could not exist without the other, and we need a lot of both.

The individual and the collective. Competition and co-operation. Both sectors do much good; both can screw up. The hard part is finding the best combination of the two somewhere in the middle, not at either extreme.

As Frydenberg has often said, the budget’s strategy is to bring about a “business-led” recovery. This explains why most of the money it spends or gives up goes to business as tax breaks. Tax cuts and cash bonuses to individuals come a poor second and direct spending on job creation has largely been avoided.

Frydenberg justified this by saying that “eight out of every 10 jobs in Australia are in the private sector. It is the engine of the Australian economy.”

Surely he’s exaggerating, I thought on budget night. But I’ve checked and it’s true. Or rather, it is now. These days, 89 per cent of men and 81 per cent of women work in the private sector, leaving just 15 per cent of workers in the public sector.

In 1994, before the mania for privatisation and outsourcing took hold, 28 per cent of employees worked in the public sector (with two-thirds of those working for state governments).

The electricity, gas and water utilities used to be almost completely public sector. Now they’re 78 per cent private. Sale of the Commonwealth Bank, state banks and insurance companies mean the finance sector is almost totally private.

The sale of Qantas and Australian Airlines, ports and shipping, airports and much public transport means employment in the transport industry is 90 per cent private. Despite state government ownership of schools, TAFEs and universities, employment in education is now only 54 per cent public.

Despite health and community services being largely government-funded, three out of four workers are privately employed.

See what’s happened? With some help from their rivals, the Libs have worked tirelessly over the past 25 years moving workers from the Labor public tribe to the Liberal private tribe. Haven’t you noticed the big improvement?

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This one-year, fold-away budget won't do the trick

From the way the budget blows out debt and deficit, it may seem that Scott Morrison and Josh Frydenberg have stopped caring how much they rack up, but it ain’t so. This budget is just a one-year plan, which not only brings the handouts to an early stop, but then starts reeling much of the money back in.

This budget is like a fold-up bike you can put back in the boot after you’ve finished with it. Technically, its design is clever. But I fear it’s too clever by half.

If it turns out Morrison has turned off the budgetary stimulus too soon – as many business economists fear – he won’t have got the economy growing strongly enough and unemployment falling far enough.

His decision to turn the stimulus off so early – and to choose his budget measures based more on political correctness than job-creating effectiveness – may prove a great error of political (as well as economic) judgment as the election approaches in late next year or early 2022.

But let’s unfold Frydenberg’s one-year, fold-away budget. First, the two initial, big-ticket stimulus measures – the JobKeeper wage subsidy scheme and the temporary JobSeeker unemployment benefit supplement – have already been scaled back and their termination dates set.

The $17-billion dole supplement will end in December (with almost every dollar saved coming out of retailers’ cash registers) and JobKeeper will end in March, after a total cost of $101 billion.

First among the budget’s new measures is the immediate write-off for tax purposes of businesses’ capital equipment purchases. It will apply to new assets from now until June 2022, at a cost to revenue of $31 billion over the three years to June 2023.

But because this measure simply allows firms to deduct the cost of new equipment earlier than would otherwise apply, by the fourth year, 2023-24, firms are expected to be paying in excess of $4 billion more tax than they otherwise would have in that year.

Buried deep in the budget’s fine print you discover that what costs the revenue $31 billion in the first three years, ends up costing only a net $3 billion “over the medium term”.

Similarly, while the measure allowing companies (but not unincorporated firms) to carry back losses incurred in the three financial years to June 2022 for tax purposes will cost the revenue more than $5 billion in its first two years, by 2023-24 it will begin reeling the money back in. The net cost over the medium term is expected to be less than $4 billion.

Get it? Though the huge early cost of these measures, combined with the miniscule number of new jobs they are expected to create, makes them look like a giant handout to the government’s business supporters, in truth all they involve is a temporary improvement in businesses’ cash flows, as opposed to their profits.

Next, note that, though the JobMaker wage subsidy “hiring credit” has a cost of $4 billion over three years (with almost three-quarters of that hitting the budget next financial year), the scheme will be open only until October 7, 2021. The further cost to the budget after June 2022 will be minimal.

Finally, remember that the tax cut comes in two bits: the continuing tax cuts for people earning more than $90,000 a year, plus the temporary cost of the one-year extension of the misleadingly named “low and middle income tax offset”, aimed mainly at above-median tax-filers on $48,000 to $90,000.

Because the cash benefit of the temporary tax offset is delivered retrospectively, the two-year draw-forward of stage two (as opposed to its continuing cost from July 2022 on) will cost the budget about $7 billion this financial year and about $17 billion next year but – get this – add to revenue by almost $6 billion in 2022-23.

By then, much of this year’s budget will have been folded away.

Now you see why, after blowing out to $85 billion last financial year and an expected $213 billion this year, the budget deficit is expected almost to halve to $112 billion next year, and fall to $88 billion in 2022-23. (After that, the rate of improvement tapers off, with the deficit projected to take seven years to fall from 3 per cent of gross domestic product to 1.6 per cent.)

Question is, will the economy be able to keep up with this contraction in the budget? At present, the $101-billion JobKeeper is supporting 3.5 million workers – a quarter of all workers. It will end in March, to be replaced by the $4-billion JobMaker scheme for young workers. Doesn’t seem enough.

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Innovative: a two-class tax cut with disappearing cake

 Surely the most unfair criticism of Josh Frydenberg’s budget comes from the economist who said it was uninspiring. It’s the most innovative, creative document I can remember. With uncharacteristic modesty, he’s presented the tax cut that forms its centrepiece as just another cut, whereas in truth it’s like no other we’ve seen. Frydenberg will be remembered as the inventor of the two-class tax cut.

Those travelling first class get a big tax cut that’s permanent and will show up in their pay packet (or, these days, bank account) in a few weeks. Those in second class get a small tax cut that’s temporary, and they won’t see it until the second half of next year – which is when it will then be whipped away, leaving them paying more tax, not less.

This strange result arises because the second stage of last year’s three-stage tax plan was designed not to be of benefit to the great majority of taxpayers, those earning less than $90,000 a year. Also because of the great invention of Frydenberg’s predecessor as treasurer, Scott Morrison: the appetisingly named “low and middle income tax offset” – known to tax aficionados as the LaMIngTOn.

In its final form, announced in last year’s pre-election budget, the lamington provides an annual tax reduction of up to a princely $255 to taxpayers earning up to $37,000. Those earning between $37,000 and $48,000 have the size of their lamington phased up to $1080, with all those earning between $48,000 and $90,000 getting the full $1080 cake. Then it phases down to no cake at all by the time incomes reach $126,000.

That $1080 is equivalent to a tax cut of a bit less than $21 a week. But, being a “tax offset” rather than a regular tax cut, you don’t get your hands on it until you’ve submitted your tax return after the end of the financial year, and it’s included in your annual tax refund.

On the face of it, the second stage of the tax plan (which wasn’t intended to start until July 2022, but the budget brings forward to July this year) gives a tiny tax cut to those earning between $37,000 and $45,000 and a bigger cut that starts at incomes of $90,000 and keeps growing until income reaches $120,000 – by which time it’s worth $2430 a year, or about $47 a week.

Under the bonnet, however, stage two does something an old accountant such as me regards as quite clever. It whisks away the lamington and substitutes other things, without those who got it under stage one being any worse off.

Trouble is, while almost no one earning less than $90,000 would be worse off, nor would they be any better off. Taken by itself, stage two would give noticeable tax cuts only to those earning more than $90,000 (which is getting on for double the median taxpayer’s income).

Sound fair to you? It would be politically unsaleable. Nor would it fit with the government’s claim to have brought the tax cut forward purely to do wonders for “jobs and growth”.

So someone had a bright idea. While quietly whisking away the old lamington, introduce a new, identical lamington – but only for the present financial year. Problem solved. Every player gets a prize.

The 4.6 million taxpayers earning between $48,000 and $90,000 get a tax cut of $1080 or a little more, while the 1.5 million earning between $90,000 and $120,000 get up to $2430. Everyone earning more than $120,000 gets the flat $2430 (thanks, Josh).

All this was carefully spelt out in one of the sheaves of press releases Frydenberg issued on budget day. But the things he said in his televised budget speech didn’t quite fit his own facts.

“As a proportion of tax payable in 2017-18, the greatest benefits will flow to those on lower incomes – with those earning $40,000 paying 21 per cent less tax, and those on $80,000 paying around 11 per cent less tax this year,” he said.

“Under our changes, more than 7 million Australians receive tax relief of $2000 or more this year.”

Sorry. By comparing this financial year’s tax cuts not with last year’s, but with the tax we paid three years ago, in 2017-18, Frydenberg has managed to add last year’s tax cut to this year’s. For people receiving the lamington, that doubles the tax cut they’re supposedly receiving “this year”.

Why has Frydenberg chosen to describe his tax cut in such a misleading way? Because it helps disguise the truth that high-income earners are getting much bigger dollar savings than low- and middle-income earners.

Similarly, comparing tax cuts according to the percentage reduction in a person’s total tax bill is nothing more than playing with arithmetic – which, to be fair, every government does. Remember, if your income was so low you paid only $10 tax on it, I could change the tax system in a way that dropped you from the tax net and claim you’d had a 100 per cent tax reduction – which made you by far the biggest winner. Yeah, sure.

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Morrison's new goal: tax cuts adding to higher debt and deficit

This is the hanged-for-a-sheep-rather-than-a-lamb budget. Realising the coronacession means it will be ages before he can make good his premature claim to have the budget Back in Black, Scott Morrison has decided to go for broke (if you'll excuse the expression).

Many people have been anxious to see just how big Josh Frydenberg's expected budget deficit will be (a record $213 billion, dwarfing anything produced by the free-spending Kevin Rudd) and how much public debt it will leave us with (almost a net $1 trillion by June 2024, and continuing to grow every year until at least June 2031).

Mr Frydenberg is right to say that, if we want to get the economy moving and unemployment falling, he has no choice but to spend in giant licks. More concerning is whether all the money added to the debt has been chosen to deliver the greatest possible gain in jobs.

That's the problem. It hasn't. Although the plan to subsidise the wages of newly employed young people in their first year gets a big tick, the brought-forward and back-dated tax cut that is the centrepiece of this budget is among the least effective ways to create jobs.

That's because much evidence shows that a high proportion of tax cuts is saved rather than spent. This is particularly likely at present, when so many people fear they may be next to lose their job.

To be fair, Mr Frydenberg has not brought forward the third stage of the tax plan – still scheduled for July 2024 – which is slanted heavily in of favour high earners. It's well established that high income-earners save a higher proportion of tax cuts than lower income-earners.

If you remember, when stage one of these tax cuts allowed people getting the new "low and middle income tax offset" to receive a flat $1080 refund in July and August last year, Mr Frydenberg confidently predicted it would give a fillip to retail sales. Didn't happen.

Summarising, the new tax cut will be worth the equivalent of almost $21 a week to those earning between $50,000 and $90,000 a year, but about $47 a week to those earning more than $120,000 a year.

Mr Frydenberg justifies the tax cut by saying "we believe people should keep more of what they earn". Fine. But such a belief has little to do with this budget's stated goal, nor the justification for adding to the deficit: it's "all about jobs".

This tax cut is much more about political popularity than getting the economy out of recession.

The government has made much of its efforts to limit the rise in deficits and debt by keeping new spending measures temporary. But the cost of the changed tax scales will roll on forever.

When the Economic Society of Australia surveyed 49 leading economists recently, asking them to choose the four programs that would be most effective in supporting recovery, only 10 of them nominated bringing forward the legislated tax cuts.

So what measures did they favour? More than half wanted spending on social housing (which creates employment in the housing industry, adds to our stock of homes and helps the disadvantaged).

Half the economists wanted a permanent increase in JobSeeker unemployment benefits (because $40 a day is below the poverty line and any increase is almost certain to be spent).

But those two top preferences have been ignored in this budget.

By contrast, some of the measures that are in the budget didn't raise much enthusiasm. An expanded investment allowance for business got support from only 29 per cent of the economists – presumably because it wasn't expected to be very effective. At best, it's likely to draw forward some of the spending on capital equipment that would have been spent in later years.

And even spending on infrastructure projects was preferred by only 20 of the 49 economists – perhaps because too much of it goes on wasteful projects.

The government's two main stimulus measures – the JobKeeper wage subsidy and the JobSeeker temporary supplement – have been most successful in breaking the economy's fall.

But they were cut back from the end of September, and this budget doesn't change the plan to end them from March and December respectively.

If the measures in the budget prove insufficient to fill the gap their withdrawal leaves, and so keep the recovery progressing, it will be because the government has been too quick to limit its spending and replace it with tax cuts.

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Smaller Government has failed, but let's cut taxes anyway

Think about this: despite a rocketing budget deficit, Scott Morrison is planning to press on with, and even bring forward, highly expensive tax cuts for high income-earners at just the time we’re realising that the 40-year pursuit of Smaller Government has been a disastrous failure.

Wake-up No. 1: the tragic consequences of the decision to outsource hotel quarantine in Victoria have confirmed what academic economists have long told us, and many of us have experienced. Contracting out the provision of public services to private operators cuts costs at the expense of quality.

Wake-up No. 2: efforts to keep the lid on the growing cost of aged care have given us appalling treatment of the old plus high profits to for-profit providers and some not-for-profits seeking to cross-subsidise other activities.

A new report by Dr Stephen Duckett and Professor Hal Swerissen, of the Grattan Institute, summarises the aged care system’s “litany of failures”, as revealed by the royal commission, as “unpalatable food, poor care, neglect, abuse and, most recently, the tragedies of the pandemic”.

There was a time when aged care was provided by governments, particularly in Victoria and Western Australia. But as the population has aged, successive federal governments have sought to limit the role of government by having aged care provided first by religious and charitable organisations and then by for-profit businesses.

The report’s authors note how little we spend on aged care. Countries with well-functioning aged care – such as the Netherlands, Denmark, Sweden and Japan – spend between 3 and 5 per cent of gross domestic product, whereas we spend 1.2 per cent.

“Rather than ensuring an appropriately regulated market, the government’s primary focus has been to constrain costs,” they say. When old people are assessed for at-home care or for residential care, the emphasis is less on their needs than on their eligibility for less-costly or more-costly support.

Partly because of the failure to set out clear standards for the quality of the care the community should be providing to our elderly – presumably, because keeping it vague helps limit costs – the system has become “provider-centric”.

Over the past two decades, the provision of aged care has increasingly been regarded by government as a market. “Residential facilities got bigger, and for-profit providers flooded into the system. Regulation did not keep pace with the changed market conditions,” the authors say.

But, though you’d better believe the profit motive of for-profit providers is super real, anyone who’s done even high-school economics could tell that the aged-care “market” offers nothing like the countervailing forces that textbooks describe.

The royal commission’s interim report found “it is a myth that aged care is an effective consumer-driven market”. A myth instigated and perpetuated by the Smaller Government brigade.

Duckett and Swerissen say that, “in practice, providers have much more information, control and influence than consumers. In residential care, a veil of secrecy makes it very difficult for consumers to make judgments about key quality variables such as staffing levels.”

Rather than turning aged care into a well-functioning market, “the so-called reforms resulted in for-profit providers increasingly dominating the system. The number of for-profit providers has nearly tripled in the past four years, from 13 per cent in 2016 to 36 per cent in 2019".

Even the Land of the Free has instituted a five-star system for ranking residential institutions to better inform the aged and their families. We haven’t bothered. But research for the royal commission shows that a majority of providers have staffing levels below three stars. And, the authors add, it doesn’t necessarily follow that the more you pay, the higher the quality.

Residential aged care can be so offputting that it’s gone from being a lifestyle choice to a last resort. So great is the public’s aversion to aged care that the government has had to offer a range of at-home assistance packages.

But, consistent with the half-arsed pursuit of Smaller Government, the government has allowed a waiting list of about 100,000 people to build up. And, since the packages are delivered by private providers, amazing proportions of the cost can be eaten up by “administrative costs”.

Duckett and Swerissen say that, while (much) more money is needed, this won’t be enough to fix the problem without not only better regulation but fundamental change in principles, governance and incentives. Access to extra funding should be tightly scrutinised so the money goes to upgrade staffing and not to greater profits for wealthy owners of provider businesses.

Back to tomorrow’s budget. The strongest motivation behind the Quixotic quest for Smaller Government is the desire of the better-off to pay lower taxes. Like Don Quixote, it has failed. Fixing it will cost billions. But blow that, let’s cut taxes regardless.

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Doing health admin on the cheap may mean things go wrong

In my game, where you spend years watching the antics of politicians and bureaucrats from a ringside seat – say, watching the inquiry into Victoria's tragic hotel quarantine debacle – you tend to become cynical. But not as cynical as a gym buddy of mine, who's had much experience of such inquisitions.

He says that when everyone's denying having made the fateful decision, but saying they don't know who did make it, it's usually a sign they're trying not to dob in the boss.

It's possible the boss in question was now-departed health minister Jenny Mikakos, but I doubt it. Bureaucrats from one department don't usually cover for some other department's minister.

One thing I've noticed over the years is that when the hue and cry is closing in on the really big political boss, it's not surprising to see someone else take the dive on their behalf. If it's a public servant writing the so-sorry-I-misled-you-prime-minister letter, they can expect to be looked after in their next appointment. When it's another minister, it's usually less congenial.

The inquiry revealed various instances of ministers claiming not to have been briefed by their departments. So, the Sir Humphreys work it out themselves and let their ministers know later? Don't believe it. The days of Yes, Minister are long gone.

These days, department heads – federal and state – are sacked so often that senior public servants live in fear of displeasing their minister. How might that happen? If you told them something they'd prefer to be able to say they hadn't been told. Or even if you gave them advice that really annoyed them.

As so often happens, what was missing from the quarantine inquiry's proceedings was acknowledgment of the role of ministerial staffers. They're invisible, apparently. These days, much communication between a department and its minister goes via the staffers. They decide what's too trivial, inconvenient or potentially embarrassing to be passed on.

In all the toing and froing before the inquiry, you may have noticed a lot of witnesses declining to accept responsibility for "collective decision-making" decisions. Such evasion of responsibility is one of the besetting sins of public servants. Their political masters ought to put a stop to it. Which they would – were they not too busy playing the same game.

Back to the search for a guilty party. In Canberra lore, conspiracies are always trumped by stuff-ups. So I don't find it hard to believe that no one in particular made the decision to outsource the running of hotel quarantine to private contractors. It really was a decision that, in Scott Morrison's memorable phrase, "made itself".

It was taken without much thought or discussion because "that's what we always do". Outsourcing the provision of public services has become so ubiquitous no one thought of doing it any other way.

You may think that outsourcing the delivery of public services to for-profit providers – a form of privatisation – must be the bright idea of some naive economist, and you'd be right. Actually, half right.

An economist who's put much thought into government "contracting out", Oliver Hart, of Harvard, demonstrated that it was a good idea if your goal is to cut costs, but a bad idea if you care about maintaining the quality of the service.

This is because of a problem economists call "incomplete contracts". It's humanly impossible to write a contract that covers every problem that could arise and every way the contractor could game the contract at your expense. When you deliver the service yourself, you retain control over quality. Hart was awarded the Nobel prize for his sagacity.

Outsourcing is hugely fashionable in business as well as government. In my experience, it's always about saving money in the fond hope any loss of quality won't be noticed.

Often, the saving comes from ending the good wages and conditions you pay your own workers by sacking them and sending them down the road to work for some contractor on lower pay and worse conditions. It's a way of side-stepping successful unions.

In the public sector, however, another attraction of outsourcing is that it blurs lines of responsibility. "The contractors are giving you a hard time? Blame them, not me." "You'd like to see the contract I've made with the supplier? Sorry, commercial in confidence."

Truth is, governments at both levels and of both colours have gone for years saving money by contracting out wherever possible and imposing annual "efficiency dividends" (an Orwellian term for public service redundancies).

They've given us government on the cheap because they believed we'd prefer a tax cut to decent service. They could have striven to give us better government – including government that was big on accountability and where lines of responsibility were clear – but they settled for cheaper government.

They've spent decades cutting corners in a hundred ways, hoping we wouldn't notice (or do no more than grumble about) the slow decline in quality. Now the pandemic has caught them out. Pity so many lives were lost in getting the message through.

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Frydenberg decides to favour limiting debt and deficit

Well, that’s a relief. The economy faced falling off a “fiscal cliff” if Scott Morrison had gone ahead with his plan to end the expensive JobKeeper and JobSeeker schemes in September, but he decided to keep them going at lower rates for another quarter or two. So, another expansionary (mini-) budget.

Is that what you think? It’s certainly what Treasurer Josh Frydenberg wants you to think. He’d like to have his cake and eat it: be seen to be continuing to stimulate (he’d prefer the term “support”) the recessed economy, while actually cutting back that support as he succumbs to his party’s ideology of putting fixing the budget ahead of fixing the continuing rise in unemployment.

Judged strictly, however, this week’s measures and mini-budget aren’t expansionary, they’re contractionary. While it’s true Morrison will continue the JobKeeper wage subsidy scheme for another six months from September, and continue the increase in the amount of the JobSeeker unemployment benefit for another three months, both will involve greatly reduced support.

Between September and February, the JobKeeper payment to workers will be cut from $1500 a fortnight to $1000 a fortnight for those who work more than 20 hours a week, and to $650 a fortnight for those working less than 20 hours a week. Either way, the whole scheme will be wound up after another six months.

After September, the JobSeeker supplement to the dole will be cut from $550 a fortnight to $250 a fortnight, and wound up after December.

Over the six months to September, JobKeeper is expected to cost something less than $70 billion, whereas the following six months will cost $16 billion. Slashing the JobKeeper supplement will reduce the additional cost to less than $4 billion.

And if a sharp recovery in private sector spending doesn’t occur in the next six months – it would be another of Morrison’s miracles if it did – then the reduction in fiscal (budgetary) support will leave the economy growing more slowly than it would have.

The point is, according to the strict Keynesian way of judging it, for a budget to be “expansionary”, the extra stimulus it provides has to be greater than the stimulus it previously provided. If you cut back the amount of stimulus being provided, that counts as “contractionary”.

Now, you can argue that, in its original form, JobKeeper was too generous, giving those few casual workers it helped more money per fortnight than they’d been earning.

There’s no denying that the scheme, having been pulled together in a great hurry, had its flaws. But to say it needed to be made fairer or more efficient, doesn’t change the fact that, if you fix those flaws in a way that hugely reduces the amount of money the government is pumping into the economy to limit its contraction, your policy change is contractionary.

From the perspective of keeping the government spending big while households and firms have good reasons to spend as little as possible, if you decide Ms X is being paid too much, you need to give the saving to someone else.

In other words, if you think like an accountant rather than an economist, you get the wrong answer. That’s the trouble with Liberal Party ideology: it’s the thinking of an accountant (“Oh no, that woman’s getting more than she should.” “Oh no, look at all that deficit and debt mounting up.”) rather than the thinking of an economist (“If the government isn’t spending at a time like this, who will be?”).

Putting it another way, in the Liberals’ drift to the Right, their way of thinking about how the economy works has reverted to being “pre-Keynesian” – to thinking about the economy the way their grandfathers did in the Great Depression when economic orthodoxy’s answer to the problem was to cut wages and balance the budget.

John Maynard Keynes convinced the economics profession that such thinking was exactly the wrong way to fix a recession or depression. That’s why few economists deny that he was the greatest economist of the 20th century – and why, at times like this, the thinking of almost every economist is heavily influenced by “the Keynesian revolution”.

When it suits them, however, the Libs are not averse to using a very Keynesian concept: that the budget has “automatic stabilisers” built into it. This week Frydenberg has been anxious to point out (mainly, I suspect, to Liberal voters) that the huge blowout in the budget deficit isn’t explained solely by his stimulus spending.

No, the deficit is up also because tax collections have collapsed. Many companies have had their profits greatly reduced or even turned to losses, meaning they’ll be paying much less company tax. More significantly, many people have had their incomes reduced, meaning they’ll be paying much less income tax.

As well, with many more people eligible for unemployment benefits, government spend on these payments has jumped (and would have even without the temporary supplement).

This week’s budget update shows that, over last financial year and the present one, Treasury expects the budget balance to worsen by $281 billion. The government’s discretionary policy measures explain just $177 billion of this, leaving the remaining 37 per cent - $104 billion – explained by the budget’s automatic response to the downturn in the economy.

As the budget papers explain, economists call this the work of the budget’s inbuilt automatic stabilisers, which reduce tax collections and increase government spending automatically when the economy turns down. (And do the opposite when the economy’s booming.)

The automatic stabilisers have thus helped to stabilise demand – stop it falling as much as it would have – without the government doing anything. Any explicit decisions the government makes to increase its spending or cut taxes thus add to the stabilisation already provided automatically.

And the budget papers add an important point: our progressive income tax system means that people’s after-tax income falls by less than their pre-tax income does – another aspect of the budget’s automatic role in limiting the fall in demand.

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Complacent government cutting back support far too early

Sorry, but this is the economic statement of a government that’s complacent about controlling the coronavirus and about getting a million unemployed people back to work. It sees its job as largely done. Now it’s time to quickly wind back its spending on supporting the economy and call for the bill.

You can tell Prime Minister Scott Morrison and Treasurer Josh Frydenberg decided this before the extent of the setbacks in Victoria and NSW became fully apparent. They have assumed that after the six-week lockdown in Melbourne, everything will be fine again.

That’s quite an assumption, especially because those two states account for more than half the national economy.

A less complacent assumption would have been that, in the many months likely to pass before a vaccine is widely available, several further major setbacks could occur and delay the return to confidence by consumers and businesses that normal economic times had resumed and it was time to get on with spending and investing.

If so, the government might have a lot more spending to do to keep the economy above water until the pandemic’s “once-in-a-century shock” to the economy has passed.

Were you shocked by the news of the highest budget deficits since World War II, leading to net public debt already up to $488 billion and expected to hit $677 billion by next June?

Such shock seems to have been the main goal of Thursday’s budget update. The government’s spin doctors announced the fate of both the JobKeeper wage subsidy scheme and the temporary doubling of the JobSeeker unemployment benefit two days earlier so as to now heighten public concern about all that money being spent, and get us to accept the government’s decision that spending should be wound back pronto.

And that’s what Morrison announced on Tuesday – though you could be forgiven for not noticing it through all the spin. The government had gone for weeks threatening to end both schemes in September.

So when Morrison announced that they would be continued for another six months, in modified form, there was a sigh of relief. Few people noticed that the threatened “fiscal cliff” would now be just a precipitous incline.

It’s estimated that two-thirds of companies – and their employees – will be off JobKeeper by early next year. Which will be fine provided the economy bounces back as strongly as the government seems to believe it will.

But Treasury’s forecast that the economy will grow by 2.5 per cent in 2021 seems optimistic to me – and in any case, wouldn’t be sufficient to do much to turn around the 870,000 jobs lost between March and May this year and the million workers who saw their hours cut.

What seems clear is that the government is anxious to rein in the growth in its spending so as to limit the growth in its debt. What’s much harder is to find economists who agree that, with the economy’s prospects still so worrying, now is the time to be cautious and pull back.

A poll of 50 leading economists, conducted by the Economic Society of Australia, found that 44 of them agreed the government should use its budget to boost demand during the economic crisis and recovery, “even if it means a substantial increase in public debt”.

And if Reserve Bank Governor Philip Lowe shares the government’s worries about debt and deficit, he’s got a strange way of showing it.

Only on Tuesday he said that “debt across all levels of government in Australia, relative to the size of the economy, is much lower than in many other countries and it is likely to remain so. The Australian government can borrow at the lowest interest rates since Federation.”

So it is “well placed to smooth out the shock to private incomes and support the economy through the pandemic”.

It all translates to economists telling the government it’s the “eye-watering” levels of unemployment it should be most worried about.

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Don't forget those the pandemic leaves out in the cold

After a fortnight's patriotic duty swanning round the backblocks of the state dispensing modest monetary good cheer – and discovering we were far from the only cityslickers doing it – it's back to a city plunged into renewed foreboding. The greatest concern is the pandemic's returning risk to our lives but, for me, this worsens rather than detracts attention from the great economic cost: protracted unemployment. A second wave of the virus would bring a double-dip recession.

When Treasurer Josh Frydenberg – a man so committed to looking on the bright side he's positively Pythonesque – feels it his duty to advise that the official unemployment rate of 7.1 per cent is actually an effective rate of 13.3 per cent once you allow for the peculiarities of the lockdown, you know we must be in deep trouble.

He wouldn't be issuing such a warning if he didn't need to prepare us for next week's mini-budget, which the setbacks in Melbourne and Sydney will have caused to be a lot less penny-pinching than earlier planned.

Where before Scott Morrison might have told himself the worst was over and it was time to start limiting the damage to his precious budget, now he must keep the money flowing so as to limit the damage to the livelihoods of many workers and their families.

Back in March, many of the government's initial measures to limit the economic damage caused by his harsh but unavoidable efforts to stop the spread of the virus – including the innovative JobKeeper wage subsidy scheme and JobSeeker's doubling of the rate of unemployment benefits – were timed to last six months and so end in late September.

The mini-budget's main purpose is to announce what will happen after that. A point to remember is that these measures don't just directly relieve the financial pressure on people who've lost their jobs, they benefit all of us indirectly by injecting additional money into the economy, which then flows through many hands – shopkeepers and workers alike – keeping the economy moving and thus limiting the further rise in joblessness.

A further thing to remember is that the unemployed don't only need money to help them keep body and soul together and feed their families (not to mention money to keep their mobile working, travel to job interviews and be appropriately dressed), they also need help finding another job.

The terrible thing about recessions is that they throw the economy up in the air, so to speak, and what eventually comes down is different to what went up. Recessions accelerate the changing structure of the economy. The industries and occupations change, with some contracting and others expanding.

So the jobs move, and employers' demand for particular occupations changes. Even with assistance from the wonders of the internet, many workers need help to locate a new job, need guidance to give up on industry A and try industry B, or even help to retrain for a job in another occupation where demand is greater.

After a severe recession, it can take a year or more before the quantity of goods and services produced each quarter has returned to where it was before it started falling, and several years before it gets back to where it would have been had the recession not happened.

But it takes longer for employment to return to where it was and far longer for unemployment to fall. After the last recession, the number of people on unemployment benefits fell by almost half, from a peak of 890,000 in 1993 to 464,000. But get this: it took 14 years.

If that wasn't bad enough, in that time, the number of recipients who'd been on the dole for more than a year fell by only 20 per cent to 276,000.

One lesson from this is that it's the unemployed who'll bear most of the economic cost of this pandemic, however long it lasts. It will take longer than you may think for people who lose their jobs to find another. While they're out in the cold, we who've kept our jobs have a moral obligation to ensure they're given a reasonable sum to live on, as well as a lot of help finding a new berth.

Many will find a job within a month or two, but some will take much longer. And the longer it takes, the less likely it becomes. These are people who deserve extra help to avoid getting stuck in the mud at the bottom of the unemployment pool, and we should give it.

Last week the Australian Council of Social Service called for JobKeeper to be phased down only gradually, and for the JobSeeker payment to be increased permanently by at least $185 a week, which would lift it to the rate of the age and other pensions.

The focus of Centrelink and the Job Network should be switched from penalising the jobless for concocted infringements to actually helping them find jobs and retrain. It's the least we should do.

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Morrison moves the deck chairs on the hulk of our universities

A new rule of politics seems to be that no matter how badly the pollies have stuffed up some area of government responsibility, they can always make it worse. Enter the hapless federal Education Minister Dan Tehan who, doubtless acting under instructions from the boss, has just announced another set of passive-aggressive changes to university funding.

If, like a good Quiet Australian, you haven't been paying close attention, you may have gained the impression that the government is acting to help our unis to take in more local students – helping fill the vacuum left by the disappearance of overseas students – and changing the structure of tuition fees to encourage students into more occupationally oriented courses, which will make them "job-ready graduates" going into fields where the need for graduates is expected to be greatest.

You probably haven't noticed that, according to Tehan, the package includes "an additional $400 million over four years" for regional unis, and "a further $900 million" for the National Priorities and Industry Linkage Fund.

Except that the whole package is "budget neutral" – a bureaucrat's way of saying it will cost the government not an extra cent. Since the government's expecting extra demand for uni places over the next three years, this is tantamount to its first major cost-cutting exercise after taking fright at the blowout in the budget deficit caused by the lockdown of the economy. So the "extra" and "further" funding will be coming not from the government's pockets but those of the universities and their students.

The government will fund an extra 39,000 places by 2023 – an increase of about 6 per cent – as the recession prompts more school leavers to stay on in education (and avoid taking a gap year), but will compensate for this by cutting the amount of its funding per student.

According to calculations by Professor David Peetz, of Griffith University (whose former job as a senior federal bureaucrat helps him find where the bodies are buried), the government will cut its funding by an annual $1883 per student, with the average increase in tuition fees of $675 per student reducing the net loss to universities to $1208 per student. (The fee changes won't apply to existing students, however.)

That is, the unis are being asked to do more with less. It's a safe bet their main response will be to further increase their ratio of students to staff. Unis will become even more of a sausage factory – which will be really great for the nation's investment in "human capital".

My guess is that the changes to the structure of tuition fees – with a hodgepodge of big cuts, small cuts, small increases, big increases and no changes – are intended to give the appearance of doing something to increase employment, to gratify the parliamentary Liberal Party's antipathy towards the universities (hotbeds of leftie activists who think Black Lives Matter and have kids who wag school because the silly-billies are worried about climate change) and to divert attention from the way the unis have been short-changed.

With the fee for humanities degrees up by a mere 113 per cent, it's quite a diversion. I'll be diverted only to the extent of quoting from a speech by a Business Council official in 2016: business needed the skills of "critical thinking, synthesis, judgment and an understanding of ethical constructs". The humanities produced people who can "ask the right questions, think for themselves, explain what they think, and turn those ideas into actions".

Ah, maybe that's what the backbench doesn't fancy.

Professor Andrew Norton, of the Australian National University, a recognised expert, doubts that the fee changes will do much to change students' preferences away from courses they think they'd like. And Peetz points out that it's the unis, not the government, that will be bearing the cost of the fee reductions for those courses the government prefers.

Which brings us to Professor Ian Jacobs, boss of UNSW, who points to the perverse incentives the changes will create (assuming the Senate is mad enough to pass them). Unis will be tempted to offer most places in those courses with the widest gap between the high government-set tuition fee and the cost of running the course. They'll be pushing BAs harder than ever.

This, of course, is exactly the way you'd expect the vice-chancellors to behave when you've taken government-owned and regulated agencies, spent 30 years pursuing a bipartisan policy of cutting their federal funding (from 86 per cent to 28 per cent of total receipts, in the case of Sydney University) and pretending they've been privatised.

Then, after they've turned to getting about a quarter of their funding from overseas students, but the coronavirus obliges you to ban foreign travellers, you hang them out to dry, refusing them access to the JobKeeper wage subsidy scheme because they should never have allowed themselves to become so dependent on a single source of revenue.

For a while I thought the crisis had got Scott Morrison governing for all Australians. It hasn't taken him long to revert to playing friends and enemies.

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Economy's need may run second to Morrison's spending hang-ups

Looking back, Scott Morrison's response to the coronavirus has been masterful on the medical side and, on the economic side, his willingness to spend money cushioning the job-threatening consequences of the lockdown was unstinting. But (and there had to be a but) with the economy's recovery far from assured I fear his nerve may be cracking.

The plain truth is that the only way out of deep recessions is for governments to spend their way out. But for a government as far to the right as Morrison's, spending money with enthusiasm is an unnatural act. It has an ideological objection to government spending which, it believes, is a necessary evil at best, and so should be kept to a minimum.

It claims to be motivated by the pursuit of Jobs and Growth but its "revealed preference", as economists say – not what it says, but what it does – is to prioritise the elimination of debt and deficit.

So great is its aversion to debt that the government is impervious to reason. Interest rates have been so low for so long that governments can borrow for 1 per cent or less. When you allow for an inflation rate of about 2 per cent, this means financial institutions (including your super fund) are willing to pay the government for the privilege of lending to it.

In which case, why not borrow as much as you need? Because that word "debt" just sounds so bad. And that debt will have to be repaid by our children. Actually, it won't be. Governments rarely repay debt. What they mainly do is roll it over while they wait for the economy to outgrow it, with help from inflation.

And ask yourself this: what do you think your kids would prefer to inherit? A bit more public debt or an economy that's been deeply recessed for a decade, with stagnant living standards, little opportunity to get ahead and stories about how much better things were in their parents' day.

Recessions always involve the private sector – businesses and households – contracting and the public sector expanding to take up the slack and get things moving again. In our particular circumstances, six years of weak wage growth and record household housing debt mean consumers have little scope to start spending big.

For their part, businesses won't spend on expansion until they see a reason to. Morrison's notion of incentivising business with investment tax breaks, changes to wage fixing and cuts in red tape is magical thinking.

That leaves it up to the government to keep spending until the private sector has the wherewithal to spend. Without a government-laid foundation, believing in a "business-led recovery" is believing the economy runs on spontaneous combustion.

I suspect Morrison has looked at our prospective budget deficits and taken fright. Paradoxically, although he readily agreed to the JobKeeper wage subsidy scheme when told it would cost $130 billion, when Treasury realised it wouldn't take nearly as much to "flatten the curve" as the epidemiologists had led it to expect and so cut the cost to $70 billion, Morrison saw this as a miraculous escape from the sin of profligacy.

The ideologically pure end of his own party started urging him to spend no more. And this week he started talking about the need to find budgetary savings.

This would be completely contrary to the advice he received only last week from the Organisation for Economic Co-operation and Development that "there is ample fiscal space to support the economic recovery as needed". This is the OECD's way of saying "if you Aussies think you have a frightening level of debt, you're kidding yourselves". The International Monetary Fund says the same.

The OECD continues: "The scarring effects of unemployment – especially for young workers – should be alleviated through education and training, as well as enhancing job search programs. Firms should continue to be supported ... The authorities should be considering further stimulus that may be needed once existing measures expire ... Such support should focus on improving resilience and social and physical infrastructure, including strengthening the social safety net and investing in energy efficiency and social housing."

To be fair, should Morrison turn from spending to cutting before the economy has fully recovered, he'd be no more disastrously wrong-headed than Britain's David Cameron and other European leaders after the global financial crisis, when they started tightening their budgets too soon and condemned their countries to a decade of weak growth.

You can see Morrison's change of tack in his poorly received HomeBuilder package. Reviving the housing industry is a standard part of the response to every recession, but this is the package you have when you're only pretending to have a package.

It's too small to make much difference and the deadlines for its $25,000 grants are so tight few people are likely to qualify. Glaring by its absence was any mention of spending on social housing.

But this raises another of the Libs' hang-ups. They oppose government spending in general, but spending that helps the needy in particular.

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Economy to blame for part of the expected budget blowout

When you ask people who work in the House with the Flag on Top why the budget deficit has gone up or gone down, most will tell you it’s gone up because the government decided to spend more money, or it’s gone down because the government decided to spend less money.

When you live in Canberra, the budget looms large and the economy is something far distant in Melbourne or Sydney or somewhere. The budget is the steering wheel by which those in the national capital control the economy of you and me, they think.

When you consider how close they live to all the economists in Treasury and all the distinguished economists at the Australian National University, it's surprising how little so many Canberrans understand about the economy.

The truth is, the nation’s economy – almost all of which exists outside the ACT – is far bigger and more powerful than the budget of the federal government (even after you throw in the budgets of the eight states and territories).

So, though it’s true that changes in the federal budget can have a big influence on what happens in the economy, it’s just as true that what happens in the economy can have a big influence on what happens to the budget.

To be clear, there’s a two-way relationship between the big thing that is the economy and the much smaller thing that is the budget. What’s done to the budget affects the economy, but what you and I - and the businesses we mainly work for - do to the economy has a big effect on the budget.

On how much tax we end up having to pay, and on the benefits – in kind as well as cash – the government has to pay us. How many kids we have and send to school. Whether they decide to go on to university or TAFE. How old we get and need the age pension and go to doctors and hospitals more often. Whether we lose our jobs and need to be supported by the dole. And all the rest.

With the virus and the consequent recession changing everything, this week we were supposed to get an emergency update on the state of the economy and the budget from Treasurer Josh Frydenberg. But he’s put it off until late next month.

Not to worry. On Friday the independent Parliamentary Budget Office stepped into the breach and produced “medium-term fiscal projections” of the effect of the coronavirus and the policy response to it.

Starting with the forecasts in the mid-year update published in December as its base, it used the Reserve Bank’s recently published forecasts for the economy (in lieu of Treasury’s) to estimate the expected change in the federal budget’s receipts, payments and underlying cash balance brought about by the crisis.

Its headline finding was that the crisis may cause the federal government’s net public debt to be between $500 billion and $620 billion higher than it would otherwise have been by 2029-30. That would be equivalent to between 11 and 18 per cent of gross domestic product.

But no one knows what the future holds, and projections 10 years into the future are so speculative as to be useless. They’re actually a bad thing because they give the uninitiated (including the politicians) a false sense of certainty.

The report’s way of putting this is to say its results are “indicative only” – which is an econocrats’ way of saying that, at best, they give you a rough idea of what might happen. So let’s just focus on the guesstimates for this (almost over) financial year and the next two, ending with 2021-22.

They show the budget deficit for this financial year is now expected to be $67 billion worse than formerly expected. The budget balance for the coming financial year may be $191 billion worse and for 2021-22 may be $56 billion worse. That’s a total deterioration of $314 billion.

Now, the explicit policy decisions of the government in response to the virus are expected to account for only $187 billion of that total. This accounts for almost all the expected increase in government payments, leaving the expected fall of $126 billion in tax collections and other receipts making up the remainder.

Get it? About 40 per cent of the overall deterioration came from the recession, caused by the fall in tax collections – individuals earning less income and paying less income tax; companies earning lower profits and paying less company tax; consumers buying less and paying less goods and services tax – leaving the government’s own actions accounting only for the remaining 60 per cent.

As economists put it, about 60 per cent of the expected deterioration in the budget balance over three years is “structural”, whereas 40 per cent is “cyclical” – meaning it will fix itself as the economy recovers.

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Right now, we need all the government spending we can get

Lying awake in bed last night thinking about our predicament, a frightening insight came to me: the only way out of a recession is to spend your way out. It sounds wrong-headed, but it’s not. It’s just, as economists say, “counter-intuitive”.

Who must do all this spending? In the first instance, the government. And let me tell you, if Scott Morrison lacks the courage to spend as much as is needed – as it seems he may – he’s likely to be kicked out at the next election because we’ll still be languishing in a recession that’s deeper and longer than it needed to be.

The reason spending your way out of trouble strikes us as foolhardy is that we’re used to thinking as individuals. If I and my family tried that solution, we’d soon get ourselves into even deeper trouble. True. But what’s true for the individual isn’t necessarily true for all of us acting together via the government – which we elected to do things on our behalf and to our benefit.

It shouldn’t really surprise us that governments can get away with doing things you and I can’t. That’s partly because the federal government represents 25 million individuals. It’s also because national governments have powers you and I don’t possess: the power to cover the money they spend by imposing taxes on us, and even the power simply to print the money they spend.

This, of course, is what worries Morrison and his ministers about spending big. When governments spend too much they go into deficit and debt, and then they have to raises taxes to cover the deficit and eventually pay off the debt.

But that’s the wrong way to think about it. The right way is the way Morrison has already said we’ll cope with the debt: we’ll grow our way out of it. The trick, however, is that you don’t get the economy back to growing unless you spend enough to get it growing.

Let’s get back to basics. Economic activity is about getting and spending – producing and consuming. We earn incomes by producing goods or services (or, more likely, by helping our employer produce goods or services), then spend most of that income on the goods and services we need to live our lives.

Recessions occur when, for some reason, we stop spending enough to buy all the goods and services being produced. (In the present case, the reason is that, in order to stop the virus spreading, the government ordered non-essential businesses to close their doors, and you and me to stay in our homes and not go out buying things.)

When people stop spending enough to buy all that businesses are producing, those businesses cut back their production. This often involves sacking workers or putting them on short hours. Obviously, people who lose their jobs cut their spending.

Even people who’ve kept their jobs tighten their belts for fear they’ll be next. Optimism evaporates as everyone gets fearful about the future. Rather than spending, people save as much as they can.

The private sector – businesses and households – contracts. To be crude, it starts disappearing up its own fundament. Until someone breaks this vicious circle, the private sector keeps getting smaller and unemployment keeps rising.

Obviously, what’s needed to reverse the cycle is a huge burst of spending. But there’s only one source that spending can come from: the government. The smaller public sector has to rescue the much bigger private sector and get it going again.

This creates a dilemma for people who’ve convinced themselves that government spending is, at best, a necessary evil to be kept to an absolute minimum because, just as dancing leads to sex, government spending leads to me paying higher taxes.

Turns out that government spending does much good and we shouldn’t be so stingy and resentful about the taxes we pay. (If some government spending is wasteful then eliminating waste is what we should be focusing on.)

In any case, provided you spend enough to get the economy growing again, that growth means rising incomes from which to pay tax. As well, once the economy is growing faster than the debt is, it declines relative to the size of the economy; the problem shrinks. We ended World War II with debt hugely higher than today. How did we get it down? That’s how.

You and I are in a hurry to pay down our debt partly because we’re mortal. We need to get it paid before we retire, let alone before we die. Governments, however, need be in no such hurry because they go on forever.

The other reason you and I are in a hurry to repay, of course, is the interest we must keep paying until we do. The higher the rate of interest, the more hurry we should be in. In evidence to a Senate committee last week, Treasury secretary Dr Steven Kennedy advised that the interest rate the government is paying on the 10-year bonds it’s issuing is 1 per cent – less than inflation. Still worried?

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There's a lot of economic worry about, but here's what matters

If you’re wondering what shape the economy will be in when we come out of lockdown, how the recovery will go – what to worry about and what not to – there are three key issues: the economy and its growth, the budget and its deficit, and unemployment and its consequences.

These three are different but related. The trick is to understand how they’re related. What causes what. The media bombards us with information about them — without pausing to put them into context.

For instance, we hear so much about the budget and its deficit (which adds to the huge amount of debt) that I’m sure some people think the budget is the economy. If only we could get the budget balanced, the economy would be right, right?

No. But you could be forgiven for thinking so because Prime Minister Scott Morrison and his Treasurer, Josh Frydenberg, have been saying things that get the two muddled up. They’ve been saying: terribly sorry about what the lockdown's done to the economy, and all the money we’ve had to spend on JobKeeper and JobSeeker and the rest as a consequence, but at least we’d got the economy back in good shape before, through no fault of ours, we were hit by the virus.

But they’re not talking about the economy, they’re talking about the budget. It was the budget they’d finally got back to balance after six years in office and were set to it get back into surplus this year before the virus upset their plans.

They were saying, at least we’d got the budget back in balance before we had to start spending like mad — about $200 billion so far — and going back into (huge) deficit. Trouble is, they’d got the budget back in shape by causing the economy to grow more slowly than it would have. So the economy was in a weak state before the virus hit – which doesn’t sound like a good thing to me.

Huh? Let’s get back to basics. The budget is just a summary of the federal government’s finances: how much money it brings in from taxes and charges, less how much money it puts out in spending on health, education, pensions and the rest.

When it raises and spends equal amounts, its budget is in balance. When it spends more than it raises, its budget is in deficit and this deficiency has to be covered by borrowing. When it raises more than it spends, its budget is in surplus. It will use the surplus to repay money it’s borrowed in earlier years.

The government and its budget are just part (a reasonably small part) of the economy, which consists of all our businesses and our households (you and me) as well as the government (federal, state and local).

The money the government raises in taxes comes from the rest of the economy, whereas the money it spends goes to the rest of the economy. So when the government reduces its deficit (as it has been until now), this means it’s reducing the net amount it’s putting into the private sector, causing its growth to be weaker than otherwise.

This can be a good thing if the private sector is growing too strongly and threatening to worsen inflation. But if the private sector’s growth is weak, as it has been, this pullback by the government will weaken it further – as it has been.

Until now. The response to the virus, with all the lockdown has done to reduce the turnover of businesses and the income of workers, has hit the private sector for six. But all the extra government spending – which has hugely increased the budget deficit – has done much to break the private sector’s fall. That cushioning will make it easier for businesses and workers to get back on their feet.

But here’s the thing: the government’s big spending (plus, don’t forget, the much less income and other taxes we’ll be paying on our greatly reduced incomes) has blown out the budget deficit and will hugely increase the government’s debt.

So, which is the bigger worry? The big increase in the government’s debt, or the big contraction in the economy? I think it’s obvious. It’s the health of the economy that matters most because that’s where all Australians (even the retired) gain their livelihood.

The budget isn’t an end in itself. It’s an instrument – one of the means to the ultimate end of helping Australians have a good life. In recent weeks, we’ve seen the government doing what all governments do: using its budget to protect our lives and livelihoods.

Sure, that will leave us with a lot more deficit and debt. But first things first. What matters most is the health, economic and social wellbeing of the people who constitute “the economy”.

We’ll worry about the debt later. In any case, as I’ll explain another day, the debt isn’t as worrying as it looks. Hint: the lower interest rates are, the less you need to worry about how much you owe — and the less hurry you need to be in to pay it back.

Next, what’s the relationship between the economy’s growth and unemployment, and which matters more? The economy is usually measured by the value of all the goods and services we produce – gross domestic product – during a period, which is also the nation’s income.

The econocrats are expecting real GDP to fall by an unprecedented 10 per cent in the present quarter, but then start growing quite quickly as businesses get back to normal. If that happens, it will be good because it’s goods and services that people are employed to help produce.

So an early return to growth in the economy is good because it gets employment up and unemployment down – which is what matters most if you think people matter more than money.

But here’s the trick: the economy returns to growth a lot earlier than unemployment returns to where it was.

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Government on the cheap leaves us burningly reliant on charity

As the cast were taking their bows at the end of a show before Christmas, one of them stepped forward to say that, as we left, we’d be approached by people with buckets collecting for the NSW Rural Fire Service. Normally I’d reach for my wallet – I’d done so a few weeks earlier when they were collecting for an actors’ charity – but this time I declined.

Like Victoria’s Country Fire Authority, the RFS is staffed by volunteers. Why did they need donations? Presumably, to help cover the cost of needed equipment or incidental expenses. Really? What’s happened to the state government’s cheque book? And don’t I remember hearing that the RFS had had its funding cut?

No one believes every worthy cause should be funded by the government so that private charity becomes redundant. And it’s true the federal government partially subsidises donations by making them tax-deductible. But where do you draw the line between what the government should cover and what can be left to the generosity – or otherwise – of private citizens?

The more I think about it, the more I realise that, as part of their commitment to Smaller Government and lower taxes, governments have been quietly shifting the dividing line between what the government pays for and what should depend on charity.

All governments have been doing it. State governments, for instance, have long left country (but not city) fire-fighting to volunteers. And have long underfunded the upkeep of public schools, believing parents and citizens can be left to make up the shortfall. But it’s been a particular trick of the federal Coalition government as it struggles to return its budget to surplus when there are expensive, vote-buying tax cuts to be covered.

If you’re wondering why, despite his contrition at having taken an overseas break his spin doctors tried to keep secret, and his freely dispensed “thoughts and prayers”, Scott Morrison remained adamant for so long that all that was needed was already being done to help the firefighters, it’s because he knows that too much generosity on the feds’ part could see his precious budget surplus whittled down to nothingness.

Since its election in 2013, this government has been insistent that the budget should be returned to surplus by cutting government spending, not by explicit increases in taxes (hidden tax increases caused by bracket creep are okay, of course, because the punters don’t notice ’em).

Its first budget in 2014 was a long-term plan to improve the budget by what the bureaucrats call “cost-shifting”. Much of the cost of health and education was to be shifted onto the states’ budgets. Some was to be moved to your household’s budget via the $7 charge for visits to the doctor.

That budget was so badly received most of those plans were reversed. But Finance Minister Mathias Cormann and his accountants have continued to limit the growth in government spending by penny-pinching in ways that voters wouldn’t notice or object to.

They’ve got welfare dependency to “its lowest level in 30 years” not by getting the unemployed into jobs, but by using petty excuses to suspend people’s dole payments. How do these unfortunates live without money to live on? They fall back on their families or go cap-in-hand to the Salvos or Vinnies. Get it? The feds are cost-shifting to charities – the same community groups whose grants they’ve cut back.

According to a recent survey of its members’ staffs by the Australian Council of Social Service, 76 per cent of staff dealing with housing the homeless reported an increase in demand, as did 71 per cent of those providing financial counselling and support (aka money). Respondents to the survey said the unmet demand naturally had adverse impacts on the community. Where people fall through the cracks they can end up in hospitals or the justice system (cost-shifting to the states).

I’ve been reading about how many small country towns are relying on newly formed charities for their supply of water. More broadly, the desire to limit government spending encourages politicians to ignore reports warning of looming troubles and push problems off into the future. Some of the foreseen problems fail to materialise, but many eventually reach crisis point and can no longer be ignored.

The aged care royal commission is revealing the shocking results of one attempt to keep government small by relying on for-profit providers, underspending on the provision of home-care packages and on policing institutions’ adherence to the rules.

Which brings us back to our truly heroic volunteer firefighters. Morrison’s reluctant decision to pay them $300 a day for a maximum of 20 days is the least he can do to acknowledge their loss of income (or annual leave) while serving their communities.

His reluctance – and anxiety to emphasise it’s not a payment of wages – is understandable, however. Behavioural economics is clear that paying people to do what they formerly did without payment can kill the motivation to donate your services for noble reasons. Morrison has stressed that this response to a problem of unprecedented severity shouldn’t be seen as setting a precedent.

Good luck with that. If climate change is making drought, heatwaves and bushfires bigger and more frequent, the horrific events of this summer will become a regular occurrence – meaning the days of leaving bushfire fighting to unpaid volunteers are numbered.

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Don’t bank on budget surpluses this year or in future

This week’s mid-year budget update has changed the fiscal outlook markedly. It’s now a lot clearer that neither in this financial year nor those following is a budget surplus assured.

Whether he knows it or not, by staking so much of his political and economic credibility on getting back to surpluses, Scott Morrison has taken an enormous gamble. When the reality of this “courageous decision, minister” finally gets through to him, I won’t be surprised to see him perform a backflip to go down in history.

Since the election of the Coalition in 2013, there’s been a great debate about the causes of our economy’s continuing sub-par performance. While some economists have argued its roots lie mainly in changes to the structure of the economy (and thus lasting), the econocrats have insisted the causes are cyclical and thus temporary.

So Treasury and the Reserve Bank have gone on, budget update after budget after budget update, predicting that, although the latest indicators show the economy remaining sub-par, it will soon return to the trend growth we were used to before the global financial crisis.

Until now. The mid-year update represents the first stage in the econocrats’ quiet shift from cyclical to structural as the predominant cause of the economy’s weakness. And the first hint it was on its way came in late November, when Reserve Bank deputy governor Dr Guy Debelle pronounced that annual wage rises of between 2 and 3 per cent were “the new normal”.

By far the most significant revisions to the budget forecasts were made to annual growth in the wage price index. With the actual for last financial year coming in at 2.3 per cent rather than 2.5 per cent, the prediction for this year was cut by 0.25 percentage points to 2.5 per cent. The following three years were cut by 0.75 points to 2.5 per cent, by 0.75 points to 2.75, and by 0.5 points to 3 per cent.

This would be the main factor explaining why, after consumer spending grew by just 1.2 per cent over the year to September, the forecasts for consumer spending were cut by 1 percentage point to 1.75 per cent for this financial year, and by 0.5 points to 2.5 per cent for next year.

Despite offsetting changes to other components of gross domestic product, these major downward revisions to wages and consumer spending do most to explain why the forecast for real GDP growth for this financial year was cut by 0.5 percentage points to 2.25 per cent – but nothing to explain why growth the following year was kept unchanged at 2.75 per cent (but see below).

The major cuts to wages and consumer spending forecasts do most to explain why, after just eight months, the government’s been obliged to slash the budget’s estimate of tax collections and other revenue over the budget year and the three “forward estimates” years by a total of – amazingly — $33 billion.

Partly offsetting this, however, are its net cuts in estimated government spending over the four years of $11.5 billion. How is this possible when, in the time since the budget, the government has announced additional spending of $8.2 billion over the period on drought support, aged care and accelerated spending on infrastructure?

It’s possible because the lower predicted growth in wages and inflation will save the budget money on indexed welfare payments and, more particularly, because the fall in long-term interest rates will save it big money on interest payments on the net public debt. An expected gross saving on the spending side of $19.7 billion.

See what a difference less optimistic forecasts for the economy make to the budget?

Slashing revenue estimates by $33 billion, less the net saving on spending of $11.5 billion, means the expected budget surpluses over the four years have been slashed by $21.5 billion, from $45 billion to $23.5 billion. The expected budget surpluses have almost halved in the space of eight months.

This means the expected surplus for this financial year has been cut to $5 billion, or just 0.3 per cent of annual nominal GDP. Do you see how, in a budget worth $500 billion, such a small sum could disappear with just the smallest overestimate of revenue or underestimate of spending?

It’s the same for the revised predictions for surpluses in the following years: $6 billion (0.3 per cent of GDP), $8 billion (0.4 per cent) and $4 billion (0.2 per cent).

As former top econocrat Dr Mike Keating has argued, with no fall in unemployment expected until a modest improvement in 2021-22, the revised forecasts offer no convincing reason why annual wage growth will recover from its present rate of 2.2 per cent to a projected 2.75 per cent in 2021-22 and 3 per cent the year after.

Amazingly, the budget update papers imply this will happen because the budget’s projection methodology requires it to. Same with the return to (pre-crisis) trend GDP growth of 2.75 per cent next financial year. (This is a sign the econocrats have some way to go in fully accepting that structural changes will stop us ever returning to the “old normal”.)

But just as hard to believe as the out-year growth projections is the budget’s assumption that, having so far succeeded in limiting average real growth in government spending to 1.8 per cent a year, the government will now limit it to 1.3 per cent a year over the next four years.

As Keating has noted (and peak welfare group ACOSS’s Dr Peter Davidson before him), this implies real government spending per person will actually be falling.

Unsurprisingly, the Parliamentary Budget Office has warned it’s hard to believe such a degree of restraint could be maintained over such a long time.

Even Morrison’s secret weapon, aka hollow log – the budget’s highly conservative assumption on future world iron ore prices – rests on a gamble that iron ore prices will remain abnormally high. It would be so much less risky just to have some fiscal stimulus.

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Letting things get worse so we're well placed to fix them later

If you've been feeling the pinch of a massive mortgage and minuscule pay rises and resolving to keep your spending tight this Christmas, Scott Morrison has good news. You will be relieved to hear the federal budget is still on track to reach a surplus this financial year and stay in surplus as far as the accountants' eyes can see.

Although many economists have been panicking over the economy's weak state – and the panickers were joined this week by the International Monetary Fund – Morrison is sticking to his resolve to keep his foot on the budget brake rather than move it to the accelerator.

This, his Treasurer Josh Frydenberg assured us in the mid-year budget review, will bring great
economic benefits, providing "the stability and certainty that households and businesses need to
plan for the future, giving them confidence to spend and invest knowing that the government can
keep taxes low and guarantee funding for essential services".

Hasn't worked so far, but it's bound to kick in soon.

Admittedly the economy's growth is weaker than he predicted it would be before the election in
May, so Frydenberg has had to cut the expected surplus this financial year by $2 billion to $5 billion (not all that much in a $500 billion budget) and by $5 billion next year.

This is mainly because the government has been obliged to abandon the confident prediction it has been making throughout its time in office that wage growth would soon return to something much healthier.

The bad news from the update is that Frydenberg is not expecting pay rises to average as much as 3 per cent a year until the second half of 2022 at the earliest.

But if that makes you fear the budget may not stay in surplus for long, Morrison has more good news. Much of the budget's recent strength despite a slowing economy is explained by the huge taxes our mining companies will be paying because a mining disaster in Brazil has pushed the world price of iron ore way up.

The trick is they've built themselves a hollow log. The budget's figuring is based on the assumption that the iron ore price collapses to $US55 a tonne. Should that not happen, Morrison can use the difference to prop up his budget if the panickers are right and the economy stays weak rather than speeding up, as he's sure it will.

On a separate matter, remember the Future Fund, set up in the early years of the resources boom when the Howard government was running budget surpluses so big they were embarrassing? According to Frydenberg's latest figuring, the income from all the shares the fund's money was invested in will account for most of the budget surpluses the government is expecting to run.

Now that's the "responsible fiscal management" we have come to expect of the Coalition. And it must surely comfort you to know that, should the worst come to the worst, the government will be well placed to launch a few life boats. On a user-pays basis, of course.

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Your antidote to Frydenberg’s budget-update talking points

At a time when the Prime Minister is refusing to accept that our weak economy needs a boost rather than a drag from the budget, stand by for loads of look-over-there spin from his unfortunate Treasurer Josh Frydenberg when he unveils the mid-year budget update today.

That was Frydenberg’s way of bluffing his way round the news earlier this month that the economy had grown by a disappointing 1.7 per cent over the year to September. So it wouldn’t be surprising to see some of those talking points get another run today.

He started with the line that, despite a result that laughed at his forecasts made only eight months earlier, the economy remains “remarkably resilient in the face of significant global and domestic economic headwinds”.

That’s a spin doctor’s way of saying “it could have been even worse”. Arithmetically true, but cold comfort. Since Frydenberg is boasting about our strong growth in exports, it’s hard to see much evidence of the global headwinds he claims are holding us back. And the domestic headwinds we’re suffering are home-grown and all too evidently a sign of poor economic management.

But Josh has more: “While other major developed economies like Germany, the United Kingdom, South Korea and Singapore have experienced negative economic growth, the Australian economy is in its 29th consecutive year of economic growth.”

Yes, but at present almost all our growth is coming from high immigration-fed population growth, not rising prosperity. As AMP Capital’s Dr Shane Oliver has noted, our annual growth in gross domestic product per person is just 0.2 per cent, compared with America’s 1.4 per cent, Japan’s 1.6 per cent and even the Eurozone’s 1 per cent.

In the first of his look-over-there arguments, Frydenberg boasts that we’ve maintained our AAA credit rating from three leading US rating agencies. Since these agencies’ lapse in ethical standards contributed significantly to the global financial crisis, this isn’t a recommendation I’d be skiting about. Any government that lets those disreputable characters dictate its budget policy lacks the courage of its convictions.

Next, we’ve seen our current account on the balance of payments “return to surplus for the first time in more than 40 years”. Not sure whether this boast is a sign of our Treasurer’s economic illiteracy, or his assessment of ours. Only the same people who think now’s a good time for the budget to take more out of the economy than it puts back – that is, return to surplus – would be foolish enough to think a current account surplus was a sign of economic strength.

It’s actually a sign that business investment is so unusually weak that our households, companies and governments are saving more than is needed to fund our national investment in new productive assets. Our usual current account deficit would be a much better sign of strong investment in future expansion.

Then we’re told that “welfare dependency is at its lowest level in 30 years”. With the unemployment rate at 5.3 per cent and the under-employment rate at 8.5 per cent, that’s not because they’ve all got jobs, it’s because of the government’s greater use of excuses to cut people off the dole and make them reliant on charity for their survival. Talk about reversion to the mean.

In a breathtaking case of Orwell’s Newspeak, Frydenberg claimed “growth has been broad-based with household consumption, public final demand and net exports all contributing to GDP growth”.

This is the very opposite of the truth. Since growth in consumer spending was a negligible 0.1 per cent during the quarter, the vast private sector of the economy actually went backwards, with what little growth we got coming from the much smaller (and despised) public sector and from net exports.

Growth in the September quarter was weaker than expected because Frydenberg’s repeated assurances that his middle-income tax offset would boost consumer spending failed to happen. Talk about chutzpah. He changed his line to “whether spent or saved, the tax cuts are putting households in a stronger economic position, making them more financially secure with more money in their pockets” without a blush.

Finally, it’s the drought’s fault – and you surely can’t blame the government for that. “Farm GDP is 5.9 per cent lower through the year to the September quarter and falling in four of the past five quarters. Rural exports fell by 2.8 per cent in the quarter,” Frydenberg said.

Arithmetically correct, but calculated to mislead. What he hopes you won’t remember is that, these days, agriculture accounts for only about 2 per cent of GDP, meaning the drought shaved only 0.1 percentage points off growth in the quarter, and 0.2 points over the year.

All this is the balderdash we get when pollies give politics priority over policy.

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Please, no more Pollyanna impressions in the budget update

The mid-year budget update we’ll see next Monday presents the government and its econocrats with a threshold question: can their battered credibility withstand one more set of economic forecasts based on little more than naive optimism?

Or won’t it matter if first the industry experts, and then the Quiet Australians in voterland, get the message that budgets are largely works of fiction - based on political spin, with forecasts crafted to fit - and so are not to be believed?

Last week’s national accounts confirmed five successive quarters of weak growth in the economy and left Reserve Bank governor Dr Philip Lowe’s lovely thought of the economy reaching a “gentle turning-point” looking pretty ragged.

Maybe if you squint you could see a pattern of improvement, with the economy’s weakness concentrated in the last two quarters of 2018 (growth in real GDP of 0.3 per cent and 0.2 per cent), and strength returning in the first three quarters of this year: 0.5 per cent, 0.6 per cent and now 0.4 per cent.

Trouble is, that ain’t economics, it’s numerology: looking at a pattern of numbers without troubling your head with the varying factors that are driving them. Look at what’s driving those numbers and the illusion is dispelled.

Every part of the private sector is weak: consumer spending, home building and business investment, so much so that, as a whole, it’s actually contracting. That consumer spending is weak and getting weaker – despite the tax cut and three cuts in interest rates – is hardly surprising when you remember how weak the growth in wages has been.

It’s a great thing that public sector spending is providing most of what little growth we’re getting while the private sector goes backwards, but it doesn’t count as a sign the economy’s getting back on its feet.

As for the contribution from net exports, it would be more encouraging if it weren’t for the knowledge that a fair bit of it comes from the fall in imports you’d expect to see when domestic demand is “flat to down”.

But for a disillusioning summary statistic, try this: real household disposable income per person – a good measure of average material living standards - has essentially been flat since the end of 2011. So the Quiet Australians have nothing to show for eight years of toil. The rest is a conjuring trick where high population growth is passed off as growing prosperity.

Three quarters into our run of five weak quarters, Scott Morrison fought the election on a claim to have delivered a Strong Economy. The two subsequent sets of national accounts have destroyed that masterpiece of the marketer’s art.

But Morrison’s misrepresentations came bolstered by Treasury forecasts and projections showing the economy would quickly recover from weakness to strength, whereupon it would enter a five-year period of above-trend (3 per cent) annual growth before reverting to trend for the rest of a decade.

This flight of back-of-an-envelope fancy not only appeared to be Treasury’s endorsement of Morrison’s unfounded claims about strong growth, they supported the government’s claim that the budget could easily afford to double the tax cuts announced in the previous year’s budget – taking the cumulative cost to revenue to $300 billion over a decade – and still achieve healthy annual surpluses, eliminating the government’s net public debt by June 2030.

Just eight months later, these fearless forecasts aren’t looking too flash. They had the economy returning to trend growth of 2.75 per cent this financial year and inflation returning to 2.5 per cent by June 2021.

Most wonderful of all, they had annual wage growth accelerating to 2.5 per cent by June (actual: 2.3 per cent, falling to 2.2 per cent following quarter), to 2.75 per cent by June next year, then to 3.25 per cent by June 2021 and 3.5 per cent by June 2022 and in all subsequent years.

Wages are such a central driver of the economy, this triumph of hope over experience was essential to any forecast recovery in consumer spending and economic growth, not to mention any return to (bracket-creep-fuelled) budget surpluses despite tax cuts.

See the problem Treasurer Josh Frydenberg and his troops face in preparing next Monday’s mid-year budget update? Do they keep playing the budgetary version of the with-one-bound-our-hero-broke-free game and leave themselves open to growing derision, or do they stop pretending, offer plausible forecasts and adopt a more defensible projection methodology, and start on the long road back to being respected and authoritative?

But if the days of Treasury being game to give the boss (Morrison) forecasts he won’t like are long gone, that raises a courage question for the Reserve heavies: when will they stop ensuring their forecasts tick-tack with Treasury’s and start telling us what they really think?

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