Budget is blokey because Morrison's 'core values' make it so

I'm sorry to have to agree, but Grattan Institute boss Danielle Wood is right to say this is a "blokey" budget. As are those who add it's a blokey budget from a blokey government.

Scott Morrison is offended by the charge, but the trouble is, the blokier you are, the harder it is to see what's blokey and what's not. Women see it sticking out, but blokes often can't.

The simple truth is that, over the centuries, what economists call the "institutional arrangements" that make up the economy have been designed by men, for the convenience of men. This was fine when the great majority of the paid (note that word) work was done by men, but not so fine now women are better educated than men and make up 47 per cent of the paid workforce.

It's because the blokiness of the way we've always managed the economy is so deeply ingrained in the way we've always thought about the economy that so many men can't see it. Outsiders can; insiders can't. To steal a phrase from the feminists of my youth, it's now the men who need the "consciousness raising".

(Of course, it's nothing new that people can see their own point of view – and their own vested interest – far better than they can see other people's.)

The first place a bias in favour of men is hidden is the division we make between the production of "goods" (by the agriculture, mining, manufacturing, utilities and construction industries) and the production of "services" by every other industry.

Kevin Rudd's declaration that he didn't want to be prime minister of a country that didn't "make things", and Morrison's similar noises recently, are manifestations of the truth that, in general, jobs in the goods sector are held in higher esteem than those that involve performing services.

Would it surprise you to learn that 79 per cent of the jobs in the goods sector are held by men whereas, in the almost four-times bigger services sector, 54 per cent of the jobs are held by women?

Would it surprise you that jobs held by men tend to be more senior and higher-paid than jobs held by women? Even within the services sector – which, of course, includes a lot of highly paid occupations, such as prime ministers and premiers, managers, doctors, dentists and lawyers.

Over the past 50 years, almost all the net growth in jobs has been in the service industries. This is because the production of goods has become increasingly "capital-intensive" (more of the work is done by machines), whereas the services sector is, by its nature, labour-intensive.

It's no accident that most of these extra service sector jobs have been filled by women, returning to the workforce or never really leaving it. Much of this growth has been in what the National Foundation for Australian Women's latest Gender Lens on the Budget report calls the "caring professions" – nursing, childcare, aged care and disabled care.

Would it surprise you that caring jobs are done mainly by women and tend to be low-status and low-paid? Surely it's obvious that being in charge of an expensive machine is a far more responsible role than being in charge of children, the elderly, the sick or disabled?

Although the coronacession is unusual in having its greatest effect on service industries, the budget sticks to the standard script of directing most stimulus to the goods sector: construction, energy, manufacturing and road and rail projects.

The concession to encourage more business investment in equipment favours capital-intensive goods industries over service industries. The tax cuts will go more to men than to women, especially after the middle-income tax offset is withdrawn next financial year.

But there's where the budget aims its stimulus and where it doesn't. No economic modelling should be taken as gospel truth, but modelling by Matt Grudnoff, of the Australia Institute, finds that bringing forward stage two of the government's tax plan will create only between 13,400 and 23,300 jobs – depending on how much of the cut is saved or is spent on imports.

By contrast, Grudnoff estimates that splitting the same $13 billion evenly between service industries – universities, childcare, healthcare, aged care and the creative arts – would create almost 162,000 jobs.

Modelling commissioned by the women's foundation from Dr Janine Dixon, of Victoria University, has found that redirecting government spending from infrastructure to the provision of greater care for children, the aged or the disabled would yield significantly greater benefit to the economy and jobs.

So why did Morrison and his Treasurer choose not to spend more on services sector jobs? Because this didn't fit with the "core values" that guided their choice of stimulus measures: "lower taxes and containing the size of government".

Although these days most of the heavily female-performed childcare, healthcare, aged care and disabled care has been contracted out to the community and private sectors, its cost is heavily subsidised by the taxpayer.

I bet it's never crossed Morrison's mind that his commitment to Smaller Government is biased against women and the further growth of female employment.

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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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Budget is big on political correctness but weak on job creation

The more I study the budget, the less impressed I am. It spends a mint of money – which it should - but Scott Morrison and Josh Frydenberg have chosen its measures based on how well they fit the government’s "core values", not on whether they’re likely to deliver "bang for buck" – maximum jobs per dollar forgone.

The funny thing is, if you read the budget papers carefully, they admit that its measures were run through the filter of Liberal Party political correctness, while also providing enough information to allow us to calculate that its most expensive measures are expected to create surprisingly few jobs.

The budget papers say the government’s fiscal (budgetary) 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".

Over the years, macro economists have given much thought to how well particular types of budget measures stimulate the economy and create jobs. They identify three broad categories of measures.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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Budget’s easy future: no more surpluses, lots more tax cuts

Last week’s budget quietly brought about a historic shift in the fiscal policy “framework”: we moved from the Treasury puritanical view of what constitutes responsible budgeting, to the more licentious Republican view.

Until now, the Liberals have been committed to ending “debt and deficit”, but now they’ve decided they can live with both. The coronacession has left them with little choice, but there’s more to it.

America’s Republicans adhere to two fiscal principles: first, budget deficits are terrible things - but only because those appalling, big-spending Democrats are in charge. Second, once the Republicans are back in power, deficits are of less concern and no barrier to us granting our supporters big tax cuts.

Treasuries – including state treasuries – have a lot of firmly held views about what constitutes good public policy, but what they care about most – their sacred duty – is to keep the budget in balance.

Every time a recession pushes the budget into deficit, they fight untiringly until the economy’s recovery and much “fiscal consolidation” has returned the budget to balance. Their rationale for this obsession is that if they don’t care about balancing the budget, who will? The vote-buying politicians?

Early in the term of the Howard government, when the budget had still not fully recovered from the recession of the early 1990s, Treasury persuaded the Libs to enshrine this objective as their “medium-term fiscal strategy” - to “maintain budget balance, on average, over the course of the economic cycle”.

Successive Labor and Liberal governments have adopted that strategy with minor alteration.

After the Rudd government’s use of fiscal stimulus to avoid the Great Recession in 2009, it added a “deficit exit strategy” which committed it to “banking” any recovery in tax receipts and avoiding any policy changes (that is, tax cuts), as well as limiting real growth in government spending to an average of 2 per cent a year (a commitment Labor only pretended to keep).

In Tony Abbott’s first budget, the Libs’ “budget repair strategy” committed them to more than offset new spending measures by reductions in spending elsewhere, and to bank any improvement in the budget bottom line until a surplus of at least 1 per cent of gross domestic product had been achieved.

In Malcolm Turnbull’s first budget in 2016, however, he broke the commitment by deciding to cut the rate of company tax while the budget was still well short of surplus.

With that commitment out the window, it was easy in last year’s pre-election budget for Scott Morrison to promise a three-stage tax cut, spread from July 2018 to July 2024 and costing $300 billion over 10 years, purely on the strength of projections showing that tax collections would otherwise exceed the government’s ceiling of 23.9 per cent of GDP and keep soaring to 25.6 per cent by 2029-30. Immediately after its miraculous re-election, it rushed the plan into law.

It was always folly for any government committed to eliminating its debt to enact tax cuts five years into an uncertain future. The projections were overly optimistic at the time, but then the coronacession blew them away.

Tax collections are now expected to be only 21.8 per cent of GDP this financial year, and are projected only to have recovered to 22.9 per cent by 2030-31 – still way below the ceiling formerly said to justify a round of tax cuts.

Any government still committed to getting the budget back to surplus as soon as reasonably possible would have cancelled the legislated tax cuts – which now would be funded by borrowing – when further targeted-and-temporary government spending would be far more effective in creating jobs. Rate-scale tax cuts (as opposed to the one-year extension of the middle-income tax offset) are a continuing drag on the budget balance.

But no, rather than cut his coat according to his cloth, Scott Morrison has doubled down, bringing the second-stage tax cuts forward two years under the pretence it will do wonders for “jobs and growth”. The budget is projected still to be in a deficit of 1.6 per cent of GDP in 10 years’ time.

To make it all legit, however, the commitment to achieve budget surpluses on average has been junked and replaced with a new medium-term fiscal strategy merely to “focus on growing the economy in order to stabilise and reduce debt”, which will thereby “provide flexibility to respond to changing economic conditions”.

As the budget papers explain, and Josh Frydenberg has said, “with historically low interest rates, it is not necessary to run budget surpluses to stabilise and reduce debt as a share of GDP – provided the economy is growing steadily”.

Which is true. And the new, weaker medium-term strategy also provides the flexibility for governments to act like the Republicans and give a tax cut in response to changing political conditions. Happy days.

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The Liberal Keynes moves back into Treasury

For a man who, just months ago, was too prudish to say that dirty word “stimulus”, there’s now no doubt Treasurer Josh Frydenberg has become a card-carrying Keynesian. This week’s budget administers a huge Keynesian boost to our recessed economy. But he’s done it in a very Liberal way.

And, although the budget papers prefer to say “support” rather than “stimulus”, the man himself is always tossing off Keynesian jargon such as “aggregate demand” and burbling about the budget’s “automatic stabilisers”.

(John Maynard Keynes, BTW, was an avowed supporter of the British Liberal Party – although it was a different animal to our party of that name.)

According to the budget papers, the budget announced a further $73 billion in stimulus (plus $25 billion in virus-related health measures) over the next four years, on top of earlier spending of $159 billion.

Another way of judging the budget’s effect on aggregate (total) demand in the economy is to say the government expects the underlying cash deficit to increase from $85 billion last financial year to $213 billion this year.

This increase of $128 billion is equivalent to more than 6 per cent of gross domestic product. Unlike a strict Keynesian analysis, however, this takes the stimulus’ addition to the “structural component” of the budget balance, arising from the government’s explicit decisions to increase government spending or cut taxes, and combines it with the addition to the “cyclical component” made by the operation of the budget’s automatic stabilisers.

As the budget papers explain, “automatic stabilisers are features of the tax and transfer system that dampen the size of economic cycles without the need for explicit actions by policymakers. The government has allowed the automatic stabilisers to operate freely to dampen the effect of the COVID-19 shock.

“In a downturn, household and business after-tax income falls by less than before-tax income (for instance, due to progressivity in the tax system and [provisions for companies to deduct their losses from future - and now past – profits for tax purposes]) and transfer payments increase (due to increases in unemployment benefit payments and income-testing of other transfer payments).

“This provides an economic stimulus [whoops] that can reduce the magnitude of the downturn,” the papers say.

But Frydenberg wants to be clear that he’s embraced Keynesianism on his own terms. The budget papers say the economic recovery plan “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”.

And, as Frydenberg has said many times, the goal is to use budgetary stimulus to bring about a “business-led recovery”. I’d have thought that spending a lot of public money makes it a government-led recovery, but I think what he means is that most of the public money should be given to businesses, rather than being spent directly or given to punters.

Once you realise this, Frydenberg’s choices of what measures to include in the budget are easier to understand.

For instance, by far the most expensive measure – costing $27 billion over four years – is a temporary concession allowing businesses to deduct the full cost of all the new equipment they buy in the first year, rather than apportion the cost over the life of the asset.

Next are the personal income-tax cuts, costing $18 billion over the budget year and the three years of the “forward estimates”.

Then there’s infrastructure grants to the states of $7 billion, plus $2 billion for road safety improvements and upgrades. Then the $5 billion cost of letting loss-making businesses get an immediate tax deduction for their loss.

Only now do we get to the budget’s other centrepiece beside the tax cuts, the JobMaker hiring credit (wage subsidy) for employers who hire jobless young people under 35, which is the government’s replacement for the $101 billion JobKeeper wage subsidy scheme when it finishes in March. The new scheme will cost just $4 billion over three years.

Then we come to the cash splash payments to pensioners ($2.6 billion), $2 billion in new spending on aged care and $2 billion on a research and development tax incentive.

You see from this incomplete list how many of the budget’s measures seek to direct money into the hands of businesses: $34 billion in tax breaks and $4 billion in wage subsidies, compared with $20 billion in personal tax cuts and the pensioner cash splash.

Most of these measures are intended to get businesses investing and employing, but they do so by cutting the cost to them of capital equipment or labour. Those who would have invested and employed anyway are left better off, without taxpayers getting any value.

(And remember that one reason the government was happy to pay what it thought would be $130 billion for the JobKeeper scheme was that the money went to workers via their employer. This left businesses better off to the extent that their workers kept working.)

You do have to wonder whether all this spending would have done more to get the economy moving and unemployment falling if more of it had gone on job subsidies and less on investment incentives. Trying to get businesses investing in expanding their production rather than trying to get more people in jobs and spending on the things businesses produce seems to get things the wrong way round.

And you see that this “Liberal values” business-directed, tax-reducing approach to fiscal stimulus explains why the budget didn’t include the two measures economists most wanted to see because they’d do most to boost consumer spending and jobs: a big spend on social housing (a no-no under the rules of Smaller Government) and a permanent increase in unemployment benefits (almost every cent of which would have been spent).

The risk with Frydenberg’s politically correct stimulus is that too much of it will be saved. He needs to bone up on Keynes’ warning about the “paradox of thrift”.

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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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The greenie good guys are wrong to oppose economic growth

Only a few sleeps to go before our annual Festival of Growth – otherwise known as the unveiling of this year’s federal budget. People will want to know whether Treasurer Josh Frydenberg has done enough to “stimulate” growth. And whether the government’s forecasts for growth are credible. But not everyone will be on the growth bandwagon.

A lot of people who worry about the natural environment will be dubious and disapproving. “Don’t these fools know that unending growth is physically impossible?” “What kind of wasteland is all this growth in the production of stuff turning the planet into?”.

I’ll be banging on next week about the need for growth, but I know I’ll be getting emails from reproving readers. “I thought you were one of the good guys. I thought you cared about the environment and had doubts about all the growth boosterism.”

Sorry, I do care about the environment and I do have doubts about the popular obsession with eternal growth. But I will still be marking the government down if it hasn’t done enough to foster growth over the next year or three.

The anti-growth lobby is half right and half wrong. They know a lot about science and they think this means they know all they need to know about economics. What they don’t know is the growth that scientists know about isn’t the same animal as the growth economists measure and business people and politicians care so much about.

And I have a challenge for the anti-growth brigade: don’t you care about the big jump in unemployment?

Let’s start with the immediate crisis. The pandemic and our attempts to suppress it have led to a fall of 7 per cent in the size of the economy in the June quarter – as measured by the quantity of Australia’s production of goods and services (real gross domestic product).

This massive contraction in production has involved a fall of more than 400,000 in the number of jobs, almost a million people unemployed and a jump in the rate of underemployment from 9 per cent to 12 per cent. Most of the people affected are young and female.

If you’re tempted to think that this fall in our production and consumption of “stuff” is a good thing and there ought to be more of it, what’s your plan for helping all those people who’ve lost their livelihood? Put ’em on the dole and forget ’em?

The standard plan for helping them get their livelihood back (or find their first proper job after leaving education) is to get production back up and keep it growing fast enough to provide jobs for those in our growing population who want to work.

Until we’ve instituted a better way of securing the livelihoods of our populous, that’s the solution I’ll be pushing for. And the growth we end up with won’t do nearly as much damage to the natural environment as the growth opponents imagine.

That’s because what our business people, economists and politicians are seeking is growth in real GDP, and growth in GDP doesn’t necessarily involve growth in our use (and abuse) of renewable and non-renewable natural resources. Indeed, as each year passes, GDP grows faster than growth in our use of natural resources.

What many environmentalists don’t understand is that increased digging up of minerals and energy, and increased damage to tree cover, soil, rivers and biodiversity as a result of farming and other human activity accounts for only a small part of the growth of GDP.

It’s wrong to imagine that growth in GDP simply involves growth in the production of “stuff” – things you can touch. What economists call “goods”. No, these days (and for decades past) most – though not all - of the growth in GDP has come from the growth in “services”.

That is, people - from the Prime Minister down to doctors, teachers, journalists, truck drivers and cleaners - who run around doing things for other people. Some of this running around involves the use and abuse of natural resources – including the burning of fossil fuels – but mostly it involves using a resource that’s economic but not environmental: the time of humans. And, of itself, human time doesn’t damage the environment.

The production of goods – by the agricultural, mining, manufacturing and construction industries – accounts for just 23 per cent of GDP, leaving the production of services accounting for the remaining 77 per cent.

Next, remember that a significant proportion of the growth in GDP over the years has come not from the application of more raw materials, land, capital equipment and labour, but from greater efficiency in the way a given quantity of those resources is combined to produce an increased quantity goods and services.

Economists call this improved “productivity” (output per unit of input). And it’s the main source of our higher material standard of living over recent centuries, not our use of ever-more natural resources per person.

In my experience, many people with a scientific background simply can’t get their head around the concept of productivity – which helps explain why many economists dismiss the anti-growth brigade as nutters. They can’t take seriously people who appear to think increased efficiency must be stopped.

A final point is that growth in population adds to environmental damage – although this is a moot point when most of the growth in a particular country’s population comes merely from immigration.

Now, let’s be clear: none of this is to dismiss concerns about the immense damage we’re doing to the natural environment, nor to imply that the global environment could cope with the world’s poor becoming as rich as we are.

No, the point is that concern should be directed to the right target: not economic growth in general, but those aspects of economic growth that do the environmental damage: world population growth, use of fossil fuels, indiscriminate land clearing, irrigation, over-fishing, use of damaging fertilisers and insecticides, and so on.

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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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