Monday, July 5, 2021

Our aspirations for a Big Australia need a big trim

Almost all the nation’s business people, economists and politicians believe too much population growth is never enough. But if there’s one thing I hope to be remembered for, it’s that I always subjected this case of group think to critical examination.

I remain to be convinced that a Big Australia would be better either for our material living standards or for our efforts to limit the damage our economic activity is doing to our natural environment – the erosion of the nation’s “natural capital”.

But, in any case, Treasurer Josh Frydenberg’s intergenerational report last week is a useful warning that our aspirations for a Big Australia need a big trim.

The pandemic is an immediate setback to such ambitions, but beyond that is the likelihood that most countries’ population growth is slowing and, in many countries, will eventually begin falling.

One big message from the report is that population growth over the next 40 years is projected to be much slower than earlier thought, with its size now expected to reach 40 million in the first half of the 2060s, about eight years later than the 2015 report projected.

This is explained by the pandemic, which is expected to cause a temporary fall in the birth rate and four years of below-average net overseas migration (foreigners arriving minus locals leaving). Annual net migration is expected actually to fall in the financial year just ended and in the new financial year, then take two years to return to 235,000 in 2024-25, at which level it then stays every year through to 2060-61.

That is, no catch-up is expected for the growth lost because of the pandemic. The assumed annual net intake of 235,000 is based on unchanged existing federal government policy on permanent and temporary migration levels.

The report’s “sensitivity analysis” shows that, were net migration projected to grow in line with the growing population (at a rate of 0.82 per cent a year) rather than stay at a flat 235,000 a year, real gross domestic product per person would be only a fraction higher in 2060-61, the labour force would be 1 million bigger and the old-age dependency ratio would be 2.8 workers per oldie rather than 2.7.

But you have to doubt whether future governments will remain free to just dial up their preferred level of annual immigration the way they have been over the past 40 years.

If there’s one demographic lesson we should have learnt by now, it’s that as families become more prosperous over the generations, they choose to have fewer children. This has become possible because of effective contraception.

Add growing longevity and you see why a declining fertility rate (expected number of births per woman), not just the retirement of the Baby Boomer bulge, has left all the developed economies with an ageing population. And, thanks to its one-child policy, the world’s most populous economy, China, also has a (rapidly) ageing population.

Like all the other rich countries, our fertility rate has long been below the population replacement rate of 2.1 babies per woman. Unlike most of the others, however, we’ve kept our population growing strongly by ever-increasing immigration.

To date we’ve had no trouble attracting all the skilled (and unskilled) workers we need, mainly from poor countries. We’ve even been able to make a lot of them pay full freight for their Australian-quality education before we scooped them up.

But with population ageing and old-age dependency ratios becoming more acute around the rich world, global competition to attract skilled workers from developing countries may become more intense.

On the other side of the equation, the supply side, as the poor countries become more developed, their living standards rise and their fertility rates fall, there may be fewer skilled workers willing to emigrate to the rich countries.

Population growth is already slowing in most developed and developing countries. It’s already falling in Japan and some European countries. It will start falling in China this decade. Our population growth is also likely to slow, and the day may come when – horror of horrors – it starts to fall.

Slower growth in the population means slower growth in the size of the economy, of course. But I can’t see why this should be a worry.

It’s notable that, though the intergenerational report projects a consequent slowing in economic growth over the next 40 years, it expects this to have little effect on economic growth per person and thus on living standards.

Whereas real GDP growth is projected to slow from 3 per cent a year over the past 40 years to 2.6 per cent over the coming 40, annual growth in real GDP per person is projected to slow only marginally from 1.6 per cent to 1.5 per cent.

Even that small slowing seems to be explained not by lower population growth, but by a similar fall in the assumed rate of average annual productivity improvement.

Taken at face value, this is an admission by the report’s authors that faster population growth makes little or no contribution to the improvement of our material living standards. The immigrants may gain by moving to Australia, but the rest of us don’t gain from their coming.

However, the report’s fine print (aka its technical appendix) advises that its projections “do not capture the broader economic, social or environmental effects of migration, such as technology spillovers or congestion”.

But if those effects were thought to be significant, you’d expect the authors to have made the effort to model them. And, of course, the effects are likely to be both beneficial and detrimental.

Looking at the economic effects, the advocates of high immigration always point to the benefit of greater economies of scale, while brushing aside the costs of the increased housing, capital equipment and public infrastructure that a bigger population and workforce must be provided with to ensure the productivity of its labour doesn’t fall.

Indeed, it’s possible our high rate of population growth is a factor contributing to our weak rate of productivity improvement.

Similarly, it’s inconsistent for advocates of high immigration also to be advocates of Smaller Government. When you’re causing congestion by failing to spend enough on the extra public infrastructure needed, including more schools and hospitals – perhaps because you’re trying to please discredited American credit-rating agencies – you shouldn’t be surprised if economic growth is weaker.

The need for governments to spend more on a bigger population is complicated and compounded by the division of responsibilities between federal and state governments. The budgetary costs and benefits of immigration are not spread evenly between federal and state governments.

The feds pick up most of the tax that immigrants pay, while the states pick up most of the cost of the extra infrastructure and services needing to be provided (especially since immigrants are denied access to many federal benefits for the first four years).

This reveals a major distortion in the intergenerational report’s continual claim that higher immigration does wonders to improve the budget. The federal budget, yes. But state budgets, probably the reverse.

Finally, there are the environmental consequences of a bigger population that both the intergenerational report and most business people, economists and politicians refuse to come to grips with.

Jenny Goldie, president of Sustainable Population Australia, reminds us that the intergenerational report “fails to take into account the environmental costs of urban encroachment on natural bushland, threatening iconic species such as the koala [and biodiversity more generally], and adding to carbon emissions.

“It fails to address the social costs of crowding, housing unaffordability and longer waiting times that generally accompany population growth,” she concludes.

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Friday, July 2, 2021

Business lobbies use the productivity slump for rent-seeking

It’s encouraging to see the scepticism with which this week’s intergenerational report from Treasurer Josh Frydenberg has been greeted. Any attempt to peer 40 years into the economy’s future will prove close to the mark only by happy accident.

But it’s discouraging to see the way the usual suspects have seized on the report’s most glaring weakness to do no more than push their vested interests in the name of “reform”.

This fifth version of the five-yearly intergenerational report allows us to see how far astray the report’s earlier projections have been, even though we’re only halfway towards the first report’s picture of the economy in 2041.

In their projections of growth in the population, its authors have repeatedly overestimated the fertility rate (expected number of births per woman) and underestimated the growth in net overseas migration (foreigners arriving minus locals leaving).

They predicted that the retirement of the Baby Boomers would see a fall in the rate at which people of working age participate in the labour force, but this “participation rate” has recently been at record highs.

It would be nice to think that, since the object of all these projections has been to alert us to looming pressures on the budget – caused, in particular, by the ageing of the population – governments have responded accordingly, thus making the reports’ prophecies self-defeating. Nice, but not likely.

The pandemic, and the expected four years of weak net overseas migration in particular, is rightly blamed for our population “growing slower and ageing faster” than previously expected. And slower growth in the size of the population means slower growth in the size of the economy.

We’re told that, whereas real GDP grew at the average rate of 3 per cent a year over the past 40 years, it’s now projected to slow to an average rate of 2.6 per cent over the coming 40.

But the justification for our obsession with economic growth is our desire for faster improvement in our material standard of living. And here’s a point Frydenberg hasn’t highlighted: according to the report’s calculations, the projected marked slowing in the economy’s overall rate of growth is expected to affect growth in GDP per person – a crude measure of living standards - only a little.

GDP per person’s average annual growth is projected to fall only from 1.6 per cent over the past 40 years to 1.5 per cent over the coming 40.

It’s here, however, that business and its media cheer squad have read the fine print and are deeply sceptical: that projection of GDP growth per person rests heavily on the mere assumption that the productivity of labour (output of goods and services per hour worked) will improve at the same average annual rate in the coming 40 years as it did over the past 30 years.

And they’re right. Of all the many assumptions on which the report’s mechanical projections depend, this assumption is far the most critical. As Frydenberg rightly says, improving productivity is what explains almost all the improvement in our standard of living over the decades.

And the sceptics are right to doubt that productivity will improve over the next 40 years at anything like the rate of 1.5 per cent a year. For a start, that 30-year average includes the 1990s, a decade when productivity improved at a rate far higher than experienced before or since.

For another thing, productivity improvement in recent years has been much weaker than usual.

So, purely by omission, the latest intergenerational report reminds us of the second biggest threat to our living standards: a continuing slump in productivity. (The biggest threat is the world’s inadequate response to climate change – another thing the report omits to take into account.)

What’s discouraging, however, is the way the business lobby groups have used this inadvertent reminder to bang the same old self-serving drum. The productivity slump has been caused by this government and its predecessors’ failure to continue the economic reform program begun by Hawke, Keating and Howard, we’re assured.

And what reforms do they have in mind? A cut in the rate of company tax for big business and changes in the wage-fixing rules to make the labour market more flexible for employers.

This lobbying is objectionable on three grounds. First, it implies that productivity improvement depends on an unending stream of changes in government policies, which is absurd. The day “reform” stops, productivity stops.

Second, it shifts the blame for weak productivity improvement from the actions of the private sector – in whose farms, mines, factories, offices and shops productivity either gets better or worse – to the politicians in Canberra.

Third, it seeks to disguise blatant rent-seeking as economic “reform”. Productivity would improve if business owners and high income-earners paid less tax, leaving the punters to pay more, and if the balance of bargaining power between bosses and workers shifted further in favour of bosses.

What this self-serving bulldust ignores is that productivity improvement has slumped in all the rich countries, not just in Australia because our pollies are so defective.

Michael Brennan, chair of the Productivity Commission, says the world’s economists are still debating the causes of the productivity slowdown.

They’ve pointed to “mismeasurement issues, a shift towards lower productivity industries, population ageing, a slowdown in the pace of technological discovery, a slowdown in the pace of technological diffusion, a plateauing of improvements in human capital, reduced rates of firm entry and exit, increased concentration and market power, lower capital investment, a shift to intangible capital and the slowing growth in global trade”.

As Melinda Cilento of CEDA, the Committee for Economic Development of Australia, has noted, “research by federal Treasury . . . showed leading Australian firms were not keeping up with leading global firms on productivity”.

Treasury would be much better employed continuing to research the causes of our productivity slump than doing literally unbelievable projections of what’s unlikely to happen over the next 40 years.

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Wednesday, June 30, 2021

Sorry, I'm too old to believe an ageing population is a terrible thing

If ever there was an exercise that, since its inception, has overpromised and under-delivered, it’s the alleged Intergenerational Report. A report on relations between the generations, on the legacy the present generation is leaving for the coming generation?

No, not really. If it was, it would be mainly about the need for us and the other rich countries to be acting a lot more seriously and urgently to limit climate change. The document Treasurer Josh Frydenberg unveiled on Monday is our fifth five-yearly Intergenerational Report.

Initially, the report made no mention of climate change. These days, following the obvious criticism, it always includes a brief chapter on the topic, before moving on to matters considered more pertinent.

This year the chapter runs to nine of the report’s almost 200 pages, in which the seriousness of the problem is acknowledged, along with the assurance “but don’t worry, I’m on it”. On every admitted dimension of the issue, we’re assured that reports have been commissioned, committees established and the government is spending $100 million on this and $67 million on that.

Another issue of relevance to relations between the generations is the ever-declining rate of home ownership as the price of houses rises ever higher. Can the aggrandisement of one generation at the expense of following generations continue? And are we content to witness the trashing of the Great Australian Dream? I found no discussion of this.

The sad truth is the Intergenerational Report is a creation of the Charter of Budget Honesty Act so, despite its grandiose name, it’s really only interested in the future state of the federal budget and in attempting to predict the size of the budget balance in 40 years’ time.

According to Frydenberg, the latest report delivers “three key insights”. First, our population is growing slower and ageing faster than expected. Second, the economy’s growth will be slower than previously thought. Third, while the federal government’s debt is sustainable and low by international standards, the ageing of our population will put significant pressures on both government revenue and its spending.

Get it? The real concern of this report – and its four predecessors – is what the ageing of the population looks likely to do to the federal budget over the next four decades. It thus echoes a longstanding concern of all the rich countries that the retirement of the Baby Boomers will put huge pressure on their budgets.

When you read the document minus the spin successive treasurers always put on it, this year’s version tells us what all five reports have told us: compared with the Europeans and Americans, we don’t have much of a problem.

The report’s big news is that our decision to close our borders as part of our response to the pandemic means our annual level of net immigration – foreigners arriving minus locals leaving – isn’t expected to return to normal until 2024-25.

According to Frydenberg, this is the first report “where the size of the population has been revised down”. But this is misleading. It doesn’t mean our population will fall, only that it won’t keep growing as fast as it has been and was expected to continue doing.

We’re now expected to have four years of below-normal net immigration, with no subsequent catch up. So whereas the previous report projected that the population would reach almost 40 million by 2055, it’s now expected to be no more than 39 million in 2061.

Since almost all the nation’s business people, economists and politicians believe too much population growth is never enough, this news will worry them. It doesn’t worry me. And I suspect most Australians will regard it as good news, not bad.

Frydenberg argues it’s bad because, since immigrants tend to be younger than the average Aussie, it will cause the population to age faster than was expected. This is arithmetically correct, but Frydenberg has given us an exaggerated impression of its extent.

He tells us that, in 1982, there were 6.6 people of traditional working age for every person over 65. Today, the ratio is down to 4.1, and by 2061 it will have fallen to 2.7. Wow. And what did the previous report tell us it would be down to by 2055? 2.7. Oh, no significant change.

Even so, isn’t that a worry? Not when you remember what economics teaches: that the economy adjusts in response to changing circumstances.

As Jenny Goldie, president of Sustainable Population Australia, has explained to the Treasurer, “as the working-age population shrinks and the labour market tightens, fewer people will be unemployed, and employers will improve wages and salaries to attract job seekers.

“This will have the effect of drawing more people into the workforce who were not working, or keeping people who would otherwise have retired.” Employers will no longer be able to afford their prejudice against hiring older workers.

If your instincts tell you not to believe those trying to convince you that people now living longer than they used to is a real worry, your instincts are right.

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Monday, June 14, 2021

Slowly, economists are revealing the weaknesses in their theories

Economics is changing. It’s relying less on theorising about how the economy works, and more on testing to see whether there’s hard empirical (observable) evidence to support those theories.

Advances in digitisation and the information revolution have made much more statistical information about aspects of economic activity available, and made it easier to analyse these new “data sets” using improved statistical tests of, for instance, whether the correlation between A and B is causal – whether A is causing B, or B is causing A, or whether they’re both being caused by C.

But another development in recent decades is economists losing their reluctance to test the validity of their theories by performing experiments. Let me tell you about two new examples of empirical research by Australian academic economists, one involving data analysis and the other a laboratory experiment.

We see a lot of calls for reform that take the form: change taxes or labour laws in a way that just happens to benefit me directly, and this will make “jobs and growth” so much better for everyone.

These reformers always convey the impression that the changes they want are backed by long established, self-evident economic principles. And they can usually find professional economists willing to say “yes, that’s right”.

But what gets me is that, when the self-declared reformers get their “reform”, it’s rare for anyone to bother going back to check whether it really did do wonders for jobs and growth. Wouldn’t there be something to learn if it was a great success, or if it wasn’t?

Do you remember back in 2017, when employers were campaigning for a reduction in weekend penalty rates? The retailers and the hospitality industry told the Fair Work Commission that making them pay much higher wage rates on Saturday and Sunday was discouraging some businesses from opening on weekends, to the detriment of the public’s convenience.

If only penalty rates were lower, more businesses would open on weekends, or stay open for longer, meaning consumers would spend more, and more workers would be employed for more hours, leaving everyone better off.

The employers got strong support from the Productivity Commission and some economist expert witnesses. So the commission decided to reduce the Sunday and public holiday penalty rates in the relevant awards by 25 to 50 percentage points, phased in over three years.

Associate Professor Martin O’Brien, of the University of Wollongong’s Sydney Business School, commissioned a longitudinal survey (looking at the same people over time) of about 1830 employees and about 240 owner-managers or employers, dividing the workers between those on awards and a control group of those on enterprise agreements (and so not directly affected).

The economists’ standard, “neo-classical” model of the way demand and supply interact to determine the market price, with movements in the price feeding back to influence the quantity that buyers demand and the quantity sellers want to supply, does predict that a fall in the price of Sunday labour will lead employers to demand more of it.

So what did the survey find? It could find no effect on employment in the retail and hospitality sectors. This is consistent with a growing body of mainly American empirical evidence that, contrary to neo-classical theory, increases in minimum wages have little effect on employment.

But here’s an interesting twist: a majority of employers reported not making the reduction in penalty rates and a majority of employees reported not receiving any reduction.

One explanation for this is that employers didn’t pass on the cuts because they valued staff loyalty and commitment. If so, this fits with the judgment of many labour economists that the relationship between a firm and its workers is far more nuanced than can be captured by the neo-classical assumption that price is the only motivator.

An alternative explanation, however, is that those employers didn’t cut the Sunday penalty rate because they weren’t paying it in the first place.

Turning to the laboratory experiment, it tests the much more theoretical assumption that the behaviour of people engaged in economic activities is guided by their “rational expectations” about what will happen in the future.

Economists have come to care about what people expect to happen because this affects the way people behave, and so affects the future we get. In recent decades, many mathematical models of the macro economy have used the assumption that people form their beliefs about the future in a “rational” way to make the maths more rigorous.

By “rational” they mean that people respond to new information by immediately and fully adjusting their expectations – beliefs – about what will happen to prices, the economy’s growth or whatever. Which is a lovely idea, but how realistic is it?

Dr Timo Henckel, of the Research School of Economics at the Australian National University, Dr Gordon Menzies, of the University of Technology Sydney, and Professor Daniel Zizzo, of the University of Queensland, analysed the results of an experiment conducted by Professor Peter Moffatt, of the University of East Anglia, involving 245 students answering questions.

On receiving each piece of new information, the subjects had first to decide whether to adjust their beliefs and then, if so, by how much. The experimenters found that the subjects reacted very differently.

They found that, in general, people don’t update their beliefs with each new piece of information. And when they do, they tend not to adjust their beliefs by as much as they probably should. In other words, people display a kind of belief conservatism, holding on to a belief for longer than they should.

They found that this conservatism is explained to some extent by people’s inattention – they were distracted by other issues – and to some extent by the complexity of the issue: it was “cognitively taxing”.

It turns out that very few people – just 3 per cent of the subjects – display the rational expectations economists assume in their model-building. Most people’s behaviour, the authors say, is better described as “inferential expectations”.

Now, you may not be wildly surprised by these findings. But, in the academic world, common sense doesn’t get you far. You must be able to demonstrate things the academic way.

Even so, Henckel says that the responses of the experiment’s subjects extend to many parts of life, from the behaviour of investors in the share and other financial markets – this is how bubbles develop – to people’s political convictions, where they hold on to beliefs for far too long, ignoring much contrary evidence.

Indeed, inferential expectations apply even to scientists, who form a view of the world which they will revise or overturn only if there is overwhelming evidence to the contrary. So don’t expect economic modellers to abandon their convenient assumption of rational expectations any time soon.

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Friday, June 11, 2021

Why people can be much nicer than economists assume

There’s a lot you can learn about the world of work – and human nature in general – from studying economics. Then again, there’s a lot you can’t learn from conventional economics – and, indeed, from the bum steers it can give you.

Consider this. The 18th century Scottish philosopher Adam Smith is said to be the father of economics. He wrote two monumental books, the second of which, The Wealth of Nations, contained the famous observation that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest”.

The worthies who developed conventional economics – and its “neo-classical” model of how markets work, the main thing taught in economics courses – seized on this idea to describe an economy populated by profit-maximising firms and self-interested consumers, all of them competing with each other to get the best deal.

They developed Smith’s reference to the “invisible hand” of competition in markets to show how this self-interest on all sides miraculously ends up satisfying everyone’s wants. Hence modern economists’ eternal banging on about the benefits of competition.

But Smith’s first book, The Theory of Moral Sentiments, said something quite different: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, thought he derives nothing from it, except the pleasure of seeing it”.

So what’s it to be? Are we totally self-interested, or do we care about the wellbeing of others? Are we individuals competing against each other for the biggest bit, or are we caring souls who co-operate with others to ensure everyone gets looked after?

Short answer: we’re both. But study conventional economics and you’re told only about the selfish, individualistic, competitive side of our nature. The moral, collective, co-operative side is assumed away. Government is seen not as a force for good, but as an alien force whose intervention in the market risks stuffing things up.

If you wonder why so many of the predictions economists make prove astray, that’s part of the reason. But some years back, two American economists associated with the Santa Fe Institute in New Mexico, Samuel Bowles and Herbert Gintis, wrote A Cooperative Species, to try to balance the story.

In the process, they provide a more convincing explanation of why humans have become the dominant species on Earth – for good and ill.

They focus on the way humans co-operate with each other in many circumstances – including when hundreds of us work for a single business, which competes with other big businesses - and argue that we co-operate not only for self-interested reasons, but also because we are genuinely concerned about the wellbeing of others.

We try to uphold “social norms” of acceptable behaviour, and value behaving ethically for its own sake. For the same reasons, we punish those who exploit the co-operative behaviour of others.

“Contributing to the success of a joint project for the benefit of [your] group, even at a personal cost, evokes feelings of satisfaction, pride, even elation,” they say. “Failing to do so is often a source of shame or guilt.”

We came to have these “moral sentiments,” in Smith’s words, because our ancestors lived in environments, both natural and as constructed by humans, in which groups of individuals who were predisposed to co-operate and uphold ethical norms tended to survive and expand relative to other groups, thereby allowing these “pro-social” motivations to proliferate.

So they explain our motivations for caring about the wellbeing of others: we do it because it makes us feel good. But they also explain the distant evolutionary origins of our disposition to co-operate and its perpetuation to the present day.

Co-operation – engaging with others in a mutually beneficial activity - was part of the behaviour of homo sapiens when we were still living on the African savannah. We formed bands to make us more successful in hunting big animals.

But though co-operation is common in many species, human co-operation is exceptional in that it extends beyond our close relatives – whom we look after in obedience to our evolutionary urge to replicate our species – to include even total strangers. And we co-operate on a much larger scale than other species except the social insects, such as ants and bees.

We co-operate in political and military objectives as well as more prosaic everyday activities: collaboration among the employees in a firm, exchanges between buyers and sellers, and the maintenance of local amenities among neighbours.

So, though they don’t see it in these terms, economists focus on a form of co-operation that involves “reciprocal altruism”. Buyers benefit sellers; sellers benefit buyers.

But human co-operation goes much further, in that it takes place in much larger groups and in circumstances that are unlikely to be repeated. Why do people tip while passing through a country town? In my own town I have reason to care about my reputation. But if I’m in your town, why does it not occur to me to cheat you in some way?

Much experimental and other evidence shows that people gain pleasure from co-operating, or feel morally obliged to. On the other hand, people enjoy punishing those who exploit the co-operation of others, or feel morally obligated to do so.

“Free-riders,” as economists call them, frequently feel guilty and, if they are sanctioned by others, they may feel ashamed.

We may have started out co-operating to hunt wild animals and mind other people’s children, but today we co-operate to enjoy the benefits of “the division of labour” (we each specialise in something we’re good at), of market exchange and the pursuit of economies of scale (in irrigation, factories, information networks) and even warfare.

And we made all this work better by inventing governments capable of enforcing the rights to property and providing incentives for the self-interested to contribute to common projects.

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Wednesday, June 9, 2021

My new hero, Mathias Cormann, now valiant for truth

I find it hugely encouraging. Don’t know if you’ve heard the glad tidings but, on his road to Damascus – or, in this case, Paris – our own Mathias Cormann, former senator and minister for finance, has experienced a miraculous conversion. He’s gone from persecutor of those who care about climate change to being a leader of the cause.

As we said in my Salvo youth, there is much joy in heaven over one sinner that repenteth. I bet Brother Scott’s joy is unconfined.

And it’s clear from Cormann’s first speech as Secretary-General of the revered Organisation for Economic Co-operation and Development that he’s seen the light on a lot more than climate change. Indeed, the new man is exhibiting a distinct air of wokefulness. He’s now valiant for “stronger, cleaner, fairer economic growth”.

Speaking to a meeting of the OECD’s 37 rich and wannabe-rich member-country Council at Ministerial Level last week, Cormann said: “We need to continue to overcome the immediate health challenge, including by pursuing an all-out effort to reach the entire world population with vaccines.

“This is not just an act of benevolence from advanced economies. It is about sustained virus protection for all of us and about giving ourselves the best chance of a sustained recovery.”

Enlightened self-interest. I love it.

Cormann hasn’t changed his tune on chasing down slippery multinational tax avoiders. “It is very important we [the OECD] continue to lead the global fight against tax evasion and multinational tax avoidance and to ensure that digital businesses and all large businesses pay their fair share,” he said.

“We need to complete this work, including by facilitating agreement on an appropriate minimum level of global taxation and by minimising the profit-shifting that has accompanied the digitisation of our globalised economy.” All well and good.

On other matters, where I come from, there was nothing we enjoyed more than hearing some reformed Trophy of Grace testifying to his former wicked ways. As finance minister, Cormann led the Coalition’s repeated cuts to our overseas aid budget which, as a poor country with a big debt, we were told, we could no longer afford.

The reborn Cormann sees it differently. “We [the rich OECD countries] must also continue to strengthen our development co-operation. Low-income countries need our co-operation more than ever – to ensure access to vaccinations, to trade, to financing to help them deal with the climate challenge,” he said.

Cormann, you recall, was one of Tony Abbott’s lieutenants in abolishing Labor’s (already watered-down) minerals resource rent tax and its “price on carbon”.

At the time we were led to believe Julia Gillard’s carbon tax was the reason the retail price of electricity had risen so steeply. Turned out it was just a small part of the story. Prices stayed high.

But, in any case, new insight has come to Cormann in a blinding flash. “Market-based economic principles work,” he now sees. “Global competition at its best is a powerful engine for progress, innovation and an improvement in living standards.”

True, he admits, competition can be uncomfortable. “It can lead to social disruption which, collectively, we need to better manage.” Love that new thought that we ought to do more things “collectively”. Doesn’t quite roll off Cormann’s tongue, but he’s getting there.

“We need to ensure access to high quality education, upskilling and reskilling to ensure everyone can participate and benefit. We need the necessary social supports for those who struggle,” he said.

Amen to that. No hanging the unis out to dry during the pandemic. No spending a decade starving technical education of funds.

On climate change, he tells us that “more and more countries are committing to net-zero emissions as soon as possible and by no later than 2050.

“The challenge is how to turn those commitments into outcomes and to achieve our objective in a ... way that will not leave people behind.”

It’s easy to be cynical. In my youth, working in a big private-sector bureaucracy and watching people fighting their way to the top, I formed the view that many people were happy to adjust their views to fit their new role in the organisation.

When, with much assistance from the Morrison government, Cormann was travelling the world canvassing support for the top OECD job, many environmental groups were loudly opposing his candidacy. They failed to anticipate the fluidity of his views.

In my limited contact with the man, I found this Rocksolid Roarer of the Right friendly to the point of charming. Remembering how successful he was at getting crossbench Senate support for the government’s controversial measures – and at so little cost to the exchequer – I think he has just the right qualities to succeed in bringing the OECD’s divers members to agreement.

And, after all, he wouldn’t be the first person lately to realise that the climate worm has turned and fossil fuel’s days are ending.

Benediction from the Apostle Mathias: “Protecting ourselves from competition and innovation does not stop it from happening elsewhere – it just means that, over time, those who find themselves behind those protective walls fall further and further behind.”

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Monday, June 7, 2021

Morrison needs the guts to save business (and the unions) from folly

Talk about don’t mention the war. The great and good – who miss jetting off overseas several times a year – keep telling us the economy won’t recover until we’ve reopened to the world. Seems they just can’t bring themselves to focus on the obvious: it’s wages, stupid.

It’s self-evident that, ultimately, it would be bad for our economy for us to stay a hermit kingdom. But these worthies are wrong if they imagine that re-opening our borders would immediately strengthen the recovery.

It’s true that our airlines won’t recover until the borders open, and our universities will remain crippled. But because Aussies normally spend far more on touring overseas than foreigners spend touring here, our tourism industry (including every country town) has been doing nicely thank you from the temporary ban on Aussies doing their touring abroad.

Our econocrats have been busy extending the fiscal stimulus to get unemployment down and skill shortages up, in the hope this will bid up wages, and so give the nation’s households more to spend through our businesses.

Trouble is, business has grown used to covering shortages of skilled labour by importing workers on temporary visas, thus avoiding pushing up wage rates (and training costs). Get it? The real reason they want the borders re-opened ASAP is so they can go on playing this game.

But it’s just one of many stratagems our businesses have been using to keep the lid on wages: increased use of part-time and casual employment, labour hire companies, discouragement of collective bargaining and greater use individual contracts, evading labour laws by pretending workers are independent contractors, and even wage theft.

Little wonder “most Australians have not had a meaningful pay rise for almost a decade” and “living standards have stagnated”, as Brendan Coates, of the Grattan Institute, reminds us.

And little wonder the economy’s growth was so weak before the arrival of the pandemic, and threatens to go back to being weak once last year’s massive fiscal stimulus has dissipated.

Market economies are circular – the money goes round and round. And nowhere is this clearer than in the two-sided nature of wages. Wages are both the chief cost faced by most businesses, and the chief source of income for their customers.

See the problem? The more success the nation’s businesses have in keeping the lid on wage costs, the less money the nation’s households have to spend on all the things business wants to sell them.

When the two sides of the wage coin get out of whack, so to speak, business starts strangling the golden goose. Efforts to achieve a healthy rate of economic growth – and rising living standards – won’t be sustained.

This is a form of market failure called a collective action problem. What seems to makes sense for the individual business is contrary to the interests of business as a whole. But no business wants to be the first to stop skimping on wage costs for fear of losing out to its competitors.

The solution to collective action problems is for some authority to come in over the top and impose a solution on all players, thus leaving none at a competitive disadvantage and all of them better off in the end because their customers have more money to spend.

In other words, the only way for us to escape an anaemic, wage-less recovery is for Scott Morrison to intervene in the economy to get wages up.

Since the Fair Work Commission’s annual minimum wage case affects the wages of one worker in four, he should have intervened in the case – as has always been the feds’ right – to encourage the commission to give a generous increase after last year’s miscued pandemic minginess.

He should be trying to set a higher wage “norm” for private sector employers by giving his own federal employees a decent, 3 per cent annual pay rise, and pressuring the premiers – Labor and Liberal – to do likewise.

He should be legislating to protect Australian workers – and his own tax collections - from the ravages of the “gig economy”, which tries to hide its evasion of our labour laws behind its genuine and welcome technological innovation.

And the very least he should be doing is to beef up the Fair Work Ombudsman’s staffing and ability to stamp out wage theft which – purely by mistake, you understand – has become endemic. This outbreak of utterly unAustralian illegal behaviour tells us a lot about the ultimately self-destructive, anti-wage mania that is gripping the nation’s business people.

The obvious problem is that doing anything to increase wage rates is totally foreign to a Liberal politician’s every instinct. The Business Council would be incandescent. Nixon going to China is one thing, but a Liberal putting up wages? Never.

Sorry, but the world turns, and successful leaders must turn with it. We used to have a chronic problem with inflation; now it’s chronic spending weakness. The unions used to have too much power; now they have too little.

Even so, there’s one thing a Liberal Prime Minister could be doing to help without giving offence to Liberal sensibilities. It would actually be a blow against his union and Labor enemies that would do a lot to strengthen the economy’s prospects over the next four years, should he have the strength to put the economy ahead of his own political discomfort.

It would save Australia’s workers from the self-interest of the union elite and the mindless tribalism of Labor (not to mention the bullying of a certain former Labor prime minister), which is happy to give their unions mates what they demand because the Libs want to destroy industry super (which is true, but not a good enough reason to oppose a change that would leave workers and the wider economy better off).

The strange thing about last month’s budget is that, though it sees the econocrats’ wage-lifting strategy getting unemployment down to 4.5 per cent by about the end of 2023, it sees no growth in real wages for the next four years.

In evidence to a Senate committee last week, Treasury secretary Dr Steven Kennedy was obliged to explain this discrepancy. It’s because, starting next month, legislation requires compulsory employer contributions to their workers’ superannuation to be increased by 0.5 percentage points for five Julys in a row, until they reach 12 per cent of wages in July 2025.

Relying on strong empirical evidence, Treasury has assumed that employers will cover 80 per cent of the cost of this impost by raising wages by that much less. The nation’s workers will thus be forced to save rather than spend a significant portion of what would have been their future pay rises.

The nation’s greedy, ticket-clipping super-fund managers play on everyone’s instinctive fear that they aren’t saving nearly enough to provide for a comfortable retirement. It suits the union elite (and their gullible Labor mates) to go along with this deception, even though Grattan’s Coates (and Treasury before him, and the recent Retirement Income Review since him) has demonstrated that, after including a part-pension, most workers will have plenty.

So the Labor tribe wants to force the nation’s employees to live on less during their working lives so they can live like royalty in retirement. Why doesn’t Morrison seek to reverse this Labor-initiated legislation? Because he fears he’d lose votes in the labour movement’s ensuing fear campaign.

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Wednesday, June 2, 2021

Smaller Government is dogging our efforts to beat the pandemic

It surprises me that, though the nation’s been watching anxiously for more than a year as our politicians struggle with the repeated failures of hotel quarantine and the consequent lockdowns, big and small, and now the delay in rolling out the vaccine, so few of us have managed to join the dots.

Some have been tempted to explain it in terms of Labor getting it wrong and the Libs getting it right – or vice versa – but that doesn’t work. Nor does thinking the states always get it right and the feds get it wrong – or vice versa.

The media love conflict, so we’ve been given an overdose of Labor versus Liberal and premiers versus Morrison & Co. But though we can use this to gratify our tribal allegiances, it doesn’t explain why both parties and both levels of government have had their failures.

No, to me what stands out as the underlying cause of our difficulties – apart from human fallibility – is the way both sides of politics at both levels of government have spent the past few decades following the fashion for Smaller Government.

Both sides of politics have been pursuing the quest for smaller government ever since we let Ronald Reagan convince us that “government is not the solution to our problems; government is the problem”.

The smaller government project has had much success. We’ve privatised almost every formerly federal and state government-owned business. We’ve also managed to “outsource” the delivery of many government services formerly performed by public sector workers.

But the smaller government project has been less successful in reducing government spending. The best the pollies have done is contain the growth in spending by unceasing behind-the-scenes penny-pinching.

And here’s the thing: pandemics and smaller government are a bad fit.

The urgent threat to life and limb presented by a pandemic isn’t something you can leave market forces to fix. The response must come from government, using all the powers we have conferred on it – to lead, spend vast sums and, if necessary, compel our co-operation.

In a pandemic, governments aren’t the problem, they’re the answer. Pretty much the only answer. Only governments can close borders, insist people go into quarantine, order businesses to close and specify the limited circumstances in which we may leave our homes.

Only governments can afford to mobilise the health system, massively assist businesses and workers to keep alive while the economy’s in lockdown, pay for mass testing and tracing, and flash so much money that the world’s drug companies do what seemed impossible and come up with several safe and effective vaccines in just months.

But when you examine the glitches – the repeated failures of hotel quarantine, the need for more lockdowns, the delay in stopping community spread, and now the slowness of the rollout of vaccines – what you see is governments, federal and state, with a now deeply entrenched culture of doing everything on the cheap, of sacrificing quality, not quite able to rise to the occasion.

As we’ve learnt, a pandemic demands quick and effective action. But when you’ve spent years running down the capabilities of the public service – telling bureaucrats you don’t need their advice on policy, just their obedience – quick and effective is what you don’t get.

The feds have lost what little capacity they ever had to deliver programs on the ground. They have primary responsibility for quarantine and vaccination, but must rely on the states for execution. Then, since both sides are obsessed by cost-cutting, they argue about who’ll pay – and end up not spending enough to do the job properly.

It took the feds far too long to realise that hotel quarantine was cheap but leaky. Every leak had the states closing borders against each other. The feds didn’t spend enough securing supplies of vaccines, then took too long to realise a rapid rollout wasn’t possible without help from the states.

Without thinking, Victoria initially staffed its hotel quarantine the usual way, with untrained, low-paid casual staff. It had run down its contact-tracing capacity and took too long to build it up – still without a decent QR code app. NSW let a host of infected people get off a cruise ship and spread the virus all over Australia.

The report of the royal commission laid much of blame for the aged care scandals on the feds’ efforts to limit their spending on aged care. They couldn’t demand providers meet decent standards because they weren’t paying enough to make decent standards possible.

One of the main ways providers make do is by employing too few, unskilled, casual, part-time staff, who often need to do shifts at multiple sites. Do you think this has no connection with the sad truth that the great majority of deaths during Victoria’s second lockdown occurred in aged care?

And now we discover the feds have failed to get the vaccine rollout well advanced even to aged care residents and staff.

Spend enough time denigrating and minimising government and you discover it isn’t working properly when you really need it.

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Sunday, May 30, 2021

Top economists think much further ahead than Morrison & Co

If Scott Morrison and Josh Frydenberg are looking for ideas about what more they could be doing to secure our economic future – after all, they’ll be seeking re-election soon enough – they could do worse than study the views of the 56 leading economists asked by the Economic Society of Australia to comment on this month’s budget.

Two points stand out. First, almost all the economists were happy to support the budget’s strategy of applying more fiscal stimulus to get unemployment below 5 per cent. They were pleased to see the government abandon its preoccupation with surpluses and debt.

As Professor Fabrizio Carmignani, of Griffith University, said, “the good thing about this budget is that it was not about repairing the deficit and debt accumulated in 2020”. Professor Sue Richardson, of Flinders University, said: “the debt and deficit mantra was never justified”.

Second, with one notable exception, the economists were critical of the government’s choice of things to spend on. The exception was its big spending on the “care economy” – aged care, childcare, disability care and mental health care – which most respondents welcomed. Indeed, quite a few thought there should have been more of it.

After that, the economists had plenty of constructive criticism of the government’s priorities. For instance, quite a number were happy to see big spending on “infrastructure”, but critical of the government’s narrow conception of what constitutes infrastructure.

Carmignani said: “there is in this budget – as in the past – an almost blind confidence in the power of investment in physical infrastructure to drive future growth and development. In fact, the future prosperity of Australia depends on innovation that requires social rather than physical infrastructures”.

Professor Gigi Foster, of the University of NSW, said: “childcare should be viewed as the social infrastructure that it is, and invested in as such. Instead, when we heard ‘infrastructure’, it was mainly code for transportation”.

So even in the area of physical infrastructure, the budget shows a lack of imagination. Professor Michael Keane, also of the University of NSW, said very little of the infrastructure money was “allocated to such urgent needs as renewable energy, climate change adaptation, environmental sustainability, water resources, etcetera. This shows a real lack of ambition.”

Richardson agrees. “The future is one of zero net greenhouse gas emissions,” she said. “The transformation of the energy, agricultural, transport and manufacturing systems that this requires is enormous, will require unprecedented levels of investment and needs to start now.“

Now that’s interesting. Historically, treasurers and their advisers have regarded the budget as the place for discussion on finances and economics, not the state of the natural environment nor the challenge of climate change.

The economy in one box, the environment in some other box. The natural environment has been seen as of such little relevance to topics such at the budget and the economy that it has barely rated a mention in the five-yearly supposed “intergenerational report”.

But that’s not how our leading economists see it. At least a dozen of them have criticised the budget’s failure to respond to the challenge of climate change. Professor Warwick McKibbin, of the Australian National University, warned that “the world is likely to be taking significant action on climate change which will substantially impact Australia’s fossil fuel exports and the future structure of the Australian economy”.

Another topic barely mentioned in the budget – one of the industries much damaged by the pandemic – was universities. Unsurprisingly, more than a dozen respondents noticed the omission. They’re self-interested, of course, but they make a good case.

Dr Leonora Risse, of RMIT University, said succinctly: “investment in the university sector [is a] generator of productivity-enhancing skills, knowledge and research”. Meanwhile, McKibbin added that “a key ingredient is an investment in human capital”.

But the academics’ concern is wider than their own patch. Risse has called for more attention to the long-running drivers of growth, such as “investment in the workforce capabilities, resourcing, wages and working conditions of high-need, high-growth sectors” such as the care economy.

Dr Michael Keating, a former top econocrat, said restoring past rates of economic growth won’t be possible without addressing the structural problems in the labour market. “This will involve much more investment in education, training and research” but “the extra money in this budget for apprentices and trainees only makes up for past cuts.”

Notice a theme emerging? Budgets should be about investment – spending money now, for payoffs to the economy later – but investment needs to be in people, not just in physical and traditional things such as roads and railways.

It’s easy to accuse academics of pontificating atop their ivory towers, but they seem able see much further into the economy’s future needs than our down-to-earth politicians.

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Friday, May 28, 2021

Reform of “human services” the triumph of hope over experience

Those leftie academics who keep accusing Scott Morrison and his government of being “neo-liberal” aren’t keeping up. This government’s neo-liberal days are long gone. But “micro-economic reform”, on the other hand, is alive and well.

If neo-liberal has any meaning, it’s a belief in free-market capitalism, privatisation and smaller government. It’s a presumption against government intervention in markets.

But that’s just what Morrison keeps doing: intervening to prop up the Portland aluminium smelter, intervening to keep oil refineries open and, of course, spending $600 million-plus to build a government-owned gas-fired power station no one in the industry wants.

By contrast, it’s clear from Treasury secretary Dr Stephen Kennedy’s big speech last week that he’s hot to trot with a new round of economic-rationalist inspired micro reform. The good old days are back.

Kennedy noted that the budget announced “significant additional funding and reforms relating to the provision of mental health, aged care and employment services,” not to mention more money for the national disability insurance scheme.

These sectors are “non-market services” – services that are either provided by the government directly or where the government provides substantial funding. “Lifting the productivity of these sectors can lead to a higher quality and quantity of services, as well as reduce demands on the budget,” he said.

Historically, the care sectors had experienced low productivity growth. In part this reflected the labour intensity of the services delivered (they must be performed by a person, not a machine), and challenges in measuring the quality of outcomes (was it done well or badly?). But there had also been failings in the design of policies and their implementation, Kennedy said.

He noted with approval a speech given in 2019 by the Productivity Commission’s Professor Stephen King, a micro-economist, identifying “human services” as the “next wave of productivity reform”.

“The government clearly has a role to play in incentivising greater productivity in these sectors, and can do so by applying sound economic principles when designing systems for funding and the provision of services, and encouraging innovation among providers to improve the quality and safety of care provided,” he said.

Using the example of aged care, Kennedy outlined four principles for improving the effectiveness (achieving the desired objective) and efficiency (doing so with the least waste of resources) of government services.

First, provide users with more choice. “Informed choice can improve outcomes for users because it enables people to make decisions that best meet their needs and preferences, generates incentives for providers to be more responsive to users’ needs and drives innovation and efficiencies in service delivery,” he said.

“However, to be truly informed, choice must be accompanied by accurate and accessible information about what the user really cares about.”

Giving consumers and their families digestible information on metrics of care . . . allows them to prioritise these metrics in choosing an aged care facility and encourages competition amongst providers on the quality of care they provide, he said.

“But we need to be careful to ensure these metrics are robustly constructed and free of manipulation by providers.”

Second, improve competition. To encourage competition between providers, the government will move from the present system of allocating subsidised places directly to particular providers, to giving the subsidy to the user and allowing them to decide which provider to take it to.

Giving users better information about the quality performance of particular providers should counter the temptation to choose providers of low-cost but low-quality care.

Third, set “efficient prices”. These refer to the size of the per-person subsidy the government pays to private providers. Efficient prices reflect all the costs and “clear the market” (attract just sufficient supply to meet demand). The government will work to set up an independent pricing mechanism.

Fourth, improve accountability and governance. The government has a direct role to play in assuring confidence in the quality, safety and sustainability of the sector, Kennedy said.

Providers will be subject to greater oversight by a new inspector-general of aged care and a beefed-up Aged Care Quality and Safety Commission. “The government requires a well-equipped regulator to undertake surveillance and enforcement of [the new] standards across the sector,” he concludes.

Sorry. It all sounds lovely – especially with the provisos added by Kennedy, who’s more worldly-wise than his Treasury predecessors – but I’m hugely sceptical.

We’ve been watching these attempts at micro-economic reform for decades. They all work the same way: take a public service that’s always been provided by the government, turn it into something that looks like an ordinary market by adding choice, contestability, monetary incentives and a smidgen of regulation, and you won’t believe the difference it makes.

Well, I would believe it’s very different – just not that it’s better. We’ve seen this game played many times and seen many stuff-ups. Using “contestability” to turn a public good into an artificially created market is the econocrats’ version of magical thinking.

They expect to see all the magic of rational self-interest-driven market forces, but don’t expect to see all the real-world complications their beautiful model leaves out: the lack of competition in country towns, the efforts of firms to make their products incomparable, the unequal bargaining power between sellers and buyers, the “transaction costs” that stop a frail, near-death old lady changing providers like you’d change from Woolworths to Coles, the non-monetary motivations, the gaming of metrics and the unintended consequences.

To get technical, the “incomplete contracts” and massive “information asymmetry” between sellers and buyers.

Yet another problem is that these grand designs are implemented not by Treasury economists, but by departmental bureaucrats who are too easily “captured” by well-organised industry lobby groups (who’ll be fighting all that “accountability and governance” every step of the way), and answerable to politicians anxious to look after those industries that give generously to party funds.

To see “human services” as “the next wave of productivity reform” is, to borrow a favourite expression of legendary Treasury boss John Stone, “the triumph of hope over experience”.

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Tuesday, May 25, 2021

Big spending on aged care not right to fix the problem

Budgets come and, all too soon, budgets go. A big deal in the latest one was the government’s response to the royal commission’s report on the scandal-plagued aged care system. We were told lots of changes will be made, at an extra cost of “$17.7 billion over five years”. Problem solved. Now we can all move on.

Sorry, not so fast. The bright young things of the media may have lost interest, but I’d like a closer look. You can put that down to my advancing years if you wish.

I’m old enough to have stopped deluding myself I won’t be ending up in any aged care home. Both my brother and elder sister are there already. My sister-in-law was too before, as the Salvos say, she was “promoted to Glory”.

I’ve looked at the government’s response and, though it wasn’t nearly as good as it should have been, it’s better than I feared.

To borrow a cliche from the interest groups – who always hope that if they sound grateful, they might get a bit more – it was “a good first step”. But, as Dr Stephen Duckett and Anika Stobart, of the Grattan Institute, put it less diplomatically, “even an investment of this scale does not meet the level of ambition set by the commission”.

Actually, the “$17.7 billion over five years” doesn’t do justice to the government’s willingness to spend. Because its measures are phased in, Grattan calculates their cost builds up to an ongoing $5.5 billion a year. That’s more than half the $10 billion a year the commission estimated the government saved on its aged care spending over the years using annual “efficiency dividends” and rationing.

Grattan groups the many decisions in the budget under four headings. First is a change in the basis on which aged care is delivered. The commission’s report called for the present Aged Care Act, which seeks to maximise the government’s freedom to limit its spending, be replaced by a new act enshrining everyone’s statutory right to decent aged care, according to their needs. As with Medicare, access to aged care proper (as opposed to ordinary living costs) should be “universal”, the commission proposed – free at the point of delivery, because the cost is funded from general taxation.

The government will introduce a new act in 2023 putting consumers at its centre but, Grattan says, with “no clear commitment to the rights of older people or to universal access”.

Many of the those who write to me believe that for-profit providers of aged care put their profits ahead of the quality of care, and fear that extra government spending won’t necessarily go to raising quality.

So, second are steps to improve the governance of providers and make them more accountable. The government will establish an independent inspector-general for aged care, and an independent mechanism for setting prices.

But, Grattan observes, it hasn’t committed to the hard part: changing the present approach to governing the system, which the report found had failed. It’s leaving the federal Department of Health in charge, and reforming rather than replacing the Aged Care Quality and Safety Commission, which is responsible for regulating the system.

Grattan doesn’t say it, but you suspect the bureaucrats have got a bit too close to the providers.

To allow people to be better informed about the quality of a provider’s care, the government will eventually introduce an American-style system of star ratings. Fine – provided it can’t be manipulated.

Third, moves to increase the number and training of staff. The key measure here, following the report’s recommendation, is a requirement that each resident receive three hours and 20 minutes of personal attention a day, including 40 minutes from a registered nurse rather than a care worker.

If properly policed – a big if – this should increase staffing, giving workers more time to help with toileting and feeding, and just to chat with residents, many of whom are lonely.

There’s a shortage of qualified staff, and the government is spending $680 million mainly on a one-off increase in TAFE training for personal carers in the first few years. The report wanted minimum Certificate III training for all personal carers, including mandatory dementia training, but this hasn’t been done.

There’d be fewer shortages of nurses and care workers, and less staff turnover, if award wages were increased, but the government’s done nothing about this.

Finally, funding changes. One of the main ways the government has limited its spending on aged care is by allowing a long waiting list for at-home aged care packages to develop. It’s decided to let through 80,000 more applicants over two years.

But it hasn’t acted on the report’s recommendation that waiting times be limited to 30 days. Rationing will stay.

The report wanted means-tested rental payments in residential care, with “refundable accommodation deposits” phased out, but no change was made.

Adequate reform of the system has a long way to go. Until it gets there, the critics are right to fear it will be only a few years before the system’s back in crisis.

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Monday, May 24, 2021

Key reform needed to fix debt and deficit: ditch stage 3 tax cut

Scott Morrison and Josh Frydenberg won’t admit it. But most economists agree that at the right time, the government should take measures to hasten the budget’s return to balance, even – to use a newly unspeakable word – “surplus”.

Economists may differ on what they consider to be the right time. But, if we’re to avoid repeating the error the major economies made in 2010 by jamming on the fiscal (budgetary) policy brakes well before the recovery was strong enough for the economy to take the contraction in its stride, the right time will be when the economy has returned to full employment, with no spare production capacity.

At that point, the inflation rate’s likely to be back within the Reserve Bank’s 2 to 3 per cent target range, with wage growth of 3 per cent or more. Any further fiscal stimulus from a continuing budget deficit would risk pushing inflation above the target, and could induce a “monetary policy reaction function” where the independent Reserve countered that risk by raising interest rates.

So, better for the government to act before the Reserve acts for it. And if you take the econocrats’ best guess at the level of full employment – when unemployment is down to between 5 and 4.5 per cent – and take the budget’s forecasts at face value (itself a risky thing to do) the right time will be in the middle of 2023.

But the growth in wages and prices has been so weak for so long, that I wouldn’t be acting until it was certain wage and price inflation was taking off.

Even so, since its own forecasts say that point will come towards the end of the next term of government, Morrison and Frydenberg should be readying to give us a clear idea of the steps they’ll take to cut government spending or increase taxes when it becomes necessary.

And, in an ideal world, they would. But, thanks to the bad behaviour of both sides of politics, our world is far from ideal. Former Labor leader Bill Shorten is only the latest to be reminded of the awful, anti-democratic truth that parties which telegraph their punches expose themselves to dishonest scare campaigns.

But that’s just the most obvious reason Morrison and Frydenberg will avoid any discussion of the nasty moves that will be necessary to make the “stance” of fiscal policy less expansionary and, when needed, mildly restrictive, thus slowing the government’s accumulation of debt in the process.

The less obvious reason is that no pollie wants to talk about the policy instrument that’s played a leading part in all previous successful attempts at “fiscal consolidation” and will be needed this time.

It’s what Malcolm Fraser dubbed “the secret tax of inflation”, but the punters call “bracket creep” and economists call “fiscal drag”.

Because our income-tax scales tax income in slices, at progressively higher rates – ranging from zero to 45c in the dollar – but the brackets for the slices are fixed in dollar terms, any and every increase in wages (or other income) increases the proportion of income that’s taxed at the individual’s highest “marginal” tax rate, thus increasing the average rate of tax paid on the whole of their income.

A person’s average tax rate will rise faster if the increase in their income takes them up into a higher-taxed bracket but, because what really matters in increasing their overall average tax rate is the higher proportion of their total income taxed at their highest marginal tax rate, it’s not true that people who aren’t pushed into a higher tax bracket don’t suffer from what we misleadingly label “bracket creep”.

I give you this technical explanation to make two points highly relevant to the prospects of getting the budget deficit down. Both concern the third stage of the government’s tax cuts, already legislated to take effect from July 2024, at a cost of $17 billion a year.

Although this tax cut is, in the words of former Treasury econocrat John Hawkins and others, “extraordinarily highly skewed towards high income earners”, Frydenberg justifies it with the claim that, because it would put everyone earning between $45,000 and $200,000 a year on the same 30 per cent marginal tax rate, it would end bracket creep for 90 per cent of taxpayers.

First, this claim is simply untrue. For Frydenberg to keep repeating it shows he either doesn’t understand how the misnamed bracket creep works, or he’s happy to mislead all those voters who don’t.

What’s true is that the stage three tax cut would greatly diminish the extent to which a given percentage rise in wages leads to a greater percentage increase in income-tax collections, thereby sabotaging the progressive tax system’s effectiveness as the budget’s main “automatic stabiliser”. Its ability to act as a “drag” on private-sector demand when it’s in danger of growing too strongly.

In an ideal world, income-tax brackets would be indexed to consumer prices annually, thus requiring all tax increases to be announced and legislated. But in the real world of cowardly and deceptive politicians – and self-deluding voters – the stage three tax cut is bad policy on three counts.

One, it’s unfair to all taxpayers except the relative handful earning more than $180,000 a year (like me). Two, the biggest tax savings go to the people most likely to save rather than spend them. Three, by knackering the single most important device used to achieve fiscal consolidation, it’d be an act of macro management vandalism.

Think of it: by repealing stage three you improve the budget balance by $17 billion in 1024-25 and all subsequent years. Better than that, you leave intact the only device that works automatically to improve the budget balance year in and year out until you decide to override it.

Without the pollies’ little helper, fiscal consolidation depends on a government that’s still smarting from its voter-repudiated attempt in the 2014 budget, having another go at making big cuts in government spending, and a government that seeks to differentiate itself as the party of low taxes now deciding to put them up.

Good luck with that.

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Friday, May 21, 2021

Treasury boss confident big government debt is manageable

Whether they realise it or not – probably not – the people up in arms about the size of the federal public debt and criticising Scott Morrison and Josh Frydenberg for not doing more to get it down in last week’s budget are saying they should have made the same error the major economies made early in their recovery from the Great Recession.

If you’ve heard Frydenberg saying he won’t “pivot to austerity policies”, you’ve heard him vowing not to make the mistake the Americans, and particularly the Brits and Europeans, made in 2010.

After they’d borrowed heavily in response to the global financial crisis, their recoveries had hardly begun before they looked back at their mountainous debt and panicked, slashing government spending and whacking up taxes.

This policy of “austerity”, as critics dubbed it, proved disastrous. It stunted their recoveries and meant they didn’t reduce their deficits and debts much at all.

This is why, to prevent the budget’s support for the still-recovering private sector falling precipitately over the coming four financial years to June 2025, Morrison and Frydenberg decided to use most, but not all, of an unexpected improvement in forecast budget deficits to increase spending and cut taxes.

Even so, the net debt in June 2024 is now estimated to be $46 billion lower than expected in last October’s budget, as independent economist Saul Eslake has pointed out.

In a speech to the Australian Business Economists this week, Treasury secretary Dr Steven Kennedy defended the government’s two-phase economic strategy.

According to the budget papers, phase one is to promote economic growth through “discretionary fiscal [budgetary] policy and the operation of [the budget’s] automatic stabilisers” so as to “ensure a strong and sustained recovery to drive down the unemployment rate”.

We will remain in the first phase of the strategy “until the recovery is secured” and growth has driven unemployment “down to pre-pandemic levels or lower”.

“Only once the economic recovery is secured will the government transition towards [phase two and] the medium-term objective of stabilising and then reducing debt as a share of gross domestic product,” the budget papers say.

But some economists – the most well-credentialled of whom is former Treasury secretary Dr Ken Henry – are concerned this willingness to live with unusually high levels of deficit and debt for many years, and without mention of any effort to return the budget to surplus – which would reduce the debt in dollar terms, not just relative to GDP - is complacent and risky.

But, with one proviso, Kennedy argues strongly that the presently projected paths of our budget deficit, our debt and the interest bill on the debt aren’t particularly risky.

When I get to that proviso you’ll see that Kennedy and his old boss aren’t so far apart. And remember this: Henry is now free to give the government advice in public, whereas the Westminster system requires Kennedy to give all his frank advice in private, not in speeches to economists.

Starting with the budget deficit, Kennedy says it grew hugely in 2020, partly because the lockdown caused tax collections to collapse and the number of people getting the dole to leap (this being the operation of the budget’s “automatic stabilisers”), but also because of the unprecedented degree of “emergency support” provided to businesses and workers.

The deficit’s expected to peak at $161 billion (equivalent to 7.8 per cent of GDP) in the financial year soon to end, then fall to $57 billion (2.4 per cent of GDP) in 2024-25. This “relatively quick” fall happens mainly because all the emergency support was temporary.

“At this stage, [a hint that policies could change, and probably will] the deficit is expected to persist through the medium term,” Kennedy says, by which he means that, seven years later in 2031-32 (the “medium term”), the projected deficit is still 1.3 per cent.

Budget statement 3 (page 100) shows that’s about the projected size of the“structural” budget deficit – the deficit that’s left after taking account of the cyclical factors affecting the budget – by then.

Kennedy explains this as representing the government’s structural (lasting) increases in spending on what it calls “essential services” – particularly aged care, disability care and the tiny permanent increase in the rate of the dole – in this year’s budget.

Such a structural deficit isn’t huge, but its existence is a tacit admission that, if government spending isn’t going to be cut, taxes should be increased.

Turning to the projected path of the net debt, Kennedy says the budget projections suggest the government is on track to stabilise and begin reducing the debt as a share of GDP in the medium term (the next 10 years), given the present economic outlook “and policy settings” (hint, hint).

The net debt is expected to be 34 per cent of GDP at June 2022, rising to almost 41 per cent at June 2025, before improving to 37 per cent at June 2032. (Eslake reminds us all this is less than half the average for the advanced economies.)

Finally, “debt servicing costs” - fancy talk for the interest payments on the debt. As a proportion of GDP – that is, comparing the interest payments with the size of the nation’s income – net interest payments are projected to “remain low by historical standards at around 1 per cent over the medium term”.

Two eye-opening graphs in Eslake’s first-rate budget analysis show 1 per cent is much lower than we were paying throughout the last quarter of the 20th century (in the late 1980s it was above 2.5 per cent). And, in inflation-adjusted dollars per head of population, it’s much lower than we were paying in both the late ’80s and the late ’90s.

Responding to Henry’s concerns, Kennedy says “there remains fiscal space [room] to respond again with fiscal policy if the need arose”. But here’s the proviso Kennedy adds: “there will come a time where it is prudent to accelerate the rebuilding of our fiscal buffers”.

That’s as frank as Treasury secretaries get in public.

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Wednesday, May 19, 2021

Don't believe what lightweights tell you about debit and deficit

If you’ve gained the impression that in their pre-election budget Scott Morrison and Josh Frydenberg have gone on a wild, vote-buying cash splash spending spree, leaving us – not to mention our grandchildren – with a string of bigger budget deficits and much increased government debt, you’ve been misled.

Some of it’s simply not true, much of it’s exaggerated and the rest has been misunderstood by people who didn’t do economics at high school. They’re people who are led by their emotions and, when they hear frightening words like “deficit” and “debt”, don’t need to be told we’re all in deep doodoo. They don’t stop to read the details.

Let me give you some of those details, with help from the independent economist Saul Eslake and his first-rate budget analysis.

What would you think if you asked me my salary and I gave you a figure I’d first multiplied by four? You’d think I was big-noting. The politicians do this every budget time to make them sound more generous than they are.

They can do it because the budget shows the cost for the coming financial year, plus “forward estimates” for the following three years. The media go along with it because it quadruples their story’s impressiveness.

They told us the budget involved new spending and tax breaks costing $93 billion “over four years”, when it would have been less misleading to say the new measures will cost the budget about $23 billion a year.

Some have implied the new measures are profligate and motivated by vote-buying. Some measures are, no doubt. But the $3.8 billion a year to fix up our scandal-ridden aged care system? The $2.2 billion a year in increased support for the unemployed? The extra $2 billion a year in infrastructure? The $1.3 billion a year to subsidise apprenticeships? Another $1.3 billion in total to help hard-hit aviation and tourism? An extra $450 million a year on women’s economic security?

The extended tax relief for small business will cost a total of $21 billion in a few years’ time, but then will be clawed back. The “new” tax cut for middle-income earners costing $7.8 billion a year Frydenberg told us about is just a one-year extension of last year’s tax cut.

Doesn’t sound much of a splash to me. The increased subsidy of childcare costs doesn’t start for a year and is about a quarter of what Labor’s promised.

Next, if you’ve gained the impression all this spending will increase the budget deficit and add to the government’s debt, you’ve been misled.

At the time of last year’s delayed budget in October, Eslake points out, the net debt was expected to reach $966 billion by June 2024. In this budget the debt’s now expected to be $46 billion less by then.

How is this possible? It’s possible because the economy has recovered much more strongly than was expected even in October. So tax collections are a lot higher than expected, and dole payments a lot lower.

By design, the government’s new spending takes up most, but not all, of this improvement. The econocrats wouldn’t have thought it smart to withdraw too much of the public sector’s support for the private sector – households and businesses – before the recovery was well established and when unemployment was still so high.

The joke is, the people up in arms about the huge growth in debt are a year late. It was last April when all the damage was done. The pandemic was raging and governments decided to put our heath first and the economy second. They locked down the economy, causing the biggest collapse in the nation’s income since World War II.

But to hold the economy together so it could rebound after the lockdown was lifted, the government spent unprecedented sums on the JobKeeper scheme (that’s $90 billion right there), the JobSeeker supplement and a dozen other temporary programs.

It’s all worked far better than expected, but there’s no denying it’s come at a great cost. Should we have let all those people die of the virus? Should we have let the economy stay flat on its back? The debt panickers weren’t saying that a year ago.

The finances of national governments don’t work the way a family’s do. Eventually, parents die. They know they must have their debts paid off before then.

But though the faces change, governments and the populations they serve never die, they just keep growing. Meaning they – like big businesses – never pay off their debt. It goes down sometimes and up others, but still goes on forever.

What governments do is out-grow their debts, so it shrinks relative to the size of the economy and all the income it generates. That’s how the developed countries got on top of the massive debt they were left with after WWII.

They didn’t pay it back, they outgrew it. And the good news is, interest rates on the public debt are now lower than ever – and won’t be going back up in a hurry.

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Monday, May 17, 2021

Budget shock: Morrison hit over the head by a paradigm

The media missed the big story in last week’s budget. They were present to observe a rare event – a shift in the economic management paradigm – but all they saw was just another big-spending, vote-buying pre-election budget.

Since the post-World War II Golden Age ended in the ignominy of stagflation in the mid-1970s, the first rule of politics has been that most of it’s economics. Economies don’t run themselves, and managing them is the chief job of national governments. Bad economic management is the chief reason governments get thrown out.

(This is the story of my career as a journalist. I arrived as a dissatisfied chartered accountant looking for a career change just as the nation’s editors were getting that message. When the editor asked me what I wanted to do in journalism, I said “write about politics”. He told me that if I wanted to get ahead, I should pretend to be an economist. Advice taken.)

But that message seems to have been lost. Today’s political journalists can see the politics in everything, but not the economics. It doesn’t help that, after decades of media management, they never get to speak to the Canberra econocrats.

What this year’s budget tacitly acknowledges is that recovering from the coronacession isn’t the real problem. We seem to have that well in hand. The real problem is that returning to the pre-virus status quo doesn’t get us to where we need to be: enjoying healthy, sustainable economic growth.

The real problem is that, like all the advanced economies, we’re stuck in what former Bank of England governor Mervyn King has called a “slow-growth trap”. The causes of this trap are “structural” (deep-seated and long-lasting) not “cyclical” (temporary).

The symptoms of that trap in Oz are neatly summarised by APAC economist Callam Pickering: “Australia hasn’t experienced an unemployment rate of 4.5 per cent or lower in 12 years. We haven’t experienced wage growth of above 3 per cent in eight years, and core inflation hasn’t sniffed 2 per cent in five years.”

The political journalists noticed Treasurer Josh Frydenberg’s “pivot” in a speech 12 days before budget night, but not the pivot the econocrats’ made under cover of the coronacession. They abandoned their seven-year insistence that the weakness in wages and inflation was merely a cyclical delay and would come right in the next year or two.

If you read the speeches of Reserve Bank governor Dr Philip Lowe and Treasury secretary Dr Steven Kennedy carefully, you see their quiet acceptance that our weak growth has structural causes, and won’t be cured unless we do something different.

Such as? Using more fiscal stimulus to target a much lower rate of unemployment, in the hope this will at last get us some decent growth in wages, which would flow on to stronger growth in consumer spending and then maybe even to stronger business investment spending.

The evidence that the two institutions have stopped pretending our problems are merely cyclical can be seen in their most recent forecasts, which have the rises in wages and inflation staying weak for the next four years.

Because the political journalists saw Frydenberg’s pivot but not the econocrats’ pivot, it never occurred to them that Scott Morrison and his Treasurer’s change of tune happened because the econocrats advised them to. Nor that what journalists see as motivated purely by political expedience, most economists (and I) have welcomed.

It’s a truism that politicians never do anything without considering its political implications. But a more perceptive observation is that governments rarely make significant policy changes without at least two good reasons.

In leaping to the conclusion that the only conceivable reason for Morrison and Frydenberg to do something so contrary to their long proclaimed “ideology” is political expedience – what pollie in their right mind would cut spending or increase taxes before an election? – the political journalists have failed to see what was obvious to the economically literate: that our present circumstances presented the government with a fortuitous alignment of attractive politics and good economic management.

As the independent economist Saul Eslake has said, “the government’s decision to defer the task of ‘discretionary budget repair’ for at least another year is politically expedient, but that doesn’t make it wrong. On the contrary, it is ‘The Right and Proper Thing To Do’ [as Alf Doolittle said in My Fair Lady].”

In this Eslake is no Robinson Crusoe. A recent survey of 60 leading economists by the Economic Society of Australia found that 47 of them back the government’s decision to aim for an unemployment rate of less than 5 per cent.

Failing to appreciate the significance of this marked change in economic strategy, some political journalists are predicting that Morrison and Frydenberg will revert to their former political ideology and fear of debt and deficit as soon as they’re re-elected.

After brilliantly using a Labor-lite budget to steal Labor’s clothes and win the election, the Debt Truck will be back and the Coalition will reassert its claim to being more fiscally responsible than those profligate unwashed Labor Party people.

Having assured us three weeks ago that the government isn’t planning “any sharp pivots towards ‘austerity’,” Frydenberg will do a reverse-pivot soon after the election. Maybe, but I doubt it. If he does, he’ll have some very P-ed off econocrats, not to mention an army of critical economists.

This is not to say, however, that sometime in the coming years, after we have achieved some decent wage growth and a return to rising living standards, whichever party is in power will act to reduce the structural budget deficit.

Not by swingeing cuts in major spending programs, but by increasing taxes – letting bracket-creep rip, increasing the Medicare levy or cutting superannuation tax breaks. In the meantime, it wouldn’t be surprising to see either side abandon the third stage of Morrison’s tax cuts which, at a cost to the deficit of a mere $17 billion a year, is aimed at rewarding higher income-earners.

The simplest way to explain the economic management paradigm shift occurring before our eyes is that the econocrats have only two levers for managing the economy: interest rates (monetary policy) or government spending and taxing in the budget (fiscal policy). When one lever stops working, they switch to the other. It’s happened before, it’s happening now, it will happen again after I’m dead.

Economic management is moving away from monetary policy not just because the official interest rate has hit zero but also because, as the International Monetary Fund’s chief economist, Dr Gita Gopinath, has written, the world is caught in a “liquidity trap” – that is, there’s loads of money waiting to be borrowed, and at very low interest rates, but business isn’t keen to borrow. Cutting rates further doesn’t change that.

But even the liquidity trap is just a symptom of deeper, structural problems causing weak wage growth, weak business investment and weak productivity improvement – all of them evident in all the advanced economies since the global financial crisis.

Get it? The developed countries are changing the rules of how they manage their economies because the old rules have stopped working. Our political journalists, convinced what’s happening here is just a tawdry election trick, don’t seem to have noticed that similar things are happening overseas.

The Americans have switched their economic management paradigm simply by moving from Donald Trump to Joe Biden. Biden, actually from the cautious, compromising side of the Democrats, is spending government money far more aggressively that Obama or Clinton.

Why? Because his economic advisers are urging him to. Trump slashed the rate of company tax; Biden wants to put it back up. So does the Conservative Boris Johnson in Britain. The race to the bottom is reversing. Business won’t be getting its way nearly as often in the new world.

What’s true is that the old paradigm fitted our Liberals much more comfortably than the new one does. Morrison and Frydenberg will have their hands full sending their backbenchers to re-education camp. They’ll need to drop their populist fear-mongering over debt and deficit, and their private good/public bad rhetoric.

The new paradigm fits Labor a lot more comfortably – provided it doesn’t take too long to realise the wind has changed, and get its courage back. Watching Anthony Albanese’s budget reply last week – in which he seemed to use the word “wages” in every second sentence – made me think he may be waking up faster than the political journalists.

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Friday, May 14, 2021

The new normal: much more reliance on government spending

What this week’s budget proves is that fiscal (budgetary) stimulus really works, something many economists had come to doubt over the four decades in which monetary policy – the manipulation of interest rates – was the main instrument used to manage the economy’s path through the business cycle.

That potency’s the main reason the economy has rebounded from last year’s government-ordered deep recession far earlier and more strongly than any economist (or I) had expected.

It’s now clear that, by the March quarter of this year, the economy’s production of goods and services – real gross domestic product – had returned to its level at the end of 2019. The level of employment was a fraction higher than before the virus struck, and the rate of unemployment had gone most of the way back to its pre-virus 5.1 per cent.

And it was Scott Morrison’s massive boost to government spending – JobKeeper, the temporary JobSeeker supplement and all the rest – “wot done it”.

This week’s budget, coming on top of last year’s, confirms there’s been a lasting shift in the main policy instrument used by the macro economy managers, from monetary policy to fiscal policy.

Why? Short answer: because when the official interest rate – the lever monetary policy uses to encourage or discourage borrowing and spending – has fallen almost to zero, your instrument no longer works.

We, and all the advanced economies, are caught in what the great British economist John Maynard Keynes called a “liquidity trap”: there’s plenty of money around to be borrowed – and at very low interest rates – but few businesses want to take it. Cutting rates even further won’t change this.

The last time the developed world was caught in a liquidity trap was the Great Depression of the 1930s. Keynes immortalised himself by thinking outside the box and coming up with the solution: give up on interest rates and switch to using fiscal policy – government spending and taxation – to keep the economy growing until the private sector – businesses and households – get their mojo back.

Note that we were caught in our liquidity trap long before the virus came along. The pandemic’s just brought matters to a head. The problem the economic managers are responding to is “structural” – deep-seated and long-lasting – not “cyclical”: temporary.

So don’t imagine the switch from using interest rates to using the budget is temporary. It will continue for as long as very low interest rates keep monetary policy impotent. And for as long as the rich countries’ bigger problem remains unemployment, not inflation.

Low inflation and low interest rates go together. That’s why the Reserve Bank’s being cautious rather than brave in assuring us it’s unlikely to increase interest rates “until 2024 at the earliest”.

But why is fiscal stimulus more effective than economists realised? Why does a dollar of stimulus have a bigger effect on GDP – a higher “multiplier effect” – than they thought? Two main reasons.

One thing that reduces the size of fiscal multipliers is the “leakage” of spending into imports. But this doesn’t matter as much in a more globalised world, when all the rich economies are likely to be stimulating at the same time. As they did in the global financial crisis of 2008 and are doing now in response to the pandemic. My country’s leakage of spending becomes your country’s “injection” of exports – and vice versa.

A second factor that was keeping multipliers low is what economists call the “monetary policy reaction function”. If a government is spending big – whether for political or economic reasons – but the independent central bank thinks this will risk inflation going above its target, it will increase rates.

The two arms of macro policy will then be pulling in opposite directions. This is what we had before the arrival of the pandemic, when the Reserve was cutting interest rates to get the economy moving, but Scott Morrison and Josh Frydenberg were focused on eliminating debt and deficit.

Now, however, fiscal policy and monetary policy are both pushing in the direction of encouraging growth and lower unemployment. With fiscal doing most of the pushing, this means a higher multiplier.

Which brings us to the obvious question: is the “stance of policy” adopted in this week’s budget expansionary or contractionary? If you believed all the silly talk of a “big-spending budget” you’d be in no doubt that it’s expansionary.

But it’s trickier than that. If you judge it the simple way the Reserve Bank does, by looking at the direction and size of the expected change in the budget balance from the present financial year to the coming year, you find the budget deficit’s expected to fall from $161 billion to $107 billion.

That’s a huge $54 billion fall, suggesting the budget is contractionary. But that’s not right. Because last year’s budget underestimated the speed with which employment and tax collections would rebound and people would get a job and go off the dole, the additional stimulus measures announced in the budget stopped that fall from being a lot bigger.

And remember this: a lot of last year’s stimulus spending – something less than $100 billion-worth - won’t have left the government’s coffers by June 30 this year. And it’s been estimated that about $240 billion-worth of stimulus spending that did leave the government’s accounts is still sitting in the accounts of households and businesses, able to be spent in the coming year.

We do know, for instance, that the saving rate of households, which was 5 per cent before the coronacession began, was still up at 12 per cent of their disposable income, after peaking at 22 per cent at the end of June last year.

The government’s forecasters are expecting that a lot of the savings of households and companies will be spent on consumption and investment in 2021-22. This tells me it would be a mistake not to think of fiscal policy as still highly expansionary. Which is as it should be.

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Wednesday, May 12, 2021

This budget couldabeen a lot better than it is

This is the lick-and-a-promise budget. The budget that proves it is possible to be half pregnant. Which makes it the couldabeen budget. Scott Morrison and Josh Frydenberg had the makings of a champion of budgets, but their courage failed them.

It’s not a bad budget. Most of the things it does are good things to do. Its goal of driving unemployment much lower is exactly right. Its approach of increasing rather than cutting government spending is correct, as is its strategy of fixing the economy to fix the budget.

But having fixed on the right strategy Morrison, reluctant to be seen as Labor lite, has failed in its execution. Economists call this “product differentiation”; others just call it marketing.

Some are calling this a big-spending budget. It isn’t. Frydenberg has kept his promise that it would be no “spendathon”. As a pre-election vote-buying budget it hardly rates. Its “new and additional tax cut” for middle-income earners of up to $1080 a year turns out to be not a tax cut but the absence of a tax increase.

Politically, this budget had to offer a convincing response to the report of the royal commission on aged care. Reports have suggested fixing the broken system would take extra spending of about $10 billion a year.

Had he accepted that challenge, Morrison would have put himself head and shoulders above his Liberal and Labor predecessors. He settled for spending an extra $3.5 billion a year. Major patch-up at best. The scandals will continue.

Politically, Morrison had to make this a women-friendly budget, to prove he valued women’s contribution to the economy and remove impediments to their economic security. Making childcare free – as it was, briefly, during the lockdown – would have been a big help to young families, as well as greatly increasing employment. It would have backed his fine words with deeds.

That would have cost about $2 billion a year. Morrison settled for $600 million a year, limiting the new assistance to about one childcare-using family in four by excluding the great majority, who have only one child in care.

Frydenberg has said that significant investments in energy, infrastructure, skills, the digital economy and lower taxes are all aimed at driving unemployment down.

But this talk of “investments” in mainly male-dominated industries is just what led female economists to be so critical of last year’s macho budget. In any case, energy and infrastructure yield few new jobs for each billion spent.

That’s why women-friendly and job-creating both pointed to a budget that focused on growing the “care economy” – aged care, childcare, disability care.

It’s labour-intensive, employs mainly women and provides services that women care about more than men. And it’s largely funded and regulated by … the federal government. Opportunity fumbled.

If you can’t get too excited by the expectation that the economy will grow by a positively roaring 4.25 per cent in the coming financial year, and a much more sedate 2.5 per cent the following year, I don’t blame you.

For one thing, budget forecasts don’t always come to pass. For another, Frydenberg’s claim that more budgetary stimulus is needed because of continuing uncertainty over the pandemic is disingenuous.

The truth is, at this stage the economy is still running on the stored heat of last year’s massive budgetary stimulus, much of which has still to be spent. The purpose of public-sector stimulus is to get the private sector – households and businesses – up to ignition point, so it keeps going under its own steam.

That hasn’t happened yet. So the purpose of the further stimulus in this year’s budget is to keep the kick-starting going until the private sector’s engine gets going.

Much of this depends on a return to decent pay rises – which is, as yet, beyond the budget’s “forecast horizon”. We haven’t had a decent pay rise since before the election of the Coalition government.

We had been used to our standard of living getting a bit better each year. That hasn’t happened for years. A Liberal Prime Minister who can’t lift our standard of living should be peddling a lot harder than he is in this budget.

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