Monday, May 16, 2022

Inflation: workers being unreasonable, or bosses on the make?

When you think about it clearly, the case for minimum award wages to be raised by 5.1 per cent is open-and-shut. So is the case for all workers to get the same. This wouldn’t stop the rate of inflation from falling back towards the Reserve Bank’s 2 to 3 per cent target zone.

But if, as seems likely, the nation’s employers contrive to ensure that this opportunity is used to continue and deepen the existing fall in real wages, the nation’s businesses will have shot themselves in the foot.

What, in their short-sightedness, they fondly imagined was a chance to increase their profits, would backfire as this blow to households’ chief source of income, crimped those households’ ability to increase or even maintain their spending on all the things businesses want to sell them.

The recovery from the “coronacession” would falter as households’ pool of savings left from the lockdowns was quickly used up, and their declining confidence in the future sapped their willingness to run down their savings any further.

Should the economy slow or even contract, unemployment could rise and the hoped-for gain in profits would be lost. Cheating your customers ain’t a smart business plan.

Such short-sighted thinking by businesses involves a “fallacy of composition” common in macro-economics: what seems “rational” behaviour by an individual firm doesn’t make sense for firms as a whole. It’s a form of “free-riding”: it won’t matter if I screw my workers because all the other businesses won’t screw theirs.

But back to wages. If all workers got a 5.1 per cent pay rise to compensate them for the 5.1 per cent rise in consumer prices over the year to March, thus preserving their wage’s purchasing power, surely that means the inflation rate would stay at 5.1 per cent?

Firms would have to raise their prices by 5.1 per cent. But many small businesses wouldn’t be able to afford such a huge pay rise and would give up, putting all their workers out of a job.

Is that what you think? It’s certainly what the employer-group spruikers want you to think. But it’s nonsense. Hidden within it is a mad assumption, that wages are the only cost a business faces.

Unless all those other costs have also risen by 5.1 per cent, the business can pass on to its customers all the extra wage cost with a price rise of much less than 5.1 per cent.

How much less? That’s a question any competent economist could give you a reasonably accurate answer to by looking up the Australian Bureau of Statistics’ most recent (for 2018-19) “input-output” tables and doing a little arithmetic.

The tables divide the economy into 115 industries, showing the value of all the many inputs of raw materials, machinery, labour, rent and other overheads to the process by which the industry produces its output of goods or services.

Any competent economist (which doesn’t include me, I’m just a journo) could do this, but only two economists from the Australia Institute, Matt Saunders and Dr Richard Denniss, have bothered, in a paper forthcoming this week, Wage price spiral or price wage spiral?

The official tables show that the proportion of total business costs accounted for by labour costs (that is, not just wages, but also “on-costs” such as employer super contributions and workers comp insurance) varies greatly between industries, ranging from less than 3 per cent in petroleum refining to almost 71 per cent in aged care.

But this “labour/cost ratio” averages just 25.3 per cent across all 115 industries.

Now, let’s assume all workers in all industries received a 5 per cent pay rise, and all businesses chose to pass all the extra cost through to prices. By how much would prices rise overall? By 1.27 per cent.

That’s going to keep inflation soaring? It’s well below the Reserve’s 2 to 3 per cent target range.

Of course, that’s just what economists call “the first-round effect”. What about when all a firm’s suppliers put their prices up to cover their wage rises? The “second-round effect” takes the overall rise in prices from 1.27 per cent to 1.85 per cent – still below the target.

Do you remember when the ABC quoted some spruiker saying the cost of a cup of coffee in a cafe could rise to $7? The authors use the tables to show that passing on a 5 per cent pay rise could increase the retail price of a $4-cup by 9 cents.

(Such people are always telling us a crop failure in South America has doubled or trebled the price of coffee beans. It’s the same trick: they never mention that the cost of beans is the least part of the price of a coffee. The biggest cost is often renting the cafe.)

Now get this. That 1.85 per cent rise in prices probably overstates the effect of a universal 5 per cent wage rise, for three reasons.

First, because it assumes zero improvement in the productivity of labour. It’s not great at present, but it’s not non-existent. Second, it assumes firms don’t respond to higher costs by shifting to cheaper substitutes.

And third, because six of the 10 “industries” with the highest labour cost pass-through are either government departments (which don’t actually charge a price that shows up in the consumer price index) or are heavily subsidised by government. Effect on the budget isn’t the same as effect on inflation.

Note that whereas the Fair Work Commission has the ability simply to order a 5 per cent rise in the many minimum award rates covering the lowest-paid quarter of the workforce, should it choose to, the public and private sector employers of the remaining three-quarters of workers are unlikely to be anything like that generous.

That’s a fourth reason the effect of wage rises is likely to be (a lot) less than the authors’ simple calculation of a 1.85 per cent rise in retail prices.

But don’t get the idea wages are the only reason consumer prices rise. Wage rises would explain little of the 5.1 per cent rise in consumer prices over the year to March.

The great bulk of the rise is explained by businesses passing on to retail customers the higher prices of imported goods and services caused the pandemic’s various supply disruptions and the Ukraine war’s effect on energy and food prices.

But some part of that 5.1 per cent rise in prices is explained by businesses deciding now would be a good time to raise their prices and fatten their profit margins. This may not be a big factor so far, but I won’t be surprised if it’s a much bigger one this quarter and in future.

For months the media have been telling us how much a problem inflation has become, with a lot worse to come. Top business leaders and industry lobbyists have used naive reporters to, first, send their competitors a message that “we’re planning big prices rises so why don’t you do the same” and, second, soften up their customers. “Prices are rising everywhere – don’t pick on me.”

It’s quite possible we’ll have trouble getting inflation back into the target range. If so, it won’t be caused by big pay rises – but it’s a safe bet people will be using a compliant media to blame it on greedy workers.

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Friday, May 13, 2022

Cutting real wages will help inflation, but weaken the economy

At last, as the election campaign reaches the final stretch, we’ve found something worth debating. Anthony Albanese has found his spine and supported a big rise in award wages, while Scott Morrison says a decent rise for the masses is a terrible idea that would damage the economy.

First the politics, then the economics. My guess is history will judge this to be the misstep that did most to cost Morrison the election. Successful Liberal leaders – John Howard, for instance – know never to be caught within cooee of a sign saying “wages should be lowered”. It’s not the way to woo outer-suburbs battlers to the Liberal cause.

That Morrison should defy this precedent in a campaign where the cost of living has become by far the biggest issue is all the more surprising.

Between them, the two contenders have revived and highlighted the oldest stereotype in Australia’s two-party politics: the Labor Party is - surprise, surprise – the party of ordinary workers, and will always champion their interests, whereas the Liberals are the party of business, and will always champion the interests of business.

It’s because the Libs are seen as the bosses’ party that they’re instinctively regarded as better at managing the budget and the economy – a mindset Morrison is desperately seeking to exploit in “these uncertain times”.

But the other side of the penny is that Labor, the party of the workers, is the party that cares, and will spend more on providing government services. Which party’s best at industrial relations and wages? One guess.

But how do the minimum wage arrangements work? And what are the broader economic implications of a rise high enough to cover the 5.1 per cent rise in consumer prices over the year to March - or not high enough, so that wages fall in “real terms”?

The Fair Work Commission conducts an annual wage review to determine the increase in the national minimum wage on July 1. Last year’s increase of 2.5 per cent applied to the 2 per cent of employees on the national minimum rate, but also the 23 per cent of employees whose wage is set by one of the various minimum rates for workers in different job classifications set out in each of the more than 100 industrial awards established by the commission.

The national minimum wage rate is about $20 an hour, or about $40,000 a year for a full-time worker. About 2.7 million workers have their wage set in this way.

A 5 per cent increase in the national minimum wage would be worth about $1 an hour or about $2000 a year. Note, however, that many of those in more skilled award classifications would be earning much more than that.

The rises the industrial parties ask for in hearings before the commission are always “ambit claims”. The Australian Council of Trade Unions wants a rise of 5.5 per cent.

On the employer side, the Australian Industry Group says the most its member businesses could possibly afford is 2.5 per cent. The Australian Chamber of Commerce and Industry says the most it could run to is 3 per cent.

Morrison has implied it would be quite improper for a federal Labor government to seek to influence the decision of the independent commission. But the fact is federal and state governments routinely make submissions to provide information about the state of the economy and indicate how generous or tight-fisted they think the commission should be – though they rarely suggest a specific figure.

The commission will give due consideration to a government’s submission but, rest assured, it will do as it sees fit, usually awarding an increase somewhere between the employers’ lowball and the unions’ highball.

My guess is this year’s decision will be a lot higher than last year’s 2.5 per cent, but not nearly as high as 5.5 per cent.

That’s particularly because the commission can be expected to allow for the 0.5 percentage-point increase in employers’ compulsory contributions to their workers’ superannuation accounts this July. The unions would love to have their cake and eat it, but I doubt they’ll be allowed to.

Albanese says, “the idea that people who are doing it really tough at the moment should have a further cut in their cost of living is, in my view, simply untenable”.

Morrison claims a minimum-wage increase sufficient to stop wages falling behind the rise in consumer prices would be “reckless and dangerous”.

The Ai Group warns that “an excessive minimum wage increase would fuel inflation and lead to higher interest rates . . . than would otherwise be the case”. It would be detrimental to economic growth and job creation.

The chamber of commerce says “any increase of 5 per cent or more would inflict further pain on small business, and the millions of jobs they sustain and create. Small business cannot afford it”.

So, what do I think? I think it’s easy to exaggerate the economic cost of giving our lowest-paid workers a decent pay rise. Small business always cries poor and warns jobs will be lost. But there’s little empirical evidence that higher wages lead to job losses.

It’s true that giving a quarter of our workers little or no compensation for the jump in prices caused by pandemic supply disruptions and the Ukraine war would be the quickest and easiest way to get inflation back down to the Reserve Bank’s 2 to 3 per cent target range.

But it would also be hugely unfair to load that burden onto our lowest paid workers, while business profits escaped untouched. The Reserve will just have to be more patient if it doesn’t want to crunch the economy with big rate rises.

And here’s the bit the business lobby groups seem too short-sighted to see. The more we cut the real incomes of our businesses’ customers, the less businesses will be able to sell to them, and the more the economy will be in anything but the “strong” condition Morrison keeps claiming it’s in.

Read more >>

Wednesday, May 11, 2022

In this election, one critical issue stands above all others

In this campaign we face a bewildering array of problems needing attention: the punishing cost of homes, the appalling treatment of people in aged care, the high cost of childcare, the neglect of every level of our education system, the continuing destruction of our natural environment and the pressure on our hospitals, not to mention the cost of living.

But there’s one problem that’s the most threatening to life, livelihood and lifestyle, the most certain to get a lot worse, the most imminent and the most urgent.

It’s not the cost of living, nor the risk of war with the Solomons (I joke), nor even the dubious behaviour of Scott Morrison and his ministers and their refusal to establish a genuine anti-corruption commission.

I’ll give you a clue: as I write, my fifth grandchild is on the way. I find it hard to believe anyone could be so self-centred and short-sighted as to think any problem could be more important or more pressing than action to limit climate change.

But the pressing need to discover whether the contending pollies have memorised a list of facts and figures has left little time for debating such minor matters as which side has the better policy on global warming.

And, whatever I may think, it’s clear most voters don’t rate climate change that highly. Recent polling by the Australian National University’s Centre for Social Research and Method shows voters rank reducing the cost of living most highly (65 per cent), followed by fixing the aged care system (60 per cent), strengthening the economy (54 per cent), reducing health care costs (53.5 per cent) and – at last – “dealing with global climate change” (just under 53 per cent).

But I’m pleased to say – and you may be surprised to hear – that the nation’s economists are in no doubt on what matters most. Three-quarters of the 50 top economists surveyed by the Economic Society of Australia nominated “climate and the environment” as the most important issue for the election.

Professor John Quiggin, of the University of Queensland, says the key message from the latest report of the Intergovernmental Panel on Climate Change is that “if the world acts now, we can avoid the worst outcomes of climate change without any significant effect on standards of living”.

But the report said it’s “now or never” to keep global warming to 1.5 degrees. Action means cutting emissions from the use of fossil fuels rapidly and hard. “Global emissions must peak within three years to have any chance of keeping warming below 1.5 degrees,” he says.

If you wanted to pick the worst continent to live on as the climate changes, it would be Australia, according to Quiggin. We are a “poster child” for what the rest of the world will be dealing with. Not that we care.

The economic costs of the transition to renewable energy would be marginal, he says. “The required investment in clean energy would be around 2.5 per cent of gross domestic product. That’s far less than the cost of allowing global heating to continue, with costs further offset by clean energy’s zero fuel costs and lower operating costs.”

Voters complain there’s no real difference between the parties, but on climate change we’re being offered the full menu of varying strengths. Climate Analytics, a non-profit research group founded by Bill Hare, has assessed three parties’ policies, plus Zali Steggall’s climate bill, which the teal independents are supporting.

The Liberals have supported zero net emissions by 2050, but refused to increase their commitment to reduce emissions 26 or 28 per cent by 2030. This is judged to be consistent with global warming of 3 degrees, bordering on 4 degrees.

Labor’s target is emission reduction of 43 per cent by 2030. Its plan is supported by the Business Council of Australia. This is judged to be consistent with global warming of 2 degrees, which would be “very likely to destroy the Great Barrier Reef”.

Steggall’s climate bill has a target of 60 per cent reduction in emissions by 2030, which is close to, but within, the upper boundary of modelled 1.5 degrees pathways for Australia. A higher target would give a higher probability of meeting the 1.5 limit.

The Greens’ target of a 74 per cent reduction by 2030 is judged consistent with limiting warming to 1.5 degrees. Some parts of the Barrier Reef would survive. Globally, the most extreme heat events could be nearly twice as frequent as in recent decades. In Australia, an intense heat event that might have occurred once a decade in recent times could occur every five years and would be noticeably hotter. Phew.

If you’ll forgive a little colourful characterisation, the choice ranges from the Liberals’ “let’s just say we’ll do something, so we don’t offend Barnaby and his generous donors” to Labor’s “let’s do a lot more than the Libs, but go easy on coal and coalminers” to the Greens’ “let’s not muck about”.

And the many Liberal voters in the party’s leafy heartland who really do care about climate change now have a way to make their views felt.

Read more >>

Monday, May 9, 2022

Inflation: bad for your budget, good for the government's

A big part of the Morrison government’s pitch about being better at economic management than Labor is its claim to have ensured all the massive increase in unfunded government spending during the years of pandemic lockdowns was “targeted and temporary”. Well, not really.

In a paper written by Matt Saunders and Dr Richard Denniss, of the Australia Institute, they study the forecasts and projections out to 2025-26 in the latest budget, which those with long memories will remember was presented at the start of this seemingly endless election campaign.

The authors find that, relative to what was projected in the last budget before the pandemic, annual government spending is now projected to grow at a much higher rate. It’s true annual spending has fallen back from its peak in 2020-21, but not by nearly as much as it should have if all the extra spending had been “targeted and temporary”.

So, what’s happened? I think I know. All the spending programs specifically labelled as part of the effort to hold the economy together during the lockdowns – JobKeeper, the JobSeeker supplement and all the rest – have indeed been wound up as promised.

But last year’s budget and this year’s both contained new spending initiatives that were separate to the explicitly pandemic-related measures. These, like most spending measures, were ongoing. Their annual cost tends to rise over time, in line with inflation and population growth.

If you remember, last year’s budget included much additional spending on aged care in response to the shocking findings of the royal commission, extra spending on the National Disability Insurance Scheme and a big increase in childcare subsidies.

Another thing worth remembering about last year’s budget: whatever the obvious political motivation for that additional spending, the econocrats co-opted it for their Plan B: if after almost a decade trying you can’t get wages to return to their normal healthy growth, why not try getting unemployment down so low that employers have to bid up wages to get or retain the labour they need?

With under acknowledged help from the temporary closure of our borders to all imported labour, Plan B has worked so well it’s now adding to the risk of ongoing inflation arising from all the once-off imported inflation.

But perhaps the most startling thing revealed by the authors’ examination of the budget papers is the way, relative to the pre-pandemic figures, nominal gross domestic product is now projected to grow at quite a faster rate than real GDP.

Why would nominal grow faster than real? Clearly, because of a higher rate of inflation. Remember, however, here we’re talking about inflation measured not as usual by the consumer price index, but as measured by the “GDP deflator”.

Why would the two inflation measures give significantly different results? Because our “terms of trade” had changed. If the prices we receive for our exports are changing at a different rate from the prices we’re paying for our imports.

So the GDP deflator includes changes in export prices, and subtracts changes in the prices of imports, whereas the CPI ignores export prices, but does include changes in the retail prices of imported consumer goods and services.

We’ve been making so much fuss about the bad news of rising import prices, such as petrol and diesel, we’ve forgotten that, as a big exporter of energy and food, we’re a net beneficiary of the Ukraine war’s effect on world commodity prices.

With much additional help from high iron ore prices, our terms of trade improved by more than 12 per cent in the March quarter, to a record high. A record high, and no one noticed.

But here’s the trick: your personal budget benefits only indirectly, if all at, from our booming exports. But it will bear the full effect of higher import prices, which do most to explain why the cost of living is up 5 per cent in a year and headed higher.

The Reserve Bank is confident this year’s round of wage rises will be a fair bit higher than last year’s, but it is adding to home-buyers’ cost of living by putting up interest rates, to help ensure wages rise by a lot less than prices in the period ahead.

So, recent developments not good news for your budget, but great news for the government’s budget. Its revenue tends to grow in line with the growth in nominal GDP. And higher inflation means higher taxes.

Mining companies paying more company tax, consumers paying more goods and services tax and, even despite the continuing fall in real wages, higher income tax collections as whatever wage rise workers do get pushes them into higher tax brackets or otherwise raises their average tax rate. Good news for some.

Read more >>

Friday, May 6, 2022

Our falling real wages will help control inflation

The media always portray an increase in interest rates as terrible news – and it’s hardly surprising that’s how Anthony Albanese sees it – but Scott Morrison is right in saying rising interest rates are a sure sign of a strong economy.

Rates fall or stay low when the economy is weak, but rise when the economy’s strong growth threatens to give us a problem with high and rising inflation – which is where we are now.

One of the main things we want from a strong economy is lots of jobs, which is just what we’ve been getting. So many jobs have been created over the past two years – almost all of them full-time – that the rate of unemployment has fallen to a very low 4 per cent, and the proportion of working-age people with jobs is higher than it’s ever been.

What could be wrong with that? Well, just that the wages people have been earning from all those jobs haven’t been keeping up with the cost of living. Last week’s news that consumer prices rose by a massive 5.1 per cent over the year to March has made that much worse.

If you want to blame Morrison for that, well, he’s actually right in saying most of its causes – supply disruptions arising from the pandemic; high petrol prices caused by Russia’s war on Ukraine – have nothing to do with our government.

But wages have been struggling to keep up with prices for all the time this government’s been in office. There are things it could have been doing to encourage higher wages, but it’s failed to do them. That’s the legitimate criticism of Morrison’s economic management.

Getting back to interest rates, the truth is that a rise in rates cuts both ways. It’s bad news for people with home loans, but good news for older people living on their savings and for young people saving for a deposit on a home.

Did I mention that nothing’s ever black or white in the economy? Almost everything that happens has advantages for some people and disadvantages for others.

But leaving aside whether individuals gain or lose from higher interest rates, where does the jump in prices leave the economy? How much of a worry has inflation become? Will rates have to rise so high they threaten the recovery? Could we even end up back in recession?

This time last week some business economists were sounding pretty panicky. “The inflation genie is well and truly out of the bottle”, some assured us. Others claimed the economy was “overheating” and, since the Reserve Bank had left it so late to start raising rates, they’d have to rise a long way to get inflation back under control.

But when Reserve governor Dr Philip Lowe announced on Tuesday that the official interest rate – aka the “overnight cash rate” – had been increased by 0.25 percentage points to 0.35 per cent, warned that further rises in rates will be needed “over the period ahead”, and explained how he saw the problem and how it could be fixed, many economists seem to have calmed down.

Implicitly, Lowe refuted the claim that the economy was overheating. Even at 5.1 per cent, our inflation rate was lower than the other rich countries’, and our wage growth so far had been much lower.

So the rise in inflation “largely reflects global factors” – that is, not of our making – but “domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices”.

That is, we don’t have as big a problem as that 5 per cent figure could make you think, but the economy’s growing so strongly we could get a problem if we kept interest rates so low.

Many retailers and other firms have gone for years trying to hold down their costs, including by finding ways to save on labour costs, and avoid passing those costs on to customers, but the rise in their pandemic and Ukraine-related costs – plus the media’s incessant talk of rising prices – has emboldened them to start increasing their own prices.

Now, as Lowe explains, even if petrol and pandemic-related costs don’t fall back down, they won’t keep rising. So in time the inflation rate will fall back of its own accord, provided it doesn’t lead to our firms putting their prices up too high and giving their workers pay rises big enough to fully cover their higher living costs.

If that does happen, the once-only rise in prices coming from abroad gets into the wage-price spiral and the inflation rate stays high.

This is why Lowe has started raising the official interest rate and may keep raising it by 0.25 percentage points every month or so until, by the end of next year, it’s up to maybe 2.5 per cent (which, not by chance, is the mid-point of the Reserve’s 2 to 3 per cent inflation target).

Note that, if 2.5 per cent is roughly equal to the “neutral” interest rate - that is, the rate that’s neither expansionary nor restrictive – this would only involve withdrawing the “extraordinary monetary support” put in place to help us through the pandemic. It would take the Reserve’s foot off the accelerator, not jam on the brakes.

According to Lowe’s estimations, the resulting reduction in mortgagees’ disposable income, plus the likelihood that most workers’ wage rises wouldn’t be sufficient to cover the 5 per cent rise in their living costs, thus reducing their wages in real terms, would limit firms’ ability to raise their prices and so help to get the inflation rate back to the top of the 2 to 3 per cent target range by 2024.

The inflation problem fixed, without crashing the economy. Done at the expense of people with home loans and ordinary workers? Yep. No one said using interest rates to control the economy was particularly fair.

Read more >>

Wednesday, May 4, 2022

Election bottom line: taxes will be going up, not down

Whichever side wins this election, it will be taking on a serious budget problem. Both sides are promising increased government spending on various worthy causes, while also promising that taxes will be cut rather than increased. This implies an ever-growing budget deficit. Do you think either side could get away with that? Only in their dreams.

Modern politicians are quite dishonest in what they tell us during election campaigns. They speak in loving detail about the expensive goodies they’re promising, but avoid mentioning any bad things they might have to do. They never present us with the bill.

And then we wonder why so many promises are broken.

Even before it thinks about the future, the new government will have to deal with unfinished business. The budget Treasurer Josh Frydenberg produced at the start of this campaign projected significant deficits for at least the next 10 years.

This despite the worst of the pandemic being over, and almost all the stimulus programs intended to keep the economy going during the lockdowns having been wound up. And despite the rate of unemployment being at its lowest in 50 years.

Economists know this profligacy will have to be corrected soon. Treasury secretary Dr Steven Kennedy has hinted as much. But that will require unpopular cuts in government spending or increases in taxes, or both.

Scott Morrison hasn’t been interested in doing any of that prior to the election. And economists have accepted that such nasty medicine is always administered after an election, not before.

The pollies won’t warn you of this, but I can. The longer the new government hesitates, the more the Reserve Bank will be obliged to compensate by raising interest rates higher than it otherwise would need to.

But that’s just the first of the budget problems the new government will inherit. The next part is that though – as the failure of its first 2014 budget demonstrated – the Coalition lacks the courage to make deep cuts in major spending programs, it has cut areas of spending that lack political support and kept a lid on spending in areas it hoped wouldn’t be noticed.

One of these tricks is to allow waiting lists and waiting times to blow out. Whenever you hear the word backlog – or spend ages on the phone waiting for “your call” to be so “important to us” that it’s actually answered – you know somebody somewhere is trying to save money by cutting the quality of the service you’re getting.

But penny-pinching is a game you can play for only so long before the worm turns. And after nine years, the pipsqueaks have started squeaking.

Did you catch the story just before budget night of the Minister for Veterans’ Affairs, Andrew Gee, who had to threaten to resign before the government relented and gave him extra funding to reduce the backlog in processing claims from veterans? (This from the guys always so sanctimonious on Anzac Day.)

High on the list of cost cuts is the public service. Who cares about all those shiny bums? Well, when you have trouble rolling out vaccinations, or getting hold of enough RATs, maybe you wonder whether it was smart to show so much knowledge and expertise to the door.

Overseas aid is another favourite for cost cutting, and we haven’t been as generous as we could be with our Pacific neighbours. Do you think, say, the Solomon Islanders might have noticed?

The diplomatic corps is another needless extravagance we’ve cut back on. More economic to wait until our relations with big neighbours deteriorate to the point where we need to spend infinitely more on defence preparedness.

Then there’s the notion that $46 a day is plenty for the unemployed to live on. How much longer do you think governments will be able to get away with that outright meanness? Especially when both sides are planning to give battlers like me a $9000-a-year tax cut in 2024.

It’s already clear the jig is up in one of the biggest areas where successive governments have tried to keep a lid on costs: aged care.

A fair part of those endless projected budget deficits is the $17 billion additional spending on aged care in last year’s budget, following the damning report of the royal commission. But there’ll need to be much further spending on care workers’ wages and training before standards are acceptable.

And that’s before you get to the big increases in spending on the National Disability Insurance Scheme and on defence.

Everything points to strong growth in government spending in coming years. And with budget deficits needing to be smaller rather than larger, this points to taxes that are higher.

Which taxes? Obvious candidates are reduced superannuation tax concessions for high earners like me, plus higher user charges for aged care. But the big one will be more bracket creep. Higher inflation equals higher income tax.

Don’t believe any politician who claims to stand for lower taxes. They can’t deliver.

Read more >>

Monday, May 2, 2022

Our inflation problem isn't a big one - unless we overreact

I can’t remember a time when the arguments of all those bank and business economists claiming “the inflation genie is well and truly out of the bottle” and demanding the Reserve Bank raise interest rates immediately and repeatedly have been so unconvincing.

At base, their problem is their unstated assumption that the era of globalisation means all the advanced economies have identical problems for the same reasons and at the same time.

If America has runaway inflation because successive presidents have applied budgetary stimulus worth a massive 25 per cent of gross domestic product at the same time as millions of workers have withdrawn from the workforce, Britain’s withdrawal from the European Union is causing havoc, and Europe’s problem is particularly acute because of its dependence on Russian oil and gas, we must be the same.

Business economists have put most of their energy into convincing themselves our problem is the same as everyone else’s, rather than thinking hard about how our circumstances differ from theirs and how that should affect the way we respond.

There’s also been a panicked response to a huge number – inflation of 5 per cent! – that says, “don’t think about what caused it, just act”. And since every other central bank has already started raising rates, what’s wrong with our stupid Reserve?

Too many economists have switched their brains to automatic pilot. We know from our experience of the 1970s and ’80s how inflationary episodes arise – from excessive demand and soaring wages – and we know the only answer is to jack up interest rates until you accidentally put the economy into recession. You have to get unemployment back up.

That stereotype doesn’t fit the peculiar circumstances behind this rise in prices, nor does it fit the way globalisation, skill-biased technological change, the deregulation of centralised wage-fixing and the huge decline in union membership have stripped employees of their former bargaining power.

The first thing to understand is that our price rises have come predominantly from shocks to supply: the various supply-chain disruptions caused by the pandemic, the war on Ukraine’s effect on oil and gas prices, and climate change’s effect on meat prices.

Various economists are arguing that price rises have been “broadly based” so as to show that price rises are now “demand-driven”, but the main reason so many prices have risen is that there have been so many different supply shocks coming at the same time, with so many indirect effects, ranging from transport costs to fertiliser and food.

Two thirds of the quarterly increase in prices came from four items. In order of effect on the index: cost of new dwellings (up 5.7 per cent), fuel prices (11 per cent), university fees (6.3 per cent) and food (2.8 per cent).

Of those, only new dwelling prices can be attributed mainly to strong demand, coming from the now-ended HomeBuilder stimulus measure. The rise in uni fees was a decision of the Morrison government.

America’s economy is “overheating”, but ours isn’t. It’s true our jobs market is very tight, and that much of this strength is owed to our now-discontinued stimulus measures.

But, paradoxically, the economics profession’s ideological commitment to growth by immigration has blinded it to the obvious: job vacancies are at record levels also because of another pandemic-related supply constraint: our economy has been closed to all imported labour (and we even sent a fair bit of it back home). This constraint has already been lifted.

The thing about supply shocks is that they’re once-only and not permanent. So, left to its own devices, without further shocks the rate of price increase should fall back over time. Petrol and diesel prices, for instance, have already fallen a bit but, in any case, won’t keep rising by 35 per cent a year year-after-year.

It’s sloppy thinking to think a rise in prices equals inflation. The public can be forgiven such a basic error, but professional economists can’t. A true inflation problem arises only when the rise in prices is generalised and is ongoing. That is, when it’s kept going by a wage-price spiral.

When a huge rise in prices, from whatever source, leads to an equally huge – or huger – rise in wages, which prompts a further round of price rises. That’s inflation.

In their panic, business economists have assumed that the loss of employee bargaining power we’ve observed in most of the years since the global financial crisis, which has done so much to confound the econocrats’ wage and growth forecasts, and caused inflation to fall short of the Reserve’s target range for six years in a row, has suddenly been transformed. Union militance is back!

Really? I’m sure employees and what remains of their unions will be asking for pay rises of at least 5 per cent this year, but how many will get anything like that much? They’ll all be on strike until they do, you reckon?

They’re safe to get more than the 2.3 per cent they got in the year to December, according to the wage price index, but the greatest likelihood is that real wages will continue to fall. And the cure for that is to raise interest rates, is it?

It is true that, if wages rose in line with prices, we would have an inflation problem, but how likely is that?

There’s been much concern about stopping a rise in “inflation expectations”, but this thinking involves a two-stage process: in expectation of higher inflation, businesses raise their prices. And in expectation of higher inflation, unions raise their wage demands.

All the sabre-rattling we’ve seen by the top retailers and their employer-equivalent of union bosses – so breathlessly reported by the media – suggests they’re increasingly confident they can get away with big price rises. But how much success individual employees and unionised workers have in realising their expectations remains to be seen.

Perhaps in this more inflation-conscious environment, employers will be a lot more generous – more caring and sharing – than they have been in the past decade. Perhaps.

The Reserve is under immense pressure from the financial markets, the bank and business economists, the media, the actions of other central banks and even the International Monetary Fund to start raising interest rates.

It will, with little delay. It must be seen to act. But whether it’s at panic stations with the media and the business economists is doubtful. And you don’t have to believe the inflation genie is out of the bottle to see that the need for interest rates to be at near-zero emergency levels has passed.

As BetaShares’ David Bassanese has predicted, the Reserve will be “not actively trying to slow the economy, but rather [will] begin the process of interest-rate normalisation now that the COVID emergency has passed”. Moving to “quantitative tightening” will be part of that process.

Read more >>

Friday, April 29, 2022

The cost of living is soaring, but raising interest rates won't help

This week removed any doubt that the cost of living is the dominant issue in this election campaign. We got official confirmation that the many people complaining about rising prices are, to coin a phrase, right on the money.

Now the Reserve Bank is under immense pressure to begin increasing interest rates at its board meeting on Tuesday. If it does so, this will add to the cost pressures facing many consumers, making the cost of living an even bigger issue politically.

But were it to wait for the latest information on wages that it will get three days before the election – which it really ought to – then increase rates in early June, it will be accused of choosing its timing to help the Coalition. And rightly so.

As Reserve Bank governor Dr Philip Lowe’s predecessor, Glenn Stevens, argued convincingly when he increased the official interest rate just before the 2007 election, which saw John Howard thrown out of office, the only way for the Reserve to be apolitical is for it to do what it believes the economy needs without regard to what’s happening politically.

Speaking of politics, The Conversation’s Peter Martin has used the ABC’s Vote Compass – a questionnaire which, among other things, asks respondents to name the issue of most concern to them – to show that, at the 2016 election, only 3 per cent picked “cost of living”.

At the 2019 election, it was only 4 per cent. At this election, however, 13 per cent of voters have picked it, making it the respondents’ second biggest concern, behind only climate change. (Which should be biggest. But that’s for another day.)

After this week, it’s probably more than 13 per cent.

This week the Australian Bureau of Statistics released figures showing the consumer price index rose by 2.1 per cent during the three months to the end of March, and by 5.1 per cent over the year to March.

Strictly speaking, the CPI is a measure of consumer prices rather than the cost of living, but it’s near enough. So this “headline” figure is the right one for people concerned about living costs. It’s the highest annual rate for two decades.

But it can be affected by extreme prices changes that don’t represent the general price pressures on the economy, so “for policy purposes” (that is, for its decisions about changing the official interest rate) the Reserve focuses on a measure of “underlying” inflation called the “trimmed mean”.

This excludes the 15 per cent of prices that rose the most during the quarter and the 15 per cent of prices that rose the least or fell.

By this measure, prices rose by 1.4 per cent during the quarter and by 3.7 per cent over the year. This is the highest it’s been since 2009, and well above the Reserve’s 2 to 3 per cent target range.

It’s standard behaviour for incumbent politicians to claim the credit for anything good that happens in the economy during their term, regardless of whether they’re entitled to.

So it’s only rough justice for opposition politicians to blame the government for anything bad that happens – which is just what Labor’s been doing this week.

But Scott Morrison and Josh Frydenberg have been arguing furiously that the leap in most prices has had nothing to do with them. And I think there’s a lot of truth to their claim.

Let’s look at the particular prices that do most to explain the March quarter jump in living costs. The biggest was a 5.7 per cent rise in the cost of newly built houses and units.

This has been caused by shortages of certain imported building materials due to pandemic-related disruptions to supply, worsened by a surge in demand for new homes arising from the authorities’ efforts to counter the “coronacession” by cutting interest rates and using HomeBuilder grants to keep the building industry moving.

Next in importance in explaining the surging cost of living is an 11 per cent rise in the cost of petrol and diesel fuel, caused by Russia’s war on Ukraine. These prices are up 35 per cent over the year to March.

The higher world oil price has also raised fresh food prices by increasing the cost of fertiliser, as well as increasing the cost of transporting many goods. The pandemic has temporarily increased the cost of international shipping.

Third in importance this quarter is a 6.3 per cent increase in university fees caused by a federal government decision last year.

Add in the 12 per cent annual rise in beef and lamb prices caused by graziers’ restocking following the end of the drought and you see that most of the rise in living costs so far comes from factors far beyond the government’s control.

So, are Morrison and Frydenberg off the hook on rising living costs? No. People feel the pain of rising prices more acutely when their wage rises haven’t been keeping up, let alone getting ahead.

In a well-managed economy, workers’ wages rise a little faster than prices. This hasn’t been happening, particularly in the past two years or so, and the government has made no attempt to rectify the problem.

Raising interest rates can do nothing to fix all the problems we’ve noted on the supply-side of the economy. The only thing it can do is dampen the demand for goods and services by increasing the cost of borrowing and by leaving those people with mortgages with less disposable income to spend.

Which is an economist’s way of saying what everybody knows: that higher interest rates add to the living costs of the third of households paying off a home loan. Those who’ve taken on loans in recent years will feel it most.

Of course, all those people living off their savings will be cheering the return to rising interest rates. But from an economy-wide perspective, the winners are far outweighed by the losers.

Read more >>

Wednesday, April 27, 2022

Banking royal commission: much misconduct, not much follow-up

Can you remember as far back as three years ago? Scott Morrison and Josh Frydenberg are hoping you can’t. And fortunately for them, the media’s memory is notoriously short.

The media mostly live in the now. What’s being promised in this election campaign? Not much as yet on what promises were made last time and what became of them.

A big issue in the years before the election in May 2019 was the many complaints about people’s mistreatment by the banks, much of it brought to light by this masthead’s Adele Ferguson. There was growing pressure for a royal commission.

But the banks denied there was a problem, and then-treasurer Morrison repeatedly dismissed the need for an inquiry. Finally, when some government backbenchers signalled their support for a motion to establish a commission, the banks begged the government to take over and ensure the inquiry had appropriate terms of reference.

Former High Court judge Kenneth Hayne was appointed to inquire into misconduct in the banking, superannuation and financial services industry. For months, the public was shocked by the misbehaviour his hearings revealed.

People – even dead people – being charged for services they didn’t receive, signatures being forged, banks finding many ways to put their profits ahead of the fair treatment of their customers.

The government, too, professed its shock and utter disapproval of the banks’ behaviour. When the commission’s final report was submitted just a few months before the election was due, the government took three days to announce it was acting on all 76 recommendations and going further in “a number of important areas”.

“My message to the financial sector is that misconduct must end and the interest of consumers must now come first. From today the sector must change, and change forever,” Treasurer Frydenberg declared.

But the backdown began just five weeks later, even before the election. Frydenberg announced that “following consultation with the mortgage broking industry and smaller lenders, the Coalition government has decided to not prohibit trail commissions on new loans, but rather review their operation in three years’ time”.

As Professor Richard Holden of the University of NSW observed at the time, Frydenberg offered nothing in its place.

Back in 2009, in the aftermath of global financial crisis, the Rudd government imposed “responsible lending obligations” making it illegal to offer credit that was unsuitable for a consumer based on their needs and capacity to make payments.

These have always irked the banks, and soon after the Coalition came to power in 2013 it attempted to wind them back, but was blocked in the Senate. The Hayne commission said they were fine.

But in September 2020, under cover of the “coronacession”, Frydenberg announced plans to dismantle the obligations because they’d become “overly prescriptive, complex and unnecessarily onerous on consumers”.

Professor Kevin Davis, of the University of Melbourne, a respected expert in this field, has argued that these justifications don’t make much sense.

By January last year, Davis found that the government was yet to implement 44 of the 76 recommendations it had accepted, and had “turned its back on five key reforms – including curbing irresponsible lending practices”.

“Instead, it appears to be banking on market forces and voluntary codes of conduct to protect financially unsophisticated borrowers. This is the triumph of ideology and vested interests over logic and evidence,” Davis said.

The Hayne commission was highly critical of the Australian Securities and Investments Commission, saying it was too accommodating towards the bodies it was regulating, being too ready to negotiate and not keen enough to litigate.

In August last year, Frydenberg significantly changed his “statement of expectations” of ASIC from the one issued in 2018. The new directions start by saying the government expects the body to “identify and pursue opportunities to contribute to the government’s goals, including supporting Australia’s economic recovery from the COVID pandemic”. Hmmm.

Hayne recommended setting up a “compensation scheme of last resort”, funded by the industry, to ensure that victims of financial misconduct actually receive compensation that had been awarded where the firm was unable to pay because it had collapsed.

Hayne also recommended a “financial accountability regime” to hold finance leaders accountable for misconduct that occurs on their watch.

The two measures were finally recommended for passage by the relevant Senate committee in mid-February. But neither was passed before parliament was prorogued for the election.

It’s remarkable what miraculously winning an election can do to your determination to make the bankers behave.

Read more >>

Monday, April 25, 2022

If you care about our future, care about declining home ownership

The most thought-provoking contribution I’ve heard so far in this utterly dumbed-down election campaign is from barrister Gray Connolly, saying the big issue we should be debating is housing and intergenerational wealth.

Connolly was speaking as a self-proclaimed Red Tory, on ABC Radio National’s Religion and Ethics Report. Red Tories, he says, are people on the political Right who have a more traditional view of what we’re trying to achieve. They are true conservatives, trying to conserve the institutions and practices that have given us the way of life we value.

Red Tories believe in communitarianism – much more about “we” than “me”. They highlight the virtues of home and family. They emphasise the boring virtues, like duty, perseverance and loyalty, not just people’s rights.

That so few Australians under 40 have any form of home ownership or wealth of any kind is a ticking timebomb socially, Connolly says. It’s this that could split the country demographically.

“I cannot believe how little work either side of politics has done on the housing issue. It’s an absolute disgrace that the Coalition, on the Right of politics, for whom home ownership is usually something very important, has done so little to promote home ownership among young people.

“You cannot have a stable country where so many people do not have security in their homes, do not have security in their work, don’t feel they’re getting ahead, and do not feel they have a stake in society that causes them to want to preserve it.

“I cannot believe that so many people on the Right of politics do not get this,” he says.

How do the economic policies of recent decades adversely affect traditional conservative values?

“For the better part of 20 years, nothing has been done other than pour fuel on the housing-price fire,” he says. This has continued even to the point of not looking after renters, not looking after people with insecure work.

It has delayed coupling and family formation for most people. “If you don’t have secure work, chances are you’re not going to form a family because chances are you cannot afford a home.”

If you have housing that is so expensive, then you have young people moving away from where their parents are. You have the family bond dissolve, he says.

“If you are a conservative, you want to conserve [that bond].” You want adult children to be able to look after their ageing parents. You want grown-up children to be able to turn to their parents for childcare. This, he says, is the natural order of society.

But because “the market” and government policy mean we don’t “prioritise residential housing for actual residence, but for investment, you have the absolute social disaster where these bonds are being split apart.”

Does it surprise you to hear anyone on the Right accepting that insecure work is a major social problem? Though the Red Tory label is a recent British invention, Connolly traces its origins back to the mid-19th century and Benjamin Disraeli.

Then, then the Conservatives saw the trade union movement as a necessary counterbalance to the “viciousness and brutality of Manchester liberalism,” Connolly says. (Manchester would have been seen as centre of the dark satanic mills.)

Connolly says Red Tories accept the role of the state as protector of the nation, but also of the family and the family structure. They see the state as being useful for achieving bigger projects for the national good.

Phillip Bond, instigator of Britain’s Red Tory revival, says the market has a tendency to devour its host society. Connolly says this is a very dangerous tendency and that’s where the state comes in.

Corporations are creatures of statute, and what statutes make they can unmake and can regulate, he says. So rather than fearing the state is too powerful, “I am much more scared of the state that’s too reluctant to bring corporations to heel”.

A corporation has no special rights in society any more than any other group does. The state is meant to protect the rights that people need to be protected. We should be conserving society and the community and serving the weakest and the hurt, he concludes.

I think there’s much sense in what Connolly says, and not just about the high social price we’ll pay for making too many jobs insecure and homes too hard for too many young people to afford. We’ll damage the Australian way of life.

The economy is all of us. It belongs to all of us, not just a few big corporations. It must be the servant of our society. Governments’ job is to ensure the economy improves our way of life and doesn’t diminish it.

Read more >>

Friday, April 22, 2022

Job insecurity: close your eyes and you can't see it

Well, that’s a relief. Labor and the unions are claiming we have a problem with increasing casualisation and job insecurity, but The Australian Financial Review has looked up the official figures and discovered that, if anything, the proportion of casual workers has been falling. So, the problem’s a furphy? Sorry, ain’t that simple.

Strictly speaking, the Australian Bureau of Statistics’ labour force survey doesn’t measure “casual” employment, and certainly makes no attempt to measure whether jobs are secure or insecure, precarious or solid as a rock.

What it does do is ask the workers it surveys whether their job entitles them to annual and sick leave. We’re left free to assume that those who say no must be “casuals”, whereas those who say yes must be “permanents”.

It is true that, by this measure, the proportion of all workers who are casuals grew strongly in the decades before 2000, but then was little changed until the onset of the pandemic in 2020.

But it’s also true that the absolute number of casuals continued to rise until the pandemic.

In the two years since February 2020, the number has fallen – by 61,000, or 2.3 per cent – and so have casuals as proportion of total employment.

I very much doubt the pandemic has cured us of insecure employment.

With some people unable to work because they had the virus or were in isolation, and with our borders closed to the usual supply of temporary workers from overseas, employers became acutely short of labour. But I wouldn’t assume that what employers do during a pandemic is what they’ll keep doing when conditions improve.

So whether the labour movement is wrong to say casualisation is increasing is open to debate. And even if the proportion of casuals continues to decline in the years ahead, does that mean insecure employment isn’t worth worrying about?

In any case, casualisation isn’t really what Laborites are on about. It’s job insecurity that’s the issue. And a casual look at the statistics won’t tell you much about that either.

One man who has taken a very careful look is David Peetz, a professor of employment relations at Griffith University. He summarised his findings in two articles for The Conversation.

He started by taking a closer look at what the figures say about the nature of casual jobs. Why do some jobs need to be casual, and why do some employers need casual jobs?

Surely the answer is that employers want flexibility because they need some people to work at varying times for short periods.

But Peetz found that about a third of casuals worked full-time hours. About half had the same working hours from week to week, and were not on standby. More than half could not choose the days on which they worked.

Almost 60 per cent had been with their employer for more than a year. And about 80 per cent expected to be with the same employer in a year’s time.

What this suggests is that many workers classed as casuals don’t need to be casual in the traditional sense. Peetz found that only 27 per cent of casuals worked varying hours and had no minimum guarantee of hours.

This means a huge proportion of the workers classed as casual because they’re not eligible for paid leave could be classed as permanent, but aren’t.

Why not? One possibility is that the employer simply wants to save on the cost of leave. But defenders of the status quo assure us casual workers receive a special 25 per cent loading in lieu of paid leave. What’s more, many casuals prefer the loading to the entitlement, we’re assured.

The statistics bureau no longer asks workers who say they have no leave entitlement whether they receive a loading – or whether it’s as high as 25 per cent. But back when it did ask, less than half of casuals said they got it.

I wonder how many cases of “wage theft” involve the non-payment or under-payment of leave loading. As for people wanting cash now not paid leave in the future, that’s a sign they’re living hand-to-mouth on a wage too low to give them financial security.

Peetz argues the reason so many people working regular full-time jobs are classed as casuals is because employers have the bargaining power to impose insecurity on some of their less-skilled or less senior workers.

Even if the employer isn’t also saving on how much they have to pay the worker, they get the “flexibility” of being able to get rid of workers without notice or redundancy payout. The worker may not even be formally terminated, just not be given any more hours.

Did someone mention job insecurity?

Looking more broadly, Peetz found that the real causes of insecurity aren’t the type of contract workers are on – casual or permanent, full-time or part-time – but rather the way organisations are being structured these days.

“This is designed to minimise costs, transfer risk from corporations to employees, and centralise power away from employees,” he argued.

This motivation helps explain the dramatic increase in franchised businesses. It’s the franchisee that bears responsibility for scandals such as underpaying workers.

Other corporations call in labour-hire companies to take on responsibility for their workers. This cuts costs and transfers risk down the chain – thus making jobs more insecure. Labour-hire workers are usually casual full-time workers, he argues.

Some companies set up spin-offs or subsidiaries. Some just outsource to contracting firms.

“On the other hand, some organisations have found relying on part-time casuals counterproductive, as workers had no commitment and became unreliable. Some large retailers now use ‘permanent’ part-timers rather than casuals,” he wrote.

Between 2009 and 2016, “casual” part-timers grew by just 13 per cent, whereas “permanent” part-timers grew by 36 per cent.

Businesses have used their power to cut their labour costs. Many workers’ jobs have become less secure in the process.

Read more >>

Wednesday, April 20, 2022

It's not jobs we're short of, it's jobs that pay decent wages

When it comes to knowing what’s going on in the jobs market, there’s a bit more to it than being able to remember the present rate of unemployment. It helps to know why the unemployment rate is at the level it is, and what that implies for the family’s future finances.

In case you’ve gone deaf – or just stopped listening – Scott Morrison wants you to know the rate of unemployment has been falling rapidly over the past six months, and is now a fraction under 4 per cent.

That’s the lowest it’s been in about 50 years.

But wait, there’s more. Morrison said last week his priorities are “jobs, jobs, jobs, jobs and jobs”. To which effect he’s promising to create a further 1.3 million over the next five years. This will be on top of the 1.9 million jobs already created since the Coalition returned to power in 2013.

The growth in employment and the fall in unemployment since the economy’s massive contraction during the “coronacession” in the June quarter of 2020 is a truly remarkable achievement, for which the Morrison government deserves much credit. Don’t let any carping Labor critic convince you otherwise.

Don’t let anyone tell you the government has changed the definition of unemployment. It isn’t true. What is true is that the problem of underemployment – people who have jobs, but aren’t able to find as many hours as they’d like – is a bigger problem today than it was 50 years ago.

But the rate of underemployment has fallen to 6.3 per cent, down from 8.8 per cent two years ago, and the lowest it’s been since 2008.

In any case, almost all the 395,000 net extra jobs created since the start of the pandemic two years ago are full-time.

Next, get this. The proportion of the working-age population holding a job now stands at 63.8 per cent – the highest it has ever been.

And the biggest winners in this have been young people. Their rate of employment is 4.6 percentage points higher than it was two years ago. The rate for people aged 25 to 64 is up 1.9 percentage points, while the rate for those aged 65 and over is up 0.4 points.

But all the growth in employment hasn’t been sufficient to meet the demand from employers. The number of job vacancies is at a record level of 423,500. That is, getting on for a half a million job openings are going begging.

Now, let me ask you a question: does it sound to you as though our big problem at present is an acute shortage of jobs, jobs, jobs?

If you’ve heard of generals fighting the last war rather than coming to grips with the present one, now you know that prime ministers are prone to the same mistake.

So, why is Morrison claiming to have made getting us a lot more jobs his priority, when there must surely be more pressing problems he should be focused on? Two reasons.

One is that Australia’s had a problem with insufficient jobs – aka high rates of unemployment – since the late 1970s. This was the case for so long – did I mention 50 years? – the notion that a shortage of jobs is an eternal feature of economic life is now lodged deeply in many people’s minds.

And, as is the practice of modern politicians, Morrison finds it easier to pander to our misconceptions than to straighten them out.

“You think we can never have enough jobs? OK, I promise to create another 1.3 million of ’em.”

But how on earth do we finally seem to have got on top of a 50-year problem? Mainly because our first recession in almost 30 years turned out to be more benign than any we’ve had.

In particular, the government spent unprecedented multi-billions on the JobKeeper wage subsidy scheme, which was designed to preserve the link between employers and their workers, even when they had no work for their workers to do. It worked brilliantly.

The billions federal and state governments spent on this and many other programs to protect the incomes of businesses and workers have given an enormous boost to the demand for workers.

But remember, this surge in demand came at a time when our borders were closed to our usual supply of imported labour: overseas students, backpackers and skilled workers on temporary visas.

Now that our borders have reopened, the demand for workers will increase, but so will their supply. If employment does grow by 1.3 million in the next five years, it will be mainly because of population growth, coming mainly from immigration.

The other reason Morrison wants to talk about jobs, jobs, jobs is to direct our attention towards his economic successes and away from his economic failure: since a year or two before the Coalition’s election in 2013, wages have struggled to keep up with the rising cost of living.

If Anthony Albanese was a sharper politician, he’d be telling us his priorities were wages, wages, wages.

Read more >>

Sunday, April 17, 2022

Easter offers no escape from our responsibility for climate change

Easter is a good time to look up from the daily business of life – getting and spending – and think harder about what we’re doing and why we’re doing it. How grateful are we to those who make sacrifices for us, and how much of our effort goes into sacrificing for others?

For years, I’ve been proud to support Tearfund, a Christian overseas aid organisation. This year its meditations for Lent have focused on its report, They Shall Inherit the Earth: Christian attitudes to climate change.

Why should Christians be particularly concerned about climate change – or what someone in the report prefers to call “climate justice”?

One reason is that those who are and will be worst affected by climate change tend to be the poor – both those in relative poverty in our wealthy country and those in absolute poverty in less developed countries.

You don’t really understand Jesus and his teaching if you haven’t noticed his preoccupation with the poor.

But another reason is that Christians are called to be “stewards of the earth”.

Tim Healy, a lecturer at Alphacrucis College, says “our acceptance of the God-given mandate to care for the earth is an expression of obedience to Jesus’ command to ‘love our neighbours’ – not only those down the street but ‘down time’ as well.

“It’s those who live in the years beyond our own who stand to benefit the most from our faithful and responsible stewardship,” he says.

Susy Lee, an author, says she prefers the term “climate justice” because “the people most likely to be causing [climate change] are not the people most likely to suffer from it.

“The Kingdom of God has a lot to say about justice. God created the world and asked us to look after it justly.”

The report recounts the experience of Hattie Steenholdt, who was on a Scripture Union beach mission trip when bushfires raged through Mallacoota in the early hours of New Year’s Eve in 2019, and stayed around to help.

“We’re called to be stewards of the earth, and yet we live in a time and a society that puts the self first . . . so it is countercultural to go ‘hey, this is something big that’s going on and we’re all playing a part in it’.”

The Christian notion that we’re all responsible for caring for the earth doesn’t sound a million miles from the Aboriginal commitment to “country”.

Many Australian overseas aid agencies include our First Nations people among those they help. And, when it comes to climate change, our Torres Strait Islanders are (forgive the pun) in the same boat as the other South Pacific nations whose worries about climate change we’ve taken so little notice of.

Aunt Rose Elu, last year’s Queensland Senior Australian if the Year, is from Saibai, one of the seven Torres Strait Islands.

“When I was young,” the report quotes her as saying, “I remember that the sea was beautiful, crystal clear and the sea breeze would blow through the houses so beautifully.

“Recently I was home on Saibai and I was shocked by the changes I saw. I cried for my home. The sea level was higher than I have ever seen it. The walls were not working. The graves of my ancestors are being eroded. The high tide washes them away.”

Kuki Rokhum is a director of one of the local Christian organisations that Tearfund works with in India. She says “it is the poorest countries, and within them the poorest people – who have produced the lowest carbon emissions, and have the least resilience to allow them to respond – that feel most strongly the effects of climate-change related disasters, droughts, floods and extreme temperatures.

“With increased disasters there will be more climate-related displacement.”

Farmers in north-west India are already struggling because of unpredictable rainfall and extreme heat, but they know that future generations will feel the impact of a changing climate even more acutely, the report says.

For the family of 80-year-old Dhulji Meghwal, and many others, rainfall has become sporadic over the past two decades and extreme temperatures have led to dry and degraded soil.

“One bigha of land [around 0.4 acres] used to produce enough for the whole year. Now, that land will produce only enough for six months. People are falling into debt because they are purchasing seed from the market and then not getting the production they expect,” Meghwal says.

Economists eschew “anecdotal evidence” and prefer to stick to lofty concepts, backed up by copious facts and figures. Perhaps they’d be more persuasive if they got down to cases more often - as aid agencies have long understood.

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Friday, April 15, 2022

Digital revolution is leaving economists scratching their heads

There should be a law against holding election campaigns while people are trying to enjoy their Easter break. So let’s forget politics and think about the strange ways the economy is changing as the old industrial era gives way to the post-industrial, digital era.

The revolution in information and communications technology is working its way through the economy, changing the way it works. The markets for digital products now work very differently from the markets for conventional products.

So a growing part of the economy consists of markets that don’t fit the assumptions economists make in their basic model of markets, as Diane Coyle, an economics professor at Cambridge University, explains in her book, Cogs and Monsters.

And the way we measure the industrial economy – using the “national accounts” and gross domestic product – isn’t designed to capture the new range of benefits that flow from digital markets.

Starting at the beginning, the great attraction of the capitalist, market economy is its almost magical ability to increase its productivity – its ability to produce an increased quantity of goods and services from an unchanged quantity of raw materials, capital equipment and human labour.

It’s this increased productivity – not so much the increase in resources used – that explains most of the improvement in our standard of living over the past two centuries.

Where did the greater productivity come from? From advances in technology. From bigger and better machines, and more efficiently organised factories, mines, farms, offices and shops, not to mention better educated and skilled workers.

Particularly in the past 70 years, we benefited hugely from the advent of mass-produced consumer goods on production lines. Economists call this “economies of scale” – the bigger the factory and the more you could produce, the lower the cost of each item.

Although each extra unit produced added marginally to raw material and labour costs, the more you produced, the more the “fixed cost” of building and equipping the factory was averaged over a larger number of items, thus reducing the “average cost” per item.

Decades of exploiting the benefit of economies of scale explain why so many of our industries are dominated by just a few big firms.

But the new economy of digital production has put scale economies on steroids. Coyle says software – and movies, news mastheads and much, much else – is costly to write (high fixed cost) but virtually costless to reproduce and distribute (no marginal cost).

So, production of digital products involves “increasing returns to scale”, which is good news for both producers and consumers - everyone except economists because their standard model assumes returns are either constant or declining.

But another thing that makes the digital economy different is “network effects”, starting with the greatest network, the network of networks, the internet. The basic network effect is that the more users of the network there are, the greater the benefit to the individual user. More increasing returns to scale.

Then, Coyle says, there are indirect network effects. Many digital markets involve “matching” suppliers with consumers – such as Airbnb, Uber and Amazon Marketplace. For consumers, the more suppliers the network attracts, the better the chance of quickly finding what you want. But, equally, for suppliers, the more customers the network attracts, the easier it is to make a sale. Economists call these digital networks “two-sided platforms”. The owner of the platform sits in the middle, dealing with both sides.

So, yet more benefits from bigness. And that’s before you get to the benefits of building, mining and sharing large collections of data.

All these benefits being so great, it’s not hard to see why you could end up with only a couple – maybe just one – giant network dominating a market. Welcome to the world of Google, Facebook, Apple, Amazon and Microsoft.

In their forthcoming book, From Free to Fair Markets, Richard Holden, an economics professor at the University of NSW, and Rosalind Dixon, a law professor at the same place, note that a number of leading lights have proposed breaking up these huge tech companies, in the same way America’s big telephone monopoly and interlocking oil companies were broken up last century.

But, the authors object, in most of these markets the power of these giants stems from the “network externalities” we’ve just discussed.

“Unlike traditional markets, when the source of market power is also the source of consumer harm, in these markets the source of market power is also what consumers (and producers, in the case of two-sided platforms) value – being connected with other consumers and producers,” they write.

“The key driver of the value that these firms create is precisely the network externalities that they bring about. Facebook is valuable to users because lots of other users are on Facebook . . .

“Google is a superior search engine because in performing so many searches, machine learning allows its algorithm to get better and better, making it a more desirable search engine.”

So, the driving force that leads to these markets having one dominant player is also the force that creates economic value. “Breaking up the large players will stop there being just a few large players, but it will also stop there being nearly as much economic value created,” they say.

Research by Holden, Professor Luis Rayo and the Nobel laureate Robert Akerlof has found that markets with network externalities tend to have three features. First, the firm that wins the initial competition in the market ends up with most of the market.

Second, it’s difficult to become a winning firm, and success is fragile. For instance, Microsoft has had little success getting its search engine Bing to take business from Google. And Netscape was once dominant in the browser market, but suddenly got supplanted.

Third, winners can’t go to sleep. They must constantly innovate and seek to raise their quality.

This makes the tech markets quite different from conventional markets like oil or even old-style networks like railways.

Economists’ efforts to get a handle on the new economy continue.

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Wednesday, April 13, 2022

Let's use this election to raise the quality of the politics we get

This may be my 18th election as a journalist, but I confess I find the thought of a six-week campaign a bit daunting. Six weeks of unrelenting political argy-bargy?

Still, it does afford the luxury of one column discussing how we approach elections, before we get down to the many economic challenges the new government will face: climate change, wage stagnation, unaffordable home ownership and wasteful spending on infrastructure, not to mention integrity in government.

In elections, it’s always tempting to vote for the devil you know – a line pushed by all governments. But when you think about it, you see this notion is biased completely in favour of the incumbent. It seeks to shift the voter’s attention away from the government’s performance and play on our timidity.

What do you know about the other lot? Not much. How do you know they won’t be worse? You don’t. But, then again, they could be better.

If we always stuck to the devil-you-know rule, one side of politics would stay in power for ever. The other side would never get a go, and so would become more unknown – more unelectable – as each election passed.

Does that sound like the path to better government? Not to me, it doesn’t. In my experience, the longer governments stay in power, the worse they get. They get lazy and complacent. They worry more about helping their friends and less about keeping the rest of us happy.

They develop a sense of entitlement. They think they own the place and it’s their own money they’re spending. They get more and more reluctant to be held accountable by nosy outsiders and more inclined to keep their failures buried deep.

And that’s just the deterioration in government. The side kept out of power for year after year also goes off. Fewer and fewer of their leading lights have ever been a minister. They lose their corporate knowledge of how to run the country.

I’m old enough to remember the election of the Whitlam government in 1972, after 23 years in opposition. Wow, didn’t it show. And it wasn’t just their inexperience. They wanted to cram 23 years of “reform” into their first three years. Which, of course, is all they were given.

It wouldn’t be good for our governance if government changed hands every three or four years. But I long ago formed the view that no government – Labor or Liberal, federal or state, whether you voted for ’em or whether you didn’t – should be left in office for more than about 10 years.

With their ever-declining standards of behaviour, it’s tempting to give up on our politicians. “They’re all liars.” Actually, they rarely tell outright lies, though some do seem to have very bad memories.

What’s true is that they’re always saying things that are true from some limited perspective, but are calculated to mislead. “Record spending on health”, for instance, means provided you ignore inflation.

But when we give up on our politicians, it means they’ve won. They still get to run the place, but we’ve forfeited our right to a say in how it’s run. We’re happy for other people – including the pollies – to decide our fate. You want to make decisions that benefit your mates at my expense? Be my guest.

The trickier our politicians are, the more closely we should watch them. Whenever I speak to young people about politics, I warn them that the groups the politicians are most likely to screw are the ones that aren’t watching.

Another dangerous attitude is that there’s little difference between the two main parties. It’s true that both sides can be badly behaved, and that many policies are bipartisan. But there are differences between the parties’ approaches and, though the casual observer may find them hard to see, over time they do make a difference.

Paul Keating’s claim that when you change the government, you change the country, is right. Who we vote for in this election will change where we end up in 10 years’ time.

But the more the two major parties seem the same, the more people chose to vote for minor parties or independents – a trend likely to grow in this election. I regard this as a healthy development that will force the duopolists to lift their game.

As the number of independents grows, the possibility of a “hung” parliament increases. Both sides want us to believe this would be a bad thing, leading to instability. That’s the reverse of the truth. Minority governments are so common at state level that their presence goes unremarked.

And independents have a record of using their bargaining power to achieve reforms neither of the big parties fancy – fixed four-year terms in NSW, for instance – and moves towards greater transparency and accountability, such as freedom of information laws, and more resources for ombudsmen and auditors-general.

The way we vote in this election will make a difference. We should be using our votes to impose better quality governance on our wayward and self-serving political servants.

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Monday, April 11, 2022

Going ahead with the stage 3 tax cuts would be irresponsible

Whichever side wins the election will inherit a serious budget problem, one caused to a large extent by a single, irresponsible decision: to legislate years ahead of time for hugely expensive tax cuts in July 2024. Turns out they will be “unfunded”.

No one who professes to be terribly worried about the federal government’s huge and still-growing debt is genuine in their concern unless they’re prepared to pay a price for it: forgoing the tax cut that can no longer be afforded. Allowing the cut to happen will add significantly to the budget deficit and the further growth in our debt.

People who own a business that’s running at a loss, so to speak, shouldn’t be awarding themselves a pay rise that adds to the annual loss.

Putting it more formally, it was fully justified for the Rudd government to borrow heavily to cover the temporary measures that kept us out of the global financial crisis, just as it was fully justified for the Morrison government to borrow heavily to cover the temporary measures that saved life and limb during the worst of the pandemic.

But there is no justification for allowing the lasting spending increases and tax cuts made at the same time as the temporary measures to continue unfunded year after year, long after the crisis has passed and the economy has recovered.

A government that, having incurred so much debt through no fault of its own, continues to run a residual, “structural” deficit every year simply because it lacks the political courage either to make sweeping cuts in government spending or to ask the electorate to cover the full cost of services it doesn’t want cut by paying for them with higher taxes, simply cannot claim to be economically responsible.

It’s following a lax and unnecessarily risky practice should, say, a heavy fall in our export prices, cause the (nominal) economy to grow more slowly than interest rates, leaving us exposed when the next global crisis comes along.

That’s hardly fiscal conservatism. But the coming big tax cuts take us to a whole new level of irresponsibility.

Not only is the government afraid to ask voters to pay for the government services they demand, it’s trying to bribe its way to election by offering to make an unfunded cut in the tax they do pay, thus adding to the structural deficit and continuing growth in the debt, in both dollar terms and relative to the size of the economy that services the debt.

And the worst of it is that voting one irresponsible government out of office won’t avert the problem, just exchange that one for another. Both sides committed stage 3 to law in 2019, five years ahead of time, and Anthony Albanese has further promised to go through with it.

Here we see the worst of the games of chicken our politicians play in their unceasing attempts to “wedge” each other. Because both sides understand the game, their attempts rarely succeed. But the inevitable consequence is both sides agreeing to policies contrary to the public’s best interests.

Before the budget, Chris Richardson, Deloitte Access Economics’ great budget expert, estimated the ongoing structural deficit to be as high as about $40 billion – 2 per cent of national income. Because they’re legislated, this estimate includes the cost of the July 2024 tax cuts, whose cost he updates to be more than $21 billion a year.

See how central stage 3 is to the ongoing structural problem? Richardson notes that, because wages grew by far less that projected at the time stage 3 was announced, the cuts “now overachieve in handing back bracket creep”. That is, they’ll be “real” tax cuts, not just ones that restore the status quo.

Richardson could have added that stage 3 was never capable of achieving Scott Morrison’s advertised claim for it, that it would end bracket creep for almost all taxpayers. (You don’t have to literally change tax brackets to be a victim of inflation causing you to pay a higher average rate of tax on all your income.)

Richardson proposes that stage 3 be amended in one respect: keeping the marginal tax rate for those earning above $120,000 at 37¢ in the dollar – rather than reducing it to 30¢ – would cut the cost of the measure by (an amazing) $9 billion a year.

But why stop there when there’s so much more to be done? And when deciding not to do something you haven’t yet done is always easier politically than reversing something already done. And when not cutting taxes is infinitely easier politically than cutting existing entitlements to government spending.

Stage 3, first announced in the 2018 budget, was based on mere budget projections seven years into an unknown future - which included a pandemic. It’s a monument to the folly of counting your budgetary chickens long before they fail to hatch.

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Friday, April 8, 2022

Wars, floods and pestilence: these horrors have an economic upside

By profession, economists are hard-nosed and cold-blooded. The pictures we’re seeing of the death and destruction wreaked by Russia in its invasion of Ukraine are heart-wrenching. At home, seeing people perched on their roofs as floodwaters surge, or piling up the ruined contents of their homes on the footpath, makes your heart go out. But what economists see is that every disaster has its upside.

Once they’ve put on their professional’s hat, economists don’t see evil, or pain or any emotion. Feelings must be suppressed when what they need is objectivity.

They simply size up wars and natural disasters for the effect they’ll have on the economy, measured by inflation, unemployment and, above all, gross domestic product. And since GDP often ignores the destruction of buildings and other assets, but plays close attention to the building of new assets, it tends to paint an overly favourable view of events we see as disastrous.

This doesn’t make GDP an instrument of evil that should be banished. It’s simply mono-dimensional. It focuses on a vital, but narrow aspect of our lives – how much we produce, how much income we generate – while studiously ignoring all the other aspects.

When someone’s house has been declared uninhabitable, you and I see how painful and disorienting that must be for them. What an economist sees is all the jobs that will be created and income generated to build them a new one.

But until then, the family will be homeless! That’s OK. Those who provide them with somewhere to live will be earning income and employing people – provided they don’t just stay with family or neighbours. It’s not counted in GDP if no money changes hands.

GDP doesn’t measure wellbeing – and was never designed to. This is only a problem when people fall into the trap of thinking GDP is all that matters – an occupational hazard for economists.

Last week’s budget papers discussed the economic consequence of the war in Ukraine and the floods in NSW and Queensland. For such terrible events, the tone was surprisingly upbeat.

Combined, “the Russian and Ukrainian economies comprise less than 3 per cent of global GDP and less than 2.5 per cent of global trade.

“Foreign financial exposures to Russia are small, and the International Monetary Fund has assessed that sovereign [government] or bank default is not a systemic risk to global financial stability.”

Russia is, however, an important global supplier of rural, mineral and energy commodities. So the invasion has caused substantial disruption in global commodity markets, the papers say, and has the potential to significantly raise inflation and lower global growth.

“Russia produces 18 per cent of the world’s gas and 12 per cent of the world’s oil supply and, together with Ukraine, accounts for around 25 per cent of world wheat exports.” The invasion has increased the risk of supply disruptions, pushing up energy, agricultural and metals prices.

“Global supply chains are also reliant on Russian metals exports, especially palladium [a rare metal used in catalytic converters of exhaust fumes, and fuel cells], so significant supply disruption could have flow-on effects for global manufacturing supply chains.”

All economies will be affected by the rise in global commodity prices. Among the worst affected will be Europe, Japan and South Korea, which are highly dependent on imports of energy. These and other countries will suffer what economists call a “negative terms-of-trade shock” – that is, the prices of their energy imports will rise relative to the prices they get for their exports.

But, the papers say, a smaller set of countries will benefit from a “positive terms-of-trade shock” – because they are net exporters of the higher-priced energy commodities. Their consumers and businesses will pay the higher world price for the petrol and other fuels they use, but this will be greatly offset by the higher prices their producers of energy exports will be receiving.

Among this small group is one lucky country whose net energy exports are twice as great as its domestic energy use. It’s Austria. Sorry, make that Australia. As the economist Chris Richardson might say, you may be paying a lot more for your petrol, but the economy’s been kicked in the backside by a rainbow.

Turning to our floods, although it’s still raining and too soon for final figures, last week’s budget papers say that, under an arrangement where the federal government funds up to 75 per cent of the assistance provided by the state governments, the feds expect to pay more than $2 billion for income support to households, temporary accommodation and social services, about $600 million for community clean-up and recovery, and almost $700 million to businesses and farmers for repairs, new equipment and support services.

As well, the budget makes provision for $3 billion in further federal spending over the coming four years.

Moving from the budget to the economy, we’re told that the “direct economic cost” – that is, those purely monetary costs that show up in GDP – are expected to subtract about 0.5 percentage points from the growth in the nation’s real GDP during the March quarter.

What are the costs that show up in GDP? They’re mainly reduced production in the mining, agriculture, accommodation and food services, retail trade and construction industries.

You’ll be relieved to hear, however, that this 0.5 per cent overstates the net impact of the floods on real GDP over the longer term.

Why? Because “this direct cost will be partially offset by increased investment to replace and rebuild damaged housing, infrastructure and household goods”.

And here’s some good news: the reduced exports of coal caused by rain in the March quarter aren’t expected to be as bad as previous weather events, such as the floods and Cyclone Yasi in 2011.

If you find all this mercenary and distasteful, it’s not new. The arrival of World War II helped end the Great Depression. And rebuilding bombed out Europe and Japan after the war helped the rich countries grow faster than ever before – or since.

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Wednesday, April 6, 2022

Budget is a guide to who's a Morrison mate and who's not

Despite all the accusations being hurled at Scott Morrison, to my knowledge he’s never done what so many election-winning leaders do and promised to “govern for all Australians”. A promise not made, and thus not broken. All governments tend to look after their party’s friends and supporters, but Morrison has made this a defining feature of his reign.

There was a brief period early in the pandemic when he was in all-in-this-together mode. That was when, utterly uncharacteristically, he doubled the level of unemployment benefits – JobSeeker, to use its latest label – for a few months.

But it wasn’t long before it became clear he was playing favourites. The lockdown left many overseas students without part-time work and eligible for no government support. They were told to find their own way home, which many did.

Suddenly, the universities became public enemy No. 1. The same party that had gone for years urging the unis to find new sources of income and be less reliant on the federal taxpayer were attacked for becoming too reliant on revenue from overseas students.

While businesses large and small lined up for the JobKeeper wage subsidy scheme, our publicly owned universities were declared ineligible. Thousands of jobs were lost and, unlike with most other industries, are unlikely to return any time soon.

Our few privately owned universities were eligible, however. Similarly, public schools weren’t eligible, but independent schools were.

The government’s disdain for universities continued in last week’s budget. While Treasurer Josh Frydenberg was handing out prizes as though at a Sunday school anniversary, the universities got next to nothing.

True, the new “investing in Australia’s university research commercialisation payments” program will cost $1 billion over five years. But almost all of that will involve transferring money from existing programs.

The funny thing about the budget’s centrepiece, the cost-of-living package, is that though it doesn’t seem all that generous – a one-off $250 cash payment to pensioners and other welfare recipients, an extra $420 to those eligible for the low and middle income tax offset, and a 22c a litre cut in petrol excise for six months – at an overall cost of $8.3 billion it’s the most expensive new measure in the budget.

Because its intention is to mollify all those feeling pain from the recent jump in living costs, this is the most inclusive of the budget’s measures, with most families standing to benefit.

But though the $250 payment is aimed at those at the bottom of the income ladder, and the extra tax offset will help more than 10 million taxpayers, the cut in petrol excise will be of greater benefit to businesses and higher income-earners, simply because they use more petrol.

One group of big winners favoured in the budget are the tiny minority of people and businesses in the regions. Frydenberg announced “an unprecedented regional investment that includes transformational investments in agriculture, infrastructure and energy in the Hunter, the Pilbara, the Northern Territory and North and Central Queensland”.

Do you remember Barnaby Joyce’s Nationals demanding rural assistance in return for allowing Morrison to sign up to net zero emissions by 2050? At the time, the assistance wasn’t disclosed. Now it is.

They’re getting $7.4 billion for dams, a $2 billion “regional accelerator program” to accelerate growth in the regions, and a $1.3 billion regional telecommunications package to expand mobile coverage across 8000 kilometres of regional transport routes. Thanks a billion.

No budget would be a pre-election budget without further tax breaks to that huge voting bloc, small business. This time they’ll be getting a $120 tax deduction for every $100 they spend on training their employees, and on investment in digital technologies. That’s $1.7 billion over three years.

No doubt many small businesses will benefit from another measure to encourage more apprenticeships. The new apprentice gets $5000 and the employer who takes them on gets a wage subsidy of up to $15,000. I’ve read that tradies are the new key political demographic.

Sometimes, groups get special treatment not because they’re mates, but because governments fear offending them. A prime example are West Australians and their government. Under a deal done by Morrison when he was treasurer, because they’d convinced themselves they weren’t getting a fair share of the annual carve-up of GST revenue between the states, federal taxpayers will be paying the West Australians an extra $18.6 billion over the six years to 2025-26.

This despite the surge in iron ore royalties making Western Australia the only government in the land running a budget surplus. Tough times.

So, who wasn’t on the budget’s receiving end? The help for first-home buyers was token, and for renters, non-existent. There was a bit more to ease the continuing problems in aged care, but Frydenberg was easily outbid by Anthony Albanese.

Frydenberg has greatly reduced childcare costs for second and subsequent children, but Albanese is promising to make it free for virtually all families.

As voter loyalty to particular parties declines, politicians encourage a what’s-in-it-for-me approach to elections and pre-election budgets. If so, it’s important to know whether you’re a mate or a non-mate.

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