This article discusses the extra stimulus which should be incorporated in the October Budget, and what form that stimulus should take.
In the lead-up to the forthcoming October Budget, the government has encouraged speculation that its future support for economic recovery will mainly rely on:
- The already-announced extension of JobKeeper and JobSeeker assistance.
- Increased investment in infrastructure by Australian and State Governments.
- Bringing forward Stages 2 and 3 of its already legislated income tax cuts.
But the critical question addressed in this article is how effective these measures will be, or whether there are better ways than this to restore the economy and promote economic and jobs growth.
Extension of JobKeeper & JobSeeker
There has been near unanimous support for the Government decision to extend JobKeeper to the end of next March and JobSeeker to the end of this year. Reductions in rates of assistance have also been largely accepted. In some cases, previous rates did look excessive, with, for example, some part-time workers receiving more money under JobKeeper than they previously earned.
With regard to JobSeeker assistance, however, there are concerns that:
- JobSeeker assistance will end in three months. Almost everybody outside this government thinks a return to $40 per day at the end of December will not be enough to live on, and that the rate of assistance to unemployed people should be raised permanently.
- Modelling by Deloitte Access Economics suggests that the reduction in demand after returning to the old rate of assistance will cost as many as 145,000 jobs.
- If, instead, the rate of assistance under JobSeeker were permanently maintained at the new level of $815.70 per fortnight over the three months remaining for this year, researchers at the ANU Centre for Social Research & Methods have calculated that this would be just sufficient to ensure recipients do not fall back into poverty.
In the case of JobKeeper, the principal concerns at present are that:
- It may well prove desirable to extend JobKeeper beyond March 2021 if the pace of economic recovery is less than the government appears to anticipate. Equally, however, there is no case for making JobKeeper permanent, since zombie firms which will never recover should not be supported indefinitely. This would undermine the economy’s long-run potential, and come at a cost to people retraining and gaining permanent jobs.
- From the start, understandable criticisms have been that certain people and industries were excluded from JobKeeper for no good reason. Given the savings which will be realised by lowering rates of assistance, the opportunity should be taken to extend JobKeeper to casual workers, temporary migrants, and universities, all of whom contribute to the economy, and who have been unfairly excluded so far.
Like JobKeeper and JobSeeker assistance, one of the great advantages of stimulating the economy by additional infrastructure investment is that, in principle, this form of stimulus can be wound back as the economy recovers and there is no longer a need for government fiscal support.
In addition, it is popularly assumed that new infrastructure investment is needed, and will add to the economy’s capacity. To the extent that this is true, additional infrastructure investment makes a lot of sense when attempting to stimulate the economy, but far too often, and perhaps especially now, there are problems with this form of stimulus:
- Many and even most infrastructure investments are not warranted economically, and this is especially true of large projects which capture the popular imagination. For example, analysis by the Grattan Institute found that of the 71 projects to which the Coalition committed in the last Federal election, all but one had no business case approved by approval authority Infrastructure Australia (IA), and almost half were not even on IA’s priority list. (Incidentally, Labor’s promises were no better.)
- Infrastructure investment has been increasing strongly already, with general government gross capital formation growing at an average annual rate of 8.5 percent in real terms over the last four financial years, far faster than the economy. This further raises the question about how many other worthwhile projects are not being funded already, especially now when the rate of population growth has dramatically declined due to decreased migration, and many are working from home, possibly leading to permanent changes in working patterns and transportation demand.
- The bigger (and more glamorous) the project, the longer the necessary planning takes, and thus the longer the delays before it starts, to the point at which experience shows that much infrastructure commissioned in response to recessions has hardly started before the recession is over.
- Unlike all previous recessions, this is not a ‘tradies recession’. Instead, in contrast to past recessions, goods production has held up pretty well, and this recession has mainly impacted employment in some service industries, such as hospitality, travel, entertainment, and some specialised retailing. Consequently, mainly women and young people have been disadvantaged, and additional infrastructure investment is not going to find them a job, or at least not directly.
In particular, the Prime Minister’s embrace of what he calls ‘a gas-led recovery’, built and financed by the government, is the last thing Australia needs. Morrison argues that gas-fired electricity generation is necessary to provide system reliability when the sun does not shine and the wind does not blow. According to the electricity energy market operator AEMO, however, there is no reliability problem with the current electricity system for at least the next few years. Indeed, an audit of Australia’s energy emissions found that gas-fired electricity plants only ran at 30 percent capacity over the last 18 months. And AEMO’s roadmap for the electricity market in 2040 does not include gas in its top five list of potential sources of dispatchable power.
As Liberal Governments used to understand, if there were a looming problem requiring additional gas-fired dispatchable electricity, we can be reasonably confident that private operators would already have moved to fill the gap. There is therefore no need for the government to undertake this function, usually left to the private market. The reality is that we do not need a large new gas-fired power station, nor, with an excess supply of low-priced gas, should the government intervene to open a new high-priced gas field on economic grounds alone.
Instead, as Ross Garnaut has shown in his book, Superpower, because of our comparative advantage in the production of renewable energy there is an enormous opportunity for Australia to become a world leader in energy-intensive manufactures and the export of energy in the form of hydrogen. Scott Morrison should be behind those initiatives if he is seriously concerned about Australia’s long-run economic future. But, while highly worthwhile, these initiatives based on renewables are unlikely to come on stream quickly enough to be the main response to the present recession.
Accordingly, any additional infrastructure investment in the next year or so to support economic recovery should focus on small projects which can be undertaken quickly and for which there is real need, such as:
- Road maintenance, widespread geographically.
- Social housing in which this form of construction could readily replace the construction of multi-story dwellings for private rental, especially hard-hit by the collapse in migration and numbers of foreign students.
Bringing forward the legislated tax cuts
Unlike labour market programs and infrastructure investment, the normal disadvantage of trying to stimulate the economy through tax cuts is that they are permanent, and it is difficult politically to wind them back as the economy recovers. As these particular tax cuts have already been legislated, however, they are going to happen anyway, and consequently there is an unusually good case for advancing their implementation in present circumstances.
On the other hand, many commentators have drawn attention to how biased these tax cuts are in favour of high-income people. Indeed, research by the Australia Institute shows that “if both Stages 2 and 3 [of the government’s legislated tax cuts] are brought forward to 2020-21, 79% of the benefit goes to the top 20%, while only 3% goes to the bottom half of taxpayers”. But the high-income people who pocket most of the benefits can be expected to save much of their extra income, and therefore these tax cuts are unlikely to achieve much economic stimulation.
Ideally, to the extent that the government wants to rely on reduced taxation to stimulate economic recovery, better than this would be to recast these tax cuts. But, arguably, it would be better still than this to adopt alternative spending measures. Even middle-income households have substantially increased their savings recently, and they too may not spend their tax cuts. On the other hand, Australia is a low tax country compared to its peers, and there are areas of unmet need for additional public spending which arguably would enhance public welfare and stimulation of the economy.
What other spending is needed?
Although the government has extended JobKeeper and Jobseeker, rates of assistance are lower after the end of this month, and the Grattan Institute estimates that emergency income support will fall from $16bn a month in the September quarter to $6bn a month in the December quarter. Other support measures, such as loan repayment holidays for distressed businesses and households, will also soon come to an end.
This is part of the reason for the forecast slow rate of recovery, with the RBA indicating unemployment will still be as high as 7 percent at the end of 2022. The big question for the Budget is how much additional stimulus will be necessary to ensure the return to full-employment as quickly as possible.
The Secretary of the Treasury, Steven Kennedy, has acknowledged that additional fiscal stimulus will be required, but, to date, the Government has been very coy about how much, if any. The most authoritative analysis presently available is by the Grattan Institute, which estimates that additional stimulus of about $100bn to $120bn will be needed if we want to approach full employment (about 5 percent unemployment) by the end of 2022.
There is a strong case for directing this additional expenditure to services the government has squeezed and under-funded in recent years, such as:
- Aged care and mental health services.
- Labour market programs and vocational education and training to help disadvantaged people catch up and learn skills to give them their best chance of being job-ready when the economy recovers.
- Universities, which are presently laying off staff in response to the loss of international student revenue, but whose graduates and research are vital to the future growth of the economy.
- The cost of childcare to increase female workforce participation.
- Rent assistance, which, along with the low rate of unemployment assistance, represents the greatest area of need among low-income people.
- The arts, including the ABC and public galleries and museums, which will find it especially difficult to recover without additional funding.
- Hospitality industries, such as the provision of vouchers.
It is acknowledged that much of this proposed additional expenditure would not be temporary, and would continue after the recession. But these proposals are also biased in favour of service industries which have taken the greatest hit in this recession. Academic research reported in a recent CEDA publication suggests that the boost to employment per dollar spent in care industries is up to five times greater than a dollar spent on construction. Finally, additional expenditure on these services would respond to the greatest areas of need, and much of this expenditure on social infrastructure will promote the long-term growth of economic potential, at least as well as even the best investment in physical infrastructure.
Michael Keating is a former Secretary of the Departments of Prime Minister & Cabinet, Finance & Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University. Republished from John Menadue’s Pearls and Irritations of 22 September 2020.
Photo Men repairing building Sydney. Dean Bennett. Unsplash.
Posted 29 September 2020.