Last week they gave us a glimpse at their “dream budgets”. This week, our six budget experts are back to deliver their verdict.
“Gosh, having been thus sanctified, how could I not respond?” replies economist Saul Eslake who delivers the harshest assessment, grading Treasurer Josh Frydenberg’s effort only a “C” grade.
“I have absolutely no qualms about the size of the deficit, or the level of debt which the government is going to rack up over the short- and medium-term,” explains Eslake.
Which is just as well, given Tuesday’s revelation that federal government debt will top $1 trillion and keep rising.
“My reservations are primarily that the budget is very heavily reliant on businesses, in particular, and households responding as the government expects to the incentives.”
Eslake is referring to roughly $35 billion in tax cuts and incentives for business – including a subsidy for hiring jobless under 35s; an asset write-off scheme to minimise tax bills; and the ability to “carry back” losses against previously booked profits for a cash refund of tax paid.
In addition, households will enjoy $17.8 billion in extra income tax relief, with tax cuts set to flow as early as next month.
The government is gambling that businesses and households will take the bait and spend, rather than save, the money.
“They may do so, and I hope they will,” says Eslake. “There were other strategies which could have given greater confidence that the money would actually be spent: namely, providing it in the form of time-limited, tradeable vouchers.”
PwC chief economist Jeremy Thorpe is more optimistic, awarding the budget a solid “B” grade.
“In the current environment, the prioritisation of jobs growth is spot on,” says Thorpe. “The challenge is to give both consumers and businesses confidence to spend and invest. I suspect both groups would come away from the Budget more optimistic than they went in.”
I presented the team with the following grading system to score the budget:
A – This is the budget the nation needs right now
B – It’s not perfect, but this budget will stand us in good stead
C – I have some reservations about what the government has done
D – I have significant reservations about whether this budget will deliver what the nation needs right now
F – This budget fails to deliver the support our economy needs right now
“I’d go with B,” says tax expert Miranda Stewart. “Definitely not perfect! But spending and stimulus is needed right now, as are subsidies for ongoing jobs.”
Deloitte Access Economics’ Chris Richardson also gives the budget a “B”, noting that the government could have spent even more, given the cost of borrowing is so low.
“There’s plenty to worry about in a pandemic, but the extra government debt is not one of them. Yes, debt is up, but interest rates have dropped so spectacularly that the cost of debt [interest payments] in the next four years will be LOWER than they were in 2018-19. It’s a phantom menace.”
As things stand: “We may need to do more to drive unemployment back to 5.5 per cent,” says Richardson.
On the harsher end of the grading scale, both the University of NSW’s Gigi Foster and the Grattan Institute’s Danielle Wood score the budget a B-minus.
Says Wood: “It was absolutely the right call to change course on fiscal strategy and recognise the need for sizeable stimulus – so marks for that. But I don’t think the mix of policies was right to provide the biggest economic kick.”
Instead of incentivising business to invest, the government could have done more to stimulate household consumption or directly create jobs.
“Putting almost all the direct job-creation dollars into hard-hat professions – infrastructure, construction, manufacturing, defence, utilities and energy – suggests a real blind spot,” says Wood. “Services jobs are jobs too and have been hit hardest by this recession. And spending on government services creates more jobs per dollar than spending on infrastructure.”
All three female economists also note the absence of action on childcare costs.
“In the May budget, the absolute priority must be some proper attention paid to childcare,” says Stewart who is worried about the work disincentive high costs create for second earners.
“A quick run of the numbers with Stage 2 tax cuts shows that a second earner on the median female wage, with two kids and a partner full time on the median male wage, would keep less than $31 dollars on all days of work from one day a week after taxes, net childcare cost, and losing family benefits are taken into account,” says Stewart.
“That’s a whopping effective tax rate of 85 per cent. On Days 4 and 5 of work, she faces an effective tax rate of 95 per cent. The main cause is net childcare cost. The tax cuts do nothing to help this moderate income earning family.”
Foster agrees: “Out-of-pocket childcare costs are a tax on working. Free childcare is therefore a massive stimulus to young workers. Fully-funded, high-quality, accessible childcare offers a triple benefit for Australia: it releases labour and raises welfare today, it creates jobs everywhere (including in the regions), and it creates a more productive, happier, healthier next generation. What’s not to like?”
Asked for the number one outstanding policy issue not addressed in this budget, the team are unanimous: JobSeeker.
Says Eslake: “I really don’t understand why this wasn’t addressed in the budget – how much more new information could possibly be required before making a change that has been recognised across the political spectrum from the ACTU and ACOSS to the BCA and John Howard?”
Richardson is perhaps the most passionate on the topic: “Cutting the unemployment benefit back to $40 a day come Christmas (as is currently scheduled to happen) would be outstandingly bad policy. Not only strikingly unfair in a year in which “all in it together” is deservedly a catchcry, it is also really dumb regional policy.”
National MPs should be lobbying hardest for an increase, he says: “Suburb by suburb, town by town in the bush, the coronavirus crisis has seen most jobs lost where unemployment rates were already the highest. That says a stronger JobSeeker takes care not only of Australia’s most needy families, it also takes care of Australia’s most needy communities.”
Eslake wants JobSeeker set at around 80 per cent of the single age pension “and then we don’t have to have this argument ever again”.
In summary, then, a solid effort, but more work needed.
As Thorpe colourfully concludes: “The economy is still in trauma and this Budget has been about cauterising the economic wound. In this environment, stabilising the economy has been the priority; it was not really the time for major structural reform. The next budget (or before) will need to be framed around structural reforms to supercharge economic growth: industrial relations reform; regulatory reform; tax reform; and so on.”
See you next semester.
Source: Thanks smh.com