Herr Frydenberg is Austrian not Australian

At Murdoch’s Coalition Propaganda HQ the budget is a cash splash with no equal:

Millions of workers will have a pay cheque boost within weeks after the federal budget was rushed into law — including tax cuts projected to inject $7bn into the economy by mid-2021.

Scott Morrison’s economic ­recovery plan, which passed both houses of parliament on Friday, also includes a $26.7bn measure allowing businesses to write off the full value of assets in a single year, which economists say will provide major stimulus over the next 12 months.

The Prime Minister said the budget would have “a real impact on Australians as we come out of this COVID-19 recession”.

The omnibus legislation, which passed parliament with Labor’s support, includes other measures such as the loss carry-back plan ­that will mean $5bn in business tax relief over four years.

“This is a plan to boost business, to boost jobs, to boost investment, to boost research and development and technology, to drive jobs in our economy,” Mr Morrison said.

Separately, the government is planning to provide a $250 support payment to pensioners in November at a cost of $1.25bn.

Australian Retailers Association chief executive Paul Zahra said that money and the other budget measures were “an important and well-timed mood booster … and should provide a little more enthusiasm around Christmas spending”.

This is what your imminent increase in pay looks like in reality at the fiscal level:

That’s right, what was $170bn in free money over six months in Q2/3 this year (17% of GDP annualised) has begun collapsing to $1bn over six months (that is -17% of GDP).

Sure, the economy is going to slowly open in Victoria to support growth but it’s still highly unlikely that borders will be reopened amid COVID spot fires and shocking Andrews Government ineptitude. The international border is guaranteed to stay shut.

Paul Zahra is cock-a-whoop not because anybody is about to get a pay rise (or new work hours) or to spend more money over Christmas, but because the tax-payer is about to pick up all retailer wage bills.

Over Christmas, retailers maybe a little protected from the income smash owing to nobody having anything else to spend upon. But that is only one-third of household consumption and the wider services segments are going to absolutely stink. Meaning, for many, JobKeeper’s end lands them in a gutted JobSeeker dole cue.

Yes, some folks will get a small pay-cheque boost if they’re on PAYG but the majority won’t until they get tax returns which is why the tax cut boost is so damn tiny.

The fiscal boom lies reach apotheosis with Paul Kelly whose transformation from eminent economic historian to Coalition flunky is complete:

The contradiction almost defies belief. With gross debt to peak at a huge $1.7 trillion, thereby ending the age of Liberal Party deficit-busting restraint, the Morrison government has found the centrist political position the party has craved since 2013.

Much can go wrong from here. But consider this remarkable Liberal Party transition. The 2014 Abbott government “end of entitlement” budget with its drive towards the prized surplus, harsh policy reforms and fatal political confrontation is a monumental contrast to the Morrison government’s COVID-induced Keynesian 2020 budget — a long journey without parallel in our economic history.

Tony Abbott governed in prosperity while Scott Morrison governs in crisis. Yet there are two truths — there has never been a better time to fight a recession, and crisis can empower leadership. The 2020 budget shows that battling the COVID recession remains good politics.

The budget will have a guaranteed impact. The huge deficits to generate jobs — estimated at a combined $480.5bn across four years — will put a ceiling on unemployment with optimistic Treasury forecasts that unemployment will peak at 8 per cent in the December quarter and growth reigniting next year. That jobless rate would be less than in the previous recession of the early 1990s when it tipped over 11 per cent.

But it is the strange nature of this recession that bequeaths its politics. Historic low interest rates mean huge deficits can be financed at bargain-basements costs — so massive Keynesian stimulus has never come so cheap. Beyond that, the recession is global and caused by combating a pandemic — as distinct from government economic blunders — with the public rewarding strong action against the virus and vast fiscal expansion.

Such expansion is transforming the atmospherics of politics. The Prime Minister and the Treasurer are showing that expansionary policy is far more popular than tough-minded restraint to achieve a surplus — just ask Abbott and Joe Hockey. Because we hadn’t seen this for a long time we nearly forgot about it.

Coming in the eighth year of the government, after three election wins, the crisis gives the Liberals fresh political meaning. They are less ideological, more practical, more anchored in the political centre, more united and ever ready to engage in the Menzian method of improvising with traditional Labor positions when the situation demands.

This budget is the culminating event of the new Liberal order under Morrison-Frydenberg concord and pragmatism. It is rewriting Liberal history. This strategy and partnership will pilot the Coalition to the next election. It will frustrate the left and anger classical liberals and populist conservatives. But the fiscal expansion draws on the trust now established between the government and Treasury under Steven Kennedy.

Anthony Albanese in his budget reply accepts the election issue will be jobs and recovery, and seeks a Labor recovery profile with many echoes of Kevin Rudd as he runs on education, childcare, renewables, manufacturing and a smart country that makes things.

His budget reply is significant for its direction — the Opposition Leader won’t campaign on any Bill Shorten fantasy of a big-spending agenda financed by big taxes. His focus will be jobs, productivity and recovery. The problem is the economy is Liberal political terrain — but Albanese has no real choice. “We have a reform agenda,” he said on Friday. “The current government has none.”

Albanese’s purpose is to devise a recovery agenda based on Labor values, pitching to people where Labor thinks Morrison is vulnerable — working women, the aged, people in care, workers over 35 not being subsidised, the jobless, manufacturing workers and students.

You know, Paul, you’re not doing the Coalition or the country any favours with this ceaseless groveling. The Government clearly now believes its own propaganda and that’s the first step towards political oblivion.

Deficits are not intrinsically Keynesian. Keynesianism is a counter-cyclical policy that pump-primes demand by direct public spending and investment amid private sector retrenchment (the paradox of thrift) and underutilization (the output gap). In our case, the output gap is especially enormous thanks to the virus plug in the mass immigration pipe. There is little pump-priming of demand in this budget with its tiny and incremental income tax cut and huge incentives for business to restructure supply. The investment tax incentives are only accelerated write-downs not tax cuts. That means that all they really provide is the discount rate for foregone years of depreciation, and there is no discount rate with money at virtual zero. Moreover, why invest at all into oversupply unless it enables you to slash headcount! Which brings us back to demand. Amid huge economic slack, and calamitous levels of income retrenchment, these policies will crush labour and wages and leave demand in the dust.

The Depressionberg Unstimulus is not from any Keynesian school of thought. It’s not even from any identifiable Australian school of economic thought. It privileges production over consumption, capital investment over household income and publically sponsored creative destruction over demand management. That’s some weird Austrian not Australian economics.

Don’t get me wrong. It’s not that such an efficiency drive isn’t useful nor undesirable. At the right time, it is exactly what we need. If Australia were, say, mid-cycle and verging of capacity constraints a supply-side budget would be terrific. But doing it with confidence in the toilet, just as 17% of GDP in income giveaways is ripped out, clearly risks destroying household confidence via income shock and unemployment (despite confidence trick Murdoch propaganda).

This is what makes this budget anything but “centrist”. It is radical. Indeed, I can’t think of a comparable example of policymaking in modern economic history. The closest analogy perhaps being Andrew Mellon’s notorious advice to Herbert Hoover during the Great Depression to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”

Thus, politically, the 2014 Abbott budget is not a contradiction but the perfect analogy. Back then, the economy faced a much smaller shock as the mining boom went bust and Abbott crushed household confidence with austerity designed to boost the “lifters” and spur the “leaners”. That budget destroyed confidence so completely that it cost Abbott his job. Somehow the Morrison Government has contrived a budget that does the same thing while costing taxpayers $50bn for the pleasure. This is why the Depressionberg Unstimulus just opened a political hole in the Government large enough to drive an Empty Chair through. It is certain that Anthony Albanese will disaggregate demand segments to highlight how the budget had failed them, as any sensible politician would. But what matters more is that 90% of voters are on the demand side of the economy that the radical Depressionberg Unstimulus just ignored if not trashed. Needless to say, in due course, they’ll not be happy with Herr Frydenberg.

I might add, Paul, that deficit economics is not the home ground of the Coalition. It is the home ground of Labor. And it knows how to play on it much better, via Peter Hartcher:

Suddenly, Albanese is relevant again. He made other constructive proposals too, but the promise of universal childcare is a signal moment. It also highlights the increasingly stark contrast between politics in Australia and the US. In two ways.

…the contrast [is] over fundamental approaches to inequality. In the US, a land of shocking inequality, the concept of universal basic income (UBI) is taking hold. That is, an annual handout of taxpayer money where every adult is given the same sum regardless of need or income.

In Australia, the successful approach is not universal basic income – it’s universal basic services. And Albanese’s childcare proposal is an effort to extend this to another area of policy.

Emma Dawson, executive director of the progressive think tank Per Capita, explains why the Australian approach is better. “The idea of UBI has a lot of momentum because it has a lot of Silicon Valley money behind it, and Big Tech’s motivation is that a UBI would mean they can keep wages low and profits high. I get the appeal – just give people money, there’s no stigma attached to welfare.

“But it’s very simplistic thinking. It’ll end up with people getting the smallest amount, equivalent to the unemployment benefit. It does nothing for wealth inequality – give people the money to pay for services and it just drives up prices of services and delivers very unequal outcomes. Give people basic universal services and you are giving them power to use their own skills and build their own wealth. It’s proven to be the most effective way.”

As Australia moves into the recovery phase, Morrison has lost his Lenin-like grip and opened the way for Albanese to return to relevance. Politics is once again, as Paul Keating once described it, “the conflict business”.

There is undoubtedly an economic recovery coming just because we’ve contained the virus and will enjoy catch-up growth. But the Depressionberg Unstimulus ensures that it will be very weak for the vast majority of people and lead to ongoing falls in living standards, as its own falling real wages outlook made so clear. That’s an economic hole that Labor can drive a bus through:

I’ll leave the last word to Laura Tingle who nailed the budget better than myriad economic luminaries and propagandists:

The Government has punted everything on a private sector-led recovery out of recession; one that will happen both really, really quickly and dramatically enough to offset the huge disruption just about to start as businesses lose JobKeeper support for their workforce, run out of rent and bank payment holidays, and decide to close their doors.

The Budget forecast is for the economy to be more or less back to the level of activity it was before COVID-19 hit by the middle of next year. That looks like some feat.

Given this grand ambition, there are some perplexing political — and policy — choices in the Budget which scream ideological purity over rational decision-making.

Josh Frydenberg spoke of “providing a helping hand to those who need it”, yet so much of the Budget is actually directed at people, and sectors, who don’t need it.

The most obviously perplexing political decision is that the Government has not only abandoned such a large swathe of its own small business base, but it has constrained the chances of it taking part in the promised recovery.

…It is the myriad small- to medium-sized businesses in the services sector that have been hit conspicuously hard.

True, some have been able to alter their business models. But it is more than just the cafes and restaurants in CBDs that are affected by the flight from offices. It is more than just low paid workers in those places.

It is all those other small businesses that rely on people being out and about on the streets, or travelling around the country for business or pleasure.

Investment tax breaks don’t help any of them, nor do wage subsidies to hire extra workers — at however low a rate — if your turnover is struggling to reach pre-COVID levels.

It seems extraordinary that the party that’s supposedly the party of small business is simply abandoning all these businesses to the liquidators — particularly, as the Treasurer so often repeated on Tuesday night, as they found themselves in this situation “through no fault of their own” but as a result of deliberate Government policy in response to a health crisis.

As the Grattan Institute points out, “the worst fallout in the COVID-19 recession has been in services sectors”.

“Hospitality, the arts and administrative services have all been hit hard. Yet these sectors received next to nothing in the Budget. They are also less likely to benefit from economy-wide supports such as instant asset write-offs because they are the least capital-intensive sectors.”

These sectors all have large female workforces, which is one of the reasons why Labor and others are attacking the Budget’s failures to support women.

But a broader point is that the Government’s apparently obstinate determination to be seen to push all its support through the private sector also means ruling out something obvious: like spending money on jobs in the public sector, even when that must constrain its chances of getting the economy going again, and/or hitting its jobs target.

…So the Coalition has now got little choice but to sit back and hope the private sector delivers. If it doesn’t, we are all in a world of (even more) pain.

The Australian economy long-ago transformed into a ponzi-services plaything of pseudo-government policy: mass immigration, education, aged and health care, construction and personal services, as well as a gig economy often peopled by cheap foreign labour. These have been the jobs engine for a decade.  This is why wages cratered, part-time work skyrocketed and women were drawn into the workforce en masse both to fill the positions that were available and to offset weakening male income for household cashflow. There hasn’t been a single net private-sector job created since Depressionberg (formerly Recessionberg) took power.

MB always saw this economic structure as a ponzi-scheme that would implode in due course and so it has proven. As it happened, it was a virus that destroyed it more comprehensively and quickly than even we imagined.

Now, ze bauld Austrian vision of Herr Frydenberg ensures zat economic flooff vill burn much faster zan we predicted, ripping off not just ze bandaid but ze entire economic limb!

David Llewellyn-Smith

Comments

  1. Just to put the full stop on another great article:
    (Hat tip to Sven Henrich)
    In the USA:
    – the average borrower has US$88k yearly income and $94k of debt
    – the average prime borrower has US$98k yearly income and $110k of debt
    – the average subprime borrower has US$68k yearly income and $55k of debt

    According to the Australian Bureau of Statistics (ABS), the average mortgage size in Australia is A$500,000…(and doesn’t include those delicious euro car loans or private school fees).

    The average weekly ordinary time earnings for full-time adults in Australia in May 2020 was $1,714 = A$89k
    Just let that debt factoid of a 4x higher debt to income ratio here in Straya sink in as you consider Joshie’s ‘race to poverty’ Budget

    • The LNP has spent thirty years destroying the Australian socialist experiment in sharing the benefits and transformed us into a User Pays Society.

      Prior to the recession Australia had the highest private debt in the western world, and after the Gillard government one of the lowest public debt ratios.

      We now have one of the highest private and public debt ratios.

      Standard and Poors says everything is fine.

  2. Recessionberg is not following Austrian school of economics which advocates ‘sound money’ policy, not negative real interest rate. The budget is not guided by any economic principle : he just have no idea what he is doing.

    • Well said, Ronin. Sound money is the central plank in Austrian Economics. Also no stimulus, no bailouts of either individuals or companies. I could list another ten tenets.

      Josh is a cronyist pretending to be a fiscal conservative

      • Forced boom – bust is what was the impetuous behind central banks to start with and largely just a morality play with religious underpinnings based on atomistic individualism and ones after life.

        Yet then again these same sorts argued that business should be unshackled by any restraints and the market would punish the immoral … as labour has bore the brunt of that paradigm and power has consolidated in its own favor I question your perspective for focusing on a ex ante expectation that has failed time and time again – pre and post central banks.

        BTW there is no such thing as sound, real, natural, or science of money, it has and always been a social tool for right or wrong and I would refer to the Cambridge Capital Controversy to its time and space issues.

        Put it this way … you could get the same results today regardless of moneys administration because its not the dominate factor in shaping reality in the public or private spheres. That distinction goes to the dominate agency behind social organization and to what ends it seeks as it administrates both laws and by that monies, focus on output and not what proceeds it.

        • Skip, don’t over complicate things. Currency is a medium of exchange. It facilitates transactions. Nothing more. Writing a litany of tripe doesn’t change that. Anything can be a medium of exchange including stones and sea shells (as have been used in the past). If we didn’t have currency of some sort we would barter instead. Simple.

          Money is different. It’s a store of value AND a medium of exchange.

          • So your predecessors imagined because it suited their moral tales Dom.

            And it is complicated because of perceptions across human history change, E.g. my reference to the CCC ie. silver and copper were once held above gold contra to some mythology forwarded by some.

            Do equities store value as a form of exchange, does value remain constant, or are humans just acting like the always have since time immemorial and some have a penchant for repeating the same mistakes over and over because they internalized some mythology.

            Word of the day – “individuation”

          • Yes Dom ditto from me … thinking some time as a capital desk jockey and time spent learning AET is not – nor should be confused with comprehensive economic knowledge. That’s without the lobbyist agenda with funding incentives added on, further complicated by some fat fingering Keynes for bastardized variants or bedfellows.

            But I’ll give you this … your not a Paul Daniel King AET level sort.

  3. Surely we should be rejoicing in this news, is it not reset that this country urgently needs?
    Only in disaster will anything be learnt, and this Budget is the best low grade disaster movie ever made.
    Friedthemallberg should be Knighted for his service to the Australia!

  4. my toranaMEMBER

    Respect for reading Paul Kelly. My synapses stop firing as soon as I start reading his pompous sludge and I have to move on before my head spins and I lose consciousness.

  5. Finally made it to $ 300 billion on our way to $ 500 billion next year…….we are going to be left to our own devices at least all next year so we have to redouble our efforts to sell houses to each other .

    https://www.rba.gov.au/statistics/frequency/stmt-liabilities-assets.html

    Income streams are going the way of the dodo everywhere except China until it is their turn

    https://www.zerohedge.com/s3/files/inline-images/fx%20holdings.jpg?itok=mb2zO5W6

    • On being left to our own devices:
      Use the NRL as a guide.. Straya is not going to make the finals
      We don’t have it under the shirt.

      Parramatta coach Brad Arthur has reached a crossroad, as the club searches for answers on a season that promised so much but delivered a failure.
      Last Saturday’s loss to South Sydney marked Arthur’s fifth finals defeat in six appearances,
      the third time in four years the Eels have crashed out of contention in week two of the play-offs.

      There remains a huge question mark over the mental fortitude of Parramatta,
      and how much he has to evolve as a coach to harden a soft underbelly.
      The Eels sat down as a group six weeks ago and were shown Nine commentator Phil Gould declaring they were “kidding themselves” if they thought they were a chance at winning the title.
      “They just haven’t got the underbelly, they haven’t got it under the shirt,” against quality sides – they’ve frittered away big leads.”
      Six weeks later they surrendered an 18-8 half-time lead against the Rabbitohs to see their season slip away.
      They “capitulated”, Brad Arthur said after the game.
      Arthur, an old-school players’ coach, has been afforded every opportunity to prove his way is the right way. The club has backed him.
      But the club will now demand he works with head of football Mark O’Neill in the off-season to find a better way to ensure results improve in 2021.
      Arthur has been somewhat reluctant to embrace the power of mindfulness when it comes to impacting results with the coach prioritising football matters over mental ones.
      There is a concern that Arthur, mollycoddling the players,may have only exacerbated a potential mental weakness.

      • lmmao at the hyper stress develops a stronger breed tropes aka the floggings will continue until moral improves.

        Nothing in the sociological observations support it and more so shows a break down in societies, like some want to egg on a Rwanda so they can get their grove on.

          • Yet we are not wolves … Zoomorphism and Anthropomorphism are literary devices used in mythology to vindicate the divine. Then some are confused why economics is such a mess after transferring metaphors from physics and maths to human organization, where previously it was just plain old political theory and natural history without all the fear mongering to keep the unwashed on the path of light, are – we – there yet – ??????

  6. Great wrap. But you write, due to the ‘shocking Andrews Government ineptitude’, ‘The international border is guaranteed to stay shut’.

    We should all be deeply grateful to Dan. 🙂

  7. Fiscal is fiscal but what about the RBA. Look at RBA monetary aggregates and it is running M1 at 33% annualised for the last 6 months. This is big as in 1992 when Westpac and ANZ were bust they only did 25% per annum. As I commented last week and highlighted by Laura Tingle (who has finally written a sensible article) the most distressed sector with decimated revenues the small and medium business sector has virtually no support apart from JK and cash flow boost (Federal) for some of them. Very surprising for a supposed enterprise party but I would put it that Frydenberg has been snowed by highly paid insulated Treasury bureaucrats.

      • The problem to me is the sectors that I think the Government are trying to save the the ones that need the most adjustment. Building, aviation, etc propped up with indirect and direct subsidies where to me these are probably the most obvious candidates to downsize in a post COVID world where borders are closed and immigration is reduced. These sectors need to downsize as population growth reduces otherwise at best we get mal-investment; at worse we cause a supply shock and more job losses later.

        Conversely if we can contain the virus those service sectors (e.g. arts, local services) would have their demand bounce back as locals want to do more “local” things especially if they can’t fly away overseas – already seeing the “local tourism” effect in my area. Community jobs if not destroyed would bounce back quite well.

  8. I have a question..

    https://www.9news.com.au/national/federal-budget-2020-australia-tax-cuts-how-much-extra-cash-you-will-have-in-2020-2021/44e801dd-bd58-4987-8baa-2535fb56fb9a
    Let’s break the one-off tax relief for 2020/21 down by tax brackets:
    – If you earn up to $37,000 a year, as do 2.4 million individuals, you’ll receive a one-off tax relief of up to $510.
    – If you earn between $37,001 and $48,000, as 1.8 million individuals do, you will receive a one-off tax relief of between $510 and $2160.
    – If you earn between $48,001 to $90,000 – which is the most popular tax bracket including 4.6 million Australians – you’ll receive tax relief of between $2160 and $2295.
    – Finally if you earn between $90,001 up to $126,000 you’ll receive a tax relief of between $2295 and $2745.
    – If you earn over $126,000 you will not receive a one-off tax relief.

    so if I did salary sacrifice super contributions to knock my take home income below $126000, would I get the $2745 benefit? It seems a bit vague “earned” is that gross income or taxable income?

  9. Look, Australian governments spent most of the last decade creating all the factors for an economic disaster, it’s not like there’s some magic way out now. The runaway train is going so fast now that pulling the handbrake will derail it as opposed to letting it derail when it hits the next corner. There are no good options left.

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