Australia has lost the capacity to debate economics

Yesterday’s MSM budget discussion was shockingly bad. Most worryingly, both criticism and praise of the Depressionberg budget was wrong and misleading, suggesting Australia has lost the capacity to even debate vital economic decisions.

On the critical side, Bernard Keane at Crikey composed misleading reams. To begin with, we got this:

The Morrison government is counting on the private sector and cashed-up workers to drive a surge of economic growth, fuelled by a half-trillion dollar deficit binge that the government believes will return unemployment to 2019 levels by 2024.

…It’s not quite trickle-down economics, but it’s a massive, debt-fuelled Keynesian investment in animal spirits intended to lift a struggling economy somewhere back to where it was before the pandemic hit.

If it ever does, we’ll still have a national debt that will take decades to pay off.

Then more in a second piece:

If one of the key questions about the 2020 budget was whether the government was prepared to spend enough to support the economy, it was answered resolutely in the affirmative in Table 1 of Statement 1 of Budget Paper No. 1 which showed deficits totalling $480 billion stretching off to 2024.

The Grattan Institute had suggested the government needed to spend another $70 billion to $90 billion in 2021 and 2022 on top of its $180 billion in deficit spending already committed this year. Josh Frydenberg went way beyond that with another $112 billion deficit next year and deficits to the end of the forward estimates and then beyond into the forecasting haze of the late 2020s.

And the deficits aren’t just the result of lower tax revenue — despite justified criticisms that revenue forecasts still look too optimistic — but a massive expansion in the size of government.

First, the budget is not fiscal stimulus. The majority of the 2020/21 deficit has already been spent in 2020 and it is much smaller in 2021/22. That means that the fiscal impulse is going to decline sharply from here and detract from, not add to, growth.

Second, it is not remotely Keynesian. Keynesian stimulus is targeted at government deficit spending and investment to lift demand directly. It is not tax cuts for the simple reason that they do not work when the urge to deleverage or save seizes the private sector and demand falls. As well, most of the tax cut spending is for the supply side of the economy even though we have far too much of it.

Third, there will be no terrible legacy of national debt given the RBA is already controlling interest rates for sovereign bonds in the secondary market and will, in due course, be buying the government’s bonds direct.

In short, Bernard Keane’s (and most of the journos) criticisms operate from a grab bag of political truisms derived from Australia’s bastardised political discourse, not from economics or, for that matter, the economy.

Praise for the budget came from the predictable quarters of “business” but it has no idea, either. Check this out:

Billionaire retail magnate Solomon Lew says last night’s federal budget is the most well-thought-out budgets he has ever seen in his career.

The Premier Investments chairman said it cannot be understated “just how much this will provide a shot in the arm to employment, youth job creation, consumer confidence and spending”.

“This budget will help bring the Australian economy out of the doldrums and back to where it needs to be,” Mr Lew said.

“Treasurer Frydenberg and the Morrison Government should be commended for delivering such a formidable, and importantly manageable, budget that will provide a much-needed boost to national economy and the broader retail environment.”

Or this:

Adbri chief executive Nick Miller says the government’s budget will support job creation and stimulate economic growth.

“Combined with the recent positive progress in gas policy, the investment directly into state infrastructure projects while encouraging business investment through tax write-offs for critical assets will help drive competitiveness, efficiency and support Australia’s economic recovery,” he said.

Or this:

Australian shares are surging after a “go Australia” budget, according to AMP Capital Portfolio Manager Dermot Ryan.

“This year’s federal budget is a go Australia moment like no other and business is leading the charge,” he says

“Business spending stocks – like auto and equipment exposed sectors – are all up strongly.

He notes that business and middle-income support packages accounted for half the $100bn spending in the Morrison government’s recovery budget.

And on it goes.

First, energy prices will rise under the gas unplan because it leaves the gas cartel fully in control of Australian gas reserves. The only hope for lower prices now is LNG imports.

Second, sure, rorting the taxpayer for pay subsidies and investment is fun (especially for retailers) but all of the supply-side stimulus in the world won’t help if there is no demand to service as incomes are gutted, especially in the absence of immigration to artificially boost demand via more warm bodies.

Third, infrastructure is fighting a receding tide of NDIS and NBN spending and can’t add much to growth given it is the rate of change in spending that matters.

Bloomie provides a net survey of market economists which is nearly all bull as well:

Commsec:

  • Tax cuts have scope to boost consumer and business spending; If people are confident about job prospects then discretionary retailers such as Harvey Norman, Premier Investments and JB Hi-Fi will benefit
  • Interest rates to stay low for next three years, meaning capital growth and dividends will be important to attract investors; NOTE: Fortescue, AMP among companies with highest projected dividend yield next 12 months, based on BDVD forecasts: Bloomberg data
  • Infrastructure spending plans, state government incentives and low rates to support mining and construction sectors; Adelaide Brighton, Lendlease, Boral, Brickworks and Bluescope may benefit
  • Decision to extend first-home deposit plan may support property developers and residential builders like Stockland, Mirvac, James Hardie
  • CSL, Cochlear, Resmed may benefit from plans to boost manufacturing spending, while fuel security plan may help Santos, Woodside, Senex and Ampol
  • Still, migration outlook remains uncertain; Lack of foreign students, tourists and workers may impact travel firms, airlines and other tourism-based businesses
    • NOTE: May impact firms including Crown Resorts, Star Entertainment, Qantas, Flight Centre, Corporate Travel Management: Bloomberg
  • See ASX 200 rising to 6,450-6,550 by June 2021; Benchmark closed Tuesday at 5,962.07

Jefferies:

  • Budget supportive for healthcare sector, with focus on coronavirus diagnosis
  • Government unveiled increased funding for clinical labs to go with previously announced spending for aged and primary care
  • Reasonably benign regulatory environment for Australian health and aged care firms in near- to medium-term during Covid-19 and its aftermath
  • No changes to forecasts for stocks including Estia Health, Healius, Japara, Regis Healthcare, Sonic Healthcare, Sigma and Virtus Health

Morgan Stanley:

  • Budget is a stockmarket friendly one with clear focus on consumption support and business
  • Sets a stage where equities positioning is important; “Leveraging to the broader fiscal theme, gaining exposure to longer-dated reopening plays and embracing more broadly the prospect of cyclicility and rotation has been reinforced”
  • Consumer stimulus carries greater duration, infrastructure offers stability, while virus evolution remains key
  • See measures supporting business investment and lower unemployment as positive for banks
  • Changes to private health insurance seen supportive of system and may also feed into hospital operators
  • Healius and Sonic Healthcare have exposure to Covid-19 testing, which secured additional government funding; Suggests upside to current test assumptions, although volume will reflect demand
  • While there was some additional investment for aged care, more details for sector not expected until 2021
  • Construction components of budget support preference for Adelaide Brighton amid focus on “shovel-ready” small-to-medium-sized projects projects

Macquarie:

  • Australian budget deficit is large but broadly within range of market expectations
  • Pro-growth budget seen as supportive of a rising equity market, although given most measures were pre-announced the immediate impact is seen as minimal
  • Consumer spending support likely from tax cuts and payments to the elderly
  • Infrastructure investment likely to help companies including Downer EDI, Monadelphous Group, Cimic, Service Stream and Transurban, while construction firms CSR, Adelaide Brighton and Boral to also benefit
  • ‘We see a global wave of infrastructure stimulus as positive for resource stocks. Investors should continue to rotate to value and companies negatively impacted by Covid-19”

Goldman Sachs:

  • While not a significant amount of direct support for infrastructure and aviation stocks, they are likely to benefit if the budget achieves the broad-based increase in activity it is targeting
  • Qube among infrastructure firms that may benefit from increased trade via consumption and manufacturing production
  • Transurban and Sydney Airport more likely to get boost from increased consumer activity rather than direct road investment impact

The only house to get it right was Citi:

  • Budget actually results in “significant step-down in stimulus provided” in 2021
  • Stay cautious on discretionary retailers with elevated P/E ratios; Impact on retail demand is positive but needs to clear high hurdle in 2021
  • Volume of stimulus from tax cuts and pensioner payments “pale in comparison to the stimulus paid in June and September 2020”
  • Wage subsidy plan may boost Ebit 1% for retailers that can add staff, particularly supermarkets; Full expense of capex may lift operating cash flows 5%-10%
  • Super Retail, Coles and Woolworths may benefit from these changes
  • Infrastructure spending proposals may drive small earnings uplift at Adelaide Brighton, Boral
  • Homebuilder program not extended; While it did pull forward some work into FY21, medium-term housing risks from stimulus wind-back and border closures remain

“Business”, “journos” and “analysts” will form a screaming chorus for more traditional Keynesian stimulus next year as this mad tennis-pro experiment in lieu of basic economic wisdom tumbles into a deflationary abyss.

David Llewellyn-Smith

Comments

    • GunnamattaMEMBER

      Anybody reading the mainstream media in the leadup to the budget was swamped with headlines touting ‘tax cuts’ and how they would be ‘backdated’ – when for 90% of the people reading the headlines they were essentially meaningless (about a bag of chips per week when they have mortgage debts hanging over them of an average of 400k).

      The complete lack of real ‘analysis’ of what was mooted and then announced and the actual measurable economic effects of that was/remains simply staggering.

      At that point think that…..

      1. The lack of credibility of the mainstream media starts right there – News, Nine/Fairfax, Guardian, ABC, 7,9, 10 all guilty to varying degrees……..Like what is the editorial process thinking? ‘We tout this as something big and 6 weeks later the viewers and readers are processing something small, and they will believe us next time we tout something as being big.’

      2. Our politicians think they can continue to serve up ‘talking points’ as be all and end all facts, which are all too often insignificant (if not outright irrelevant, or even a lie) in relation to the dynamic the public wants information about or issue it wants addressed.

    • But won’t Australia be a more productive place if Retail wages are paid by the government?
      Isn’t this “Productivity with Australian characteristics” it’s just the sort of thing that would make uncle Deng proud of us. Our ability to consume (per wage retail unit) is dramatically increased which thereby increases our need to import capital and more importantly our need for imported goods.
      This is the basis of true wealth, it’s the essence of enterprise and it’s good for us.

  1. Great article. High lights the complete failure of economic reporters and pundits and the media in general to hold the government (any government) to account.

    I was particularly pi**ed of to be watching the 730 report summary and out it came the nutty complaint from the reporter that there was nothing in the budget for foreigners on temp visas and foreign students. I mean they actually lamented that those people didnt get to benefit from the largess of AUSTRALIAN tax payer money or the wage subsidy available to young workers.

    For the record i support the subsidy available to business to hire new apprentices.
    But i can easily see the repeat of those apprentices just getting fired when their subsidy runs out and replaced with another.

    I do not support the subsidy available to employers to hire people 18-30 who have been on job seeker.
    A lot of people who have stayed employed under job keeper are going to be fired and replaced because you cant convert a jobkeeper person to one that can have the subsidy. In addition a lot of existing people who have kept their job regardless of reasons will be fired to replace with one off job seeker. How is that helping to reducing unemployment.
    You cant decrease unemployment because there just arnt jobs for people.

    So friggen well deport temp visa holders and fake refugees now. Now is the time to remove them from this country so that jobs are available for Australians. Stop foreign students from any work at all.
    Yes i know there are lots of jobs that Australians wont do.
    But thats too bad for the people on jobseeker. After a certain amount of time if you are capable of doing a job, but dont want to take it then there is no more jobseeker for you. There needs to be a carrot and stick approach to get entitled Australians off ALL ages off their butts and into the work force. Not to be exploited, they need to get paid appropriately.
    There is value and meaning in all types of work. From cleaning toilets to working in fast food to being a manager.
    This is an attitude that needs to change in this country.

    • boomengineeringMEMBER

      Wrong. There is no job that Australians wont do, at the right price. That the beauty of high wages, it incites mechanization.
      The Europeans are aghast at the menial work done by low paid Americans done by robotics and electronics at home.
      If Australians wont do a certain job its because the price is factored wrong to off set unviable aspects such as seasonal, long hours, remoteness.

      • boomengineeringMEMBER

        Its not the Australians that are wrong nor the job that’s wrong, its the remuneration which eventually needs to be passed onto the customer until the said customer can’t pay exorbitant mortgages instead. This initially may result in competition from importation of such goods which in turn will lead to being the mother of invention.

      • Possibly. But i think as long as you are paid by the taxpayers just enough to get by then there is no need for anyone to actually take on a job they dont want to do. Im not suggesting people should be forced to impoverishment as a way of forcing them to take a job or look for work. The first step is the jobs have to be available.

        • boomengineeringMEMBER

          Deviating a little, one aspect often oveooked by economists is how house prices directly related to capacity to repay affected by . If mortagees can get living expenses and sundries for next to nothing via cheap imports and immigrant slave labour then all the more left over for the banks mortgage coffers due to bidding up of idiotic high house prices. Death spiral ensues when the Minksy moment arrives of jobs lost to cheaper foreigners .

          • Jumping jack flash

            This.
            But it is offset somewhat by wage theft for at least 5 of the last 10 years.

      • A lot of this mech is financialized to the eyeballs and driven by a multitude of other market factors of which buffing equity is the dominate. Once wages and productivity diverged the writing was on the wall and worship of the C-suite had the mopes stampeding too, not unlike RE, too offset earnings in the stawk market.

        High wages …. lmmao …

    • Contemporary economics is riddled with BS theory. Most economics grads are like sheep.

      Learned by rote through school then continued through Uni too. Never questioned any of it.

      And now we are in a complete mess.

  2. Your first link goes to your GMAIL account. You should definitely fix that.

    How are personal income tax cuts supply side – can you please explain that as they are definitely demand side in my book.

    This budget does not address the single biggest issue, neither do you as far as I can see, may have missed it – however there will be a collapse in commercial rents – this is happening in the US as well and the consequences are bigger than anyone is realising – a collapse in rents will collapse the commercial market.

    The decline in CBD living may also be enough to set the economy back into recession as well.

    Without an immediate return to foreign students and immediate end to all remote working this can not be resolved without massive financial government support.

    • “Without an immediate return to foreign students and immediate end to all remote working this can not be resolved without massive financial government support.”

      What do you mean by resolved?

      Many business owners who have existing leases in commercial properties for their staff have already decided to downsize their footprint & will do so.

      We just need to step back and let it happen.

      No government intervention required.

    • Labour income tax cuts are supply side because it increases labour supply, which because demand is depressed will lead to lower before tax wages over time offsetting the tax cut effect

        • Huh? I said below that cutting the GST would work by boosting demand because you only get the tax cut when you buy stuff.

          Cutting labour income taxes in a recession when interest rates are zero doesn’t work. Economists largely agree on this.

          You have to fix the demand problem first then if we can back to full employment cut taxes.

          And btw yes, cutting wages does lead people to leave the labour force. Doesn’t mean it’s a solution to high unemployment.

    • How are personal income tax cuts supply side = lower the cost of labour? I.e. you have to pay them less for the same take home pay as before. Which is an input to the supply of goods and services.
      I agree with you. Somehow depositing 900$ cheques is demand side but taking -2000$ from tax is supply side.. i think the point is, while people are locked at home and social distancing bla bla, you need to deploy policies that directly increase demand for goods and services like building a new brigde.. stokes demand for materials and labour directly with govt as the buyer.
      We need to be building bridges right now. Literally. No surprise that the harbour bridge here in syd was built in 1933, anzac bridge in 1990s recession and the metro line via chatswood started in 02 but only restarted in GFC… all direct demand projects.
      But LNP are “small govt” who think it is better to create rorts than, god forbid, actually employ people.

      • It increases after tax wage so stimulates labour supply.
        Effect on before tax wage depends on whether firms sell at lower than otherwise prices. Because demand is depressed to maintain market share they will and will then lower before tax wages.
        eg it is deflationary policy.

        • ashentegraMEMBER

          tonydd nails it in comments yesterday:

          “The number of times money can be spent before disappearing in a debt saturated economy become fewer and fewer. Every spare cent will eventually go towards paying down debts. System failure.”

  3. From the Canberra Times
    “The nation’s gross debt will hit a peak of $1.1 trillion in June 2024, or 51 per cent of GDP.”
    Australia’s GDP in 2020 was $1.32 Trillion – anyone notice anything funny about their numbers ?

    I can not find any job creating budget initiatives outside of some infrastructure ? Is this right ?

    There are just support measures for hiring, some grants for universities and private health funds ?

  4. Wellie what do some expect decades after the purge in economic departments decades ago and further diminished by assembly line cog and widget degrees or dressed up political/ideological indoctrination courses.

    Best bit is watching late stage neoliberalism invert and apply its tender machinations on those that once forced it on others as ***progress*** only to complain when it is their turn.

  5. Good summary. It is a terrible budget.
    The other point journalism is missing is the effect of labour income tax cuts during a liquidity trap.
    These will lead to lower wages and will be deflationary. By increasing labour supply this will reduce business marginal costs, because we are in a deflationary environment where the RBA cannot offset the effect firms will lower selling prices to maintain market share. Yes it will also lead to a slight tick up in consumption but because rates are at zero (meaning people want to save more even at zero) the supply side effect will overwhelm the consumption /labour demand effect.
    So they will lead to lower before tax wages and lower inflation.
    The short term increase in after tax wages will wash out in lower than otherwise before tax wages.
    What is required is either strong government spending or a large cut in the GST to stimulate consumption directly.

  6. This is a great budget, for anyone wishing for a total reset of our values and attitude towards earning a living in the real world where no nation plays fair

  7. Third, infrastructure is fighting a receding tide of NDIS and NBN spending and can’t add much to growth given it is the rate of change in spending that matters.
    Yeah Aussies are somewhat challenged when it comes to understanding the effects of Derivatives, most are capable of getting their head around first order derivatives (rate of change) but when it comes to understanding the effects of second and higher order derivatives, on the system, well lets just say logic leaves the room long before they’ve solved their first simultaneous equation.
    I don’t really know what to make of this, surely were not that poorly educated. Maybe it has more to do with our educational focus or maybe it’s just of a cultural thing (don’t become a nerd) but one thing is certain, you can’t win an argument in any pub in Australia with a sound mathematical proof.
    Does it count as correct if you can’t pass the pub test?
    Is it correct if you can’t pass the pub test?
    In the end these are social questions about trust
    In America the phrase: In dog we trust…the rest pay cash, is sort of accurate
    So what is it that we put our trust in in Australia, 50 years ago it was Religion, 20 years ago it shifted to Housing (same thing different lead dog) but what is it today?
    Whatever the answer it sure as heck ain’t math, or science or any damn derivative.

      • Less Woke More BlokeMEMBER

        Can we define professional please?
        ie was he on a/the circuit earning money?

        “Frydenberg was a keen tennis player. He attempted, unsuccessfully, to drop out of high school to pursue a career in tennis. After finishing high school, he took a gap year to play tennis full-time in Australia and Europe. Frydenberg played against Mark Philippoussis and Pat Rafter, and represented Australia at two World University Games. He and his father were present at the 1997 Maccabiah bridge collapse.[2][3]”

        I mean, I could quit my job and take a gap year and try and become a pro golfer, but playing some pro -ams or whatever doth not a professional make.

        Maybe we should call him a wannabe-pro?
        It fits. Coz he is a wannabe-treasurer.

  8. Hardly a writer concluded that this govt inevitably returns to type when it comes to spending and that it’s in their DNA to reject any significant spending in the public sector ( social housing, heath and aged care employment etc) when they can throw dollars at often very unproductive small businesses to “train” more baristas and beauticians! Tim Colebatch at Inside Story did a reasonable job on his take on the budget by listing the top six strategies that Australian economists had called for, most of which were missing from this budget. Ian Verrender at the ABC also got it right. However, in the end, most of the journos in this field are lazy, incompetent or simply way out of their depths and so they follow the herd. Just look at today’s stories where the herd has awoken to the “gender and age” bias with the employment subsidy ( quite correctly) and so it’s off in that direction for the next 24 hours. They are predictable and useless.

    • Interesting there was no cries of ‘gender bias’ when we pushed for a service economy and reduced our manufacturing base which benefited females at the expense of males.

  9. Jumping jack flash

    So i suppose we wait for all these business leaders who are supporting this budget to create new positions and raise the wages of their rank and file workers?

    Yeah right.

    Talk is cheap, especially if it gets your name and business in the news for free.

    • Anyone who gets paid for forecasts makes them rosy. That is what the buyer wants!!

      Show me the infrastructure economist who has a bearish view on volumes and I will show you an out of work economist.

  10. Businesses are pretty much split down into two groups
    On the first group you have been decimated and have next to zero cash flow.
    The other group is unaffected, some even flourishing.
    There are some in the middle but not much (but there will be more if the economy keeps deteriorating)

    The focus of the budget should have been to improve cashflow of the first group NOT boost the second group.
    Tax cuts, wage subsidies to hire, asset write off, etc all assume that you have cash flow and/or spare cash.
    None of these incentive will work on the first group and they will most likely collapse.
    Its the second group that will get the incentives yet they don’t need the incentive.

    It’s a complete misallocation of funds

    As for the personal income tax cuts, we all know its the affluent families that benefit and these happen to be the same group that has taken on massive amounts of personal debt. Most of this will be used to pay down mortgages and car loans

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