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Budget must put money in people's pockets first

Emma Rapaport  |  09 Oct 2020Text size  Decrease  Increase  |  
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Tuesday night's federal budget proposed historic spending for a historic downturn. Instant assets write-offs for almost every Australian business, a boost to the research and development tax incentive, and of course, tax cuts for 11 million Australians. But will this approach to fiscal stimulus be enough to lift us out of an economic recession? Grattan Institute chief executive Danielle Wood is sceptical.

Speaking at the Morningstar Investment Conference on Thursday, Wood said the government's pivot from emergency support to turbocharging the recovery through fiscal policy was "the right one".

In particular, she backed the wage subsidies to help young people find jobs, noting that younger Australians have been disproportionally affected by economic fallout and that graduates entering the workforce could face long-term low pay. But she doubted whether a private sector-led recovery coupled with tax cuts was the most effective way to get the economy moving.

"We know that before the crisis business investment was weak and a real reason for that was a lot of uncertainty about the economic conditions and a lot of uncertainty about the strength of the markets and consumption," she said.

"There is not much here that makes me think we are going to see some sort of a boon in consumer activity.

"The budget is forecasting basically zero real wage growth for the next four years, so there's not a huge amount to get consumers going out spending.

"My concern is that we're putting that business investment cart before the consumption horse.

"I would have liked seeing more measures to shore up consumer confidence, more measures to shore up spending, before we really start thinking about how we're going to encourage business investment."

On the tax cuts, Wood expressed concern at the time it would take for the money to hit bank accounts, and whether it would ever leave them. Instead, she suggested that voucher or targeted discounts-based scheme would do more to get people spending in the economy on sectors that need support.

"The real question is the timing," she says. "I thought it was great that the government brought forward the cuts to this financial year.

"This is really when we need to start building that confidence and getting momentum around consumption.

"But the tax offset which is really where the action is for lower- and middle-income earners, the earliest the money will be received in July next year.

"That to me is the real kicker in the package.

"Tax offsets tend to work better as stimulus with one-off payments - psychologically people are more likely to go out and spend them.

"We know that low and middle income are the ones that are spending more of the share of income, relative to high income earners during the crisis."

Wood made reference to the UK's 'Eat Out to Help Out' scheme which offered consumers discounts on meals in pubs, restaurants and cafes, which she says inspired behavioural change.

Missed opportunity in social housing

Moving onto other areas of stimulus, Wood cast doubt on whether the budget’s infrastructure measures would create the most amount of jobs possible.

"We're in a world where we already have quite a healthy pipeline of transport projects already," she said.

"The big package was around transport infrastructure spend which doesn't make a lot of sense to me as economic stimulus.

"We know the construction sector has taken a hit; it's mainly housing construction which is labour intensive.

housing

Social housing was one area that could governments could use to match jobs with a sector that's taken an economic hit, Wood said, and deliver something of long-term social value.

"You can ramp it up very quickly, it targets jobs that are going to take a hit in construction and it delivers on a social need," she says, adding that she believes politics plays a part in a reluctance to invest in the area.

Social housing received a boost under the Rudd government’s 2008/09 stimulus package in response to the global financial crisis.

No choice but to spend

Wood waved away concerns about the government's mounting debt, noting record low interest rates and the dire costs of running the economy considerably below its potential for an extended period, particularly for the unemployed.

"If you stagnate for too long, the suggestion is that it actually changes your future growth trajectory," she says.

"There's a very strong case for governments to intervene here, both from a welfare of Australians perspective, and really about our long run potential growth.

"Yes, they're big numbers and may sound scary and, yes, we've been conditioned to think about deficit and debt is the barometer of good economic management.

"But as I and many other economists have said you know this is exactly what you should be doing -using our balance sheet to cushion the shock, and it's extremely manageable on the other side."

Wood notes that while monetary policy has a role to play in the recovery, there is simply less ammunition as the governor flirts with a bizarre world of negative interest rates. While she says there are further measures on the table, she believes fiscal policy is the "main game in town".

"If we go back to the global financial crisis there was a 4.25 percentage point drop in the cash rate," she says.

"The Treasury's calculated that that's equivalent to about 100 billion dollars' worth of stimulus.

"That's a very significant amount of support that the government just hasn't had to call on this time."

is an editor for Morningstar.com.au

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