Budget 2020 Short term gain = longer term pain

Paul Kniest Director (Policy & Research)

The 2020-21 Federal Budget very much turns the expression that there is no long-term gain without short term pain on its head. This Budget delivers short gain but will inevitably lead to longer term pain.

The Budget delivered record levels of public expenditure, budget deficits and government debt.

In 2020-21 total government payments will be a record $677b, an increase of 22.8% over 2019-20. This represents 34.8% of GDP, well above the average of about 25% since the turn of the millennium. Sizeable deficits are forecast over the next four years. Net Commonwealth Government debt is expected to be in the order of $1,000 billion ($1 trillion) or 44% of GDP in 2023-24.

Figure 1 clearly also shows that the record increases in government spending is a short-term temporary boost to the economy.

In addition to the short-term gains from this boost in public spending the Budget, at cost of $17.8 billion over the forward estimates, also brings forward stage 2 of the Government’s tax cuts. All other things being equal, this reduces the ongoing level of government revenue or income and in a comparative sense (structural budget outcome) puts the Budget in a worse position into the future (refer to Budget Paper 4 Chart 3).

While the proponents of Modern Monetary Theory (MMT) might see this as an affirmation of the fact that the size of Budget deficits don’t matter, the more likely explanation is that the rhetoric around the fiscal crisis of deficits and debts has merely been relegated to reserves bench rather than permanently retired from Australia’s political discourse.

There are already muttering amongst some of the more conservative members of the Coalition Government that once a vaccine or effective treatment for COVID-19 has been found, there will a return to more traditional conservative economic lectures about escalating government debt, living within means, and tightening belts.

Given the permanent tax cuts result in larger underlying or structural deficits this will inevitably result in austere (back in the black) Budgets which will achieved by cutting public spending on public services including welfare, health and education – not by increasing taxes or living with high level of government debt.

We fear that even if there is a change in government, the short-term gains included in this Budget will inevitably be followed by longer term pain.

Numerous commentators have said that this as the Budget that business wanted. One only need look at the major initiatives announced as part of the Budget to see that, apart from the cost bringing forward personal income tax cuts, it strongly favours providing support for business.

This includes a total of almost $70billion of commitments over the forward estimates on:

• allowing business to fully write the cost of investments in year of purchase ($26.7 billion).

• Extension of JobKeeper payments ($15.6 billion).

• Loss carry back provisions (allowing business to claw back tax paid in previous years) ($4.8 billion).

• JobMaker hiring credit (wage subsidy for those under 35) ($4 billion).

• R&D Tax incentive ($2 billion).

• Modern manufacturing strategy ($1.5 billion).

• Apprentice wage subsidies ($1.2 billion).

• Various infrastructure programs (totalling $10.7 billion).

By contrast, the initiatives that provide additional public service, social or welfare support are far more modest totalling less than $10 billion over the forward estimates. This includes:

• Further support for pensioners and other welfare recipients (additional two $250 payments) ($2.6 billion).

• Additional aged care support ($2 billion).

• Access to COVID-19 vaccines and consumables ($1.8 billion).

• Supporting hospitals ($1.1 billion).

• University guaranteeing Medicare ($1 billion).

• Research support ($1 billion).

A number of commentators, foremost amongst them Dannielle Woods from the Grattan Institute, have described this a very blokey budget. Ms Wood notes that the sectors hit hardest by COVID 19, namely hospitality, tourism, the arts, recreation, administrative services and which have a higher proportion of female workers were not those supported in the Budget.

Instead the Budget provides greatest assistance to what might be described as the is helping high-vis male dominated industries such as construction, energy, defence and manufacturing.

There was criticism of the Budget for not specifically addressing the issues around the cost of childcare and the very high effective marginal tax rates faced by parents wishing to work fulltime.

In addition to the initiates outlined above, the Budget also included a $1 billion increase in the level of university research support funding.

However, as Figure 2 shows this like the rest of the Budget delivers a short-term temporary sugar which id here this financial year and gone the next.

This short-term boost is also true for the other two new inanities announced as part of the Budge: 50,000 new short-term courses, and 12,000 new Commonwealth Supported Places (CSPs). These short-term temporary gains in higher education will be offset by longer term with the passage of the Government’s Jobs-Ready Graduate legislation which slashed public investment per university place by 15% per student.

A more detailed analysis of the Budget and the Job-Ready Graduates bill will be covered in the upcoming edition of the Advocate. •