A brief lesson in economics to our unesteemed Treasurer

There is a Bachelor of Economics degree in my unhallowed past. I don’t use that material often, but it is occasionally useful in spotting nonsense,

It’s been a while since the Coalition’s first budget was released and there’s been a great deal of discussion about it. On the whole, it’s not very popular, but what’s wrong with it from a purely economics perspective?

I’ll summarise here, then go into the extended discussion.

The budget places additional burdens on the poor while costing the rich relatively little. Because poorer people spend more of their income, and tend to spend it more on local goods and services, the economy is hurt more when the poor are hurt more. Reductions in health and education can expected to be deleterious to long-term productivity. Negative consumer outlook (based both on Government rhetoric and the Budget itself) also has a negative effect on economic growth.

The Coalition’s narrative is:

  1. We’re in a debt crisis, and
  2. everybody has to bear the burden
  3. If we don’t pay the debt off now, our children will pay it off instead.
  4. Too many people are drawing from the public purse needlessly
  5. the debt crisis is all Labor’s fault, because Peter Costello is the best Treasurer Australia has ever had, and
  6. Labor spent a lot of money needlessly.

Part 1: Historical conditions and the “debt crisis”.

Firstly, the “debt crisis”. We’ve had deficits for each year since Labor initially gained power. Lest we forget, the first of those years was under the tail end of the last Coalition budget. While Labor did introduce new spending initiatives post-GFC in order to mitigate the effects of an expected recession, the cost of these was less than the actual deficit that year. In other words, had Labor done nothing to the budget, we would still have had a deficit.

However, this is not inherently a bad thing. The Howard government’s surplus years were propped up consistently by income from the mining boom. Fundamentally, during a boom, government receipts increase (due to higher tax receipts) while expenditures go down (due to lower welfare expenditures). During a recession, the scales tilt the other way. The economy follows a boom/bust cycle; at the moment, we’re probably in a slight recession, compared to the natural year-to-year average growth of the economy.

The underlying fault with the Federal budget at present is that the Howard government acted as if any surplus was a good surplus. In fact, during peak year, the surplus should be very high, in the same sort of territory where the deficit is now. What actually happened was that the government cut taxes – particularly at the high end – producing a long-term reduction in tax receipts, particularly affecting one of the areas most sensitive to boom/bust cycles. The “correct” response was either to put the money in the national kitty – as was done, to a limited extent, with the Australia fund – or to spend on infrastructure, to give a long-term boost to the economy.

As a result, when the economy dropped into conditions bordering a recession, the position of the Budget dropped to the “neutral” point determined by the modified position on spending and income. This was a fairly hefty deficit.

The Labor government’s response to the GFC was various types of spending in order to prop the economy up. While the degree to which the economy’s position was actually helped is debatable, it is certain that in the end we were one of very few countries not to get a technical recession (two subsequent periods of negative economic growth). Most of this spending was one-offs, not affecting the long-term budget balance, except for payable interest. Most economists would agree that some level of spending was necessary – even the Coalition supported the initial incentives.

This why why Swan has won international awards as an outstanding Treasurer where Costello has not.

Comparing our position with other countries shows our national debt is relatively small. We’re certainly nowhere near the territory of Greece, Italy or Spain.

We’re also trying to reduce our deficits. To be clear, there is nothing wrong with reducing the budget deficit. The problem is that the Coalition is doing so in exactly the wrong way.

There are also concerns about minor matters such as people being unable to afford food, clothing or housing. Since the Treasurer appears to be a monster with a tightly-wound watch for a soul, we’ll ignore those matters as being unlikely to affect his judgement.

Part 2: How the current budget screws up

Let’s start with some basics. Poor people, on the whole, spend more of their income and save less Richer people spend more in dollar terms, but as a proportion of their income they spend less and save more.

So if you are going to do something to affect incomes, you hit the rich, not the poor. Tax receipts are higher (more dollars per person) and the result of feedback effects is less (as the reduced income affects spending less, and the spending that is reduced is more tilted towards imports.) Taxing the rich is better for the economy than taxing the poor, broadly speaking.

What’s actually been done is that welfare spending has been dropped drastically, particularly in the form of reduced unemployment benefits to the unemployed. Education and hospital expenditures have been reduced; the medicare co-payment has been added; and of course the “Carbon tax” is being repealed in favour of a “direct action” policy that actually costs the Government money – although less than originally budgeted.

Firstly, unemployment benefits and “work for the dole”. In case you haven’t tried lately – search for a job costs money. You need decent clothing, you need to pay travel expenses, you need Internet access for access to the major job boards, and of course you need to pay to stay reasonably healthy and clean. If you turn up to a job half-starved and filthy, you probably won’t get that job. As for “work for the dole”, this amounts to a full-time job at below minimum wage, with time taken blocking opportunities to attend interviews or make phone calls to get a reasonable job in the private sector.

The long and short of it is that the unemployment benefit changes make it harder to get a job.

Overall the costs to the poor are high and costs to the rich are low (and to be phased out after three years). As such, the “burden” is primarily being borne by those least able to support it – and due to multiplier effects, the reduction will have a greater effect on the economy as a whole.

I should probably lever a mention of the PPL (Paid Parental Leave) scheme in here somewhere. I suspect that the moderate opposition to this scheme is not because people want mothers penalised for having a baby. The problem is that women on higher incomes will be paid more than those on lower incomes. It is, in essence, a baby bonus indexed to the mother’s income. It’s difficult to see this as anything but profoundly inequitable.

Second, education. The Coalition draws attention to their “deregulation” of education while carefully avoiding the mention of a 20% drop in funding. Students will need to pay much more for their degrees. However, education is to some degree a public good. You gain advantage from the educations of the people around you – a knowledgeable doctor, an informed accountant – and there are professions such as nursing that require qualification but give very little in the way of monetary reward. Poorer students are less likely to be willing to wear the increased cost. (Recall that a student is already foregoing income for several years.)

Hockey mentions that education has not been free since 1987. He doesn’t mention that the cost at that point was a $250 flat fee, which would be waived under circumstances of hardship. Larger fees were introduced a couple of years later in the form of HECS.

So reduced education spending, in the long run, results in greater income inequality and a less productive population.

Thirdly, hospital spending and the GP co-payment. There is an old saying that an ounce of prevention is worth a pound of cure. It’s better to spot an illness early when it can be more easily mitigated or prevented. A $35 GP payment (the cost to the Government) may avoid a later absence of several days, which might cost a business hundreds of dollars. It’s hard to work productively from a hospital bed. This expense can be absorbed by the doctor – but doctors are not charities. The “absorption” here is an actual cut to the doctor’s income for a consultation. I know doctors who would willingly accept such a cut for the needy; but fundamentally this is the Government forcing charity to itself. The much-mooted medical fund is another matter, addressed below.

In the meantime, hospital funding is being reduced by pushing spending to greater extent to the States. This is not an actual cut in expenditure, but a displacement to a different level of Government. Basically the States are being held to ransom, with the “victim” being the health of their citizens.

Finally, science, technology and the medical research fund.

The research fund is funded entirely by the GP co-payment. In that respect, it is not the government paying for it, but the government forcing the least healthy portions of the population to pay for it. Statistically speaking, that means it will mostly be paid for by the elderly and poor.

However, at the same time funding to the CSIRO has been cut, de-emphasising the importance of science nationally and, in the long term, costing the country in the sort of research results that can be licensed overseas. Research, even “pure” research with no end result in mind, almost always returns a net return in the long run.

The enormous cuts to anything supporting positive action on climate change have also been notable. Essentially, the current government has an ideological view on climate change and an unwillingness to listen to the science. Their approach to reducing emissions is to eliminate the carbon tax (which charges polluters for polluting) and switch to a “direct action” policy that costs money by paying polluters to pollute less – although the amount budgeted is less than originally planned. Actual effects of the carbon tax on pricing have been negligible. Most electricity pricing increases have been due to “gold plating” of electricity networks to support increased demand, even while demand has actually been falling off.

You might also want to look up how much “stopping the boats” costs the budget. It’s around half a million dollars per refugee. I wonder why Alan Jones never mentions that?

So in essence, the budget increases the burden on those whose spending patterns most support the national economy while costing little for those whose spending patterns are least supportive. Reductions in education and health spending will result in a less educated, less healthy and so less productive population. The substantial disapproval of the budget (and the Coalition’s general negativity about what is still a fairly healthy economy) is causing negative consumer outlooks, which can be expected to reduce economic growth.

Overall, we’re probably looking at a long term reduction in the strength of the national economy. The long-term cost to the economy can be expected to be much larger than the cost of extra Government debt over a few years.

3 thoughts on “A brief lesson in economics to our unesteemed Treasurer

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