Government has few palatable options when it comes to sparking jobs growth

Labor’s criticism of yesterday’s budget update is that it identifies a problem but doesn’t offer a plan. That’s a little unfair — the “plan” will come in the delayed budget in October. There’s a fair criticism to be made that the government is waiting too long to explain its strategy for dealing with the crisis, but the budget update was never about that.

What it does indicate, though, is both the extent of the challenge the government faces and the lack of options for dealing with it.

The update sees unemployment reaching 9.25% at the end of the year, and only decline to 8.75% by the following June. GDP is starting to grow again now, but even by June next year will still be smaller than in 2019-20 (if you’re wondering how that can be the case, as we were yesterday, it reflects that total GDP for 2019-20 will be bigger than total GDP across all four quarters of 2020-21, even if there’s growth in each quarter — the colossal fall in GDP in the June 2020 quarter means the economy won’t grow enough in the coming year to return to the same level of output as it managed in total in 2019-20, half of which was pre-pandemic).

The combined $270 billion in deficit spending, then, will only get us back to the middle of a severe contraction. How do we get unemployment down to 8%, 7%, then 6%, then 5%? The update shows how hard that will be.

Take that stalwart of Australian employment, construction. Dwelling investment is forecast to fall 10% in 2019-20 and then by 16% this financial year despite the government’s construction stimulus package, meaning one of our biggest employing sectors will be shedding large numbers of workers — possibly a hundred thousand — into an already large army of unemployed.

Business investment overall will fall over 12% this year on top of a 6% fall last financial year (investment was already weak — December’s MYEFO forecast just 1.5% growth for 2019-20). But that disguises that non-mining investment is expected to fall nearly 20%; mining investment will surge nearly 10%, but mining employs next to nobody.

The business community and its media cheerleaders, as usual, are clamouring for a company tax cut (funded by an increase in the GST), which they claim will encourage investment, but the US experience shows that even large company tax cuts don’t spur investment, just deliver a windfall for shareholders and executives. An investment allowance, as proposed by Labor at the last election, is far more likely to help soften the collapse in investment.

Business also says industrial relations deregulation is needed to encourage investment and lift Australia’s flagging productivity. But according to the Productivity Commission, there’s “little evidence” of “productivity effects from WR reform”. What evidence there is suggests that the Howard government’s two major rounds of industrial relations deregulation led to falls in the rate of labour productivity growth, while Labor’s re-regulation of IR led to productivity growth gains.

But ultimately, business won’t start spending again unless there’s a significant boost in household consumption.

There’s bad news there too. Wages growth is estimated to be 1.75% for 2019-20 and just 1.25% this year (the same as inflation), which will lead to a slide in household consumption: having fallen 2.5% by June this year, it will fall 1.25% this financial year. Even if consumer confidence recovers and people are willing to spend, their ability to do so will be constrained by wage cuts and job losses, especially as JobKeeper and JobSeeker taper off.

And don’t forget that there are $269 billion worth of loans that the banks have agreed to defer. Once the borrowers are required to start repayments, that will put more downward pressure on household incomes, spending and domestic demand and consumption.

That’s why there’s a push for the government to bring forward its 2022 tax cuts, which the government isn’t ruling out. “We’re the party of lower taxes,” Josh Frydenberg says in response to such arguments, with the media happily repeating the claim.

Except, that’s a lie. The Coalition is Australia’s party of high taxation — so much so that even during a global crisis, at a time when business and personal tax revenues are collapsing, the government still plans on taking more tax out of the economy than in any year when Labor was in government.

But the problem with tax cuts is that a smaller proportion of tax cuts end up being spent than direct payments — though the government plans to cut back direct payments in the December and March quarters. The tax cuts last year produced no increase in spending by households at all. And because the government’s next round of tax cuts will primarily benefit high income earners, even less of them will be spent than any support directed at low-income earners.

Indeed, much of the “reform” agenda being put forward, the evidence shows, won’t encourage growth. Lower company taxes don’t increase investment. Personal tax cuts won’t flow through to consumption. Increasing the GST to pay for that will deter household consumption. Industrial relations reform will lower productivity, reduce wages, thus reducing household consumption and increase precarious employment in the name of “flexibility”, which also undermines consumption (and helps COVID-19 spread more effectively).

What the government can do is try to strengthen household consumption, which will in turn encourage business investment, spur job creation and lift economic growth. And it can do that by encouraging wages growth (it can start by ending its pay freeze for public servants). It can restore penalty rates slashed in recent years in a failed attempt to increase employment. It can make permanent an increase in the JobSeeker allowance rather than continually threatening to cut it back to far below the poverty line.

It can pump money directly into dwelling investment by funding a major program of social housing construction — the biggest no-brainer policy of this recession — supporting one of our biggest employment sectors. And it can facilitate the investment greater household spending will produce with an investment allowance.

Without households, the government can huff and puff in an effort to boost investment and growth all it likes, and the result will still be stagnation — albeit stagnation at a much higher level of unemployment than before. The October budget should be about going hard and going households.

Where does the government go from here? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication in Crikey’s Your Say section.