What’s the point of budget repair if so many Australians are unemployed and underemployed?

September 9, 2016

9 September 2016

By Stephen Koukoulas

What’s the point of budget repair if 725,000 Australians are unemployed and a further 1,067,000 people are underemployed?

At its most basic level, economic policy is about maximising the speed at which an economy can sustainably grow to ensure the pool of unemployed and underemployed workers is as small as possible.

The superficially strong 3.3% annual GDP growth rate in this week’s national accounts would normally signal a stronger labour market. The skewing of that growth to exports of bulk commodities, where employment is small, means the domestic side of the economy is still not growing fast enough to attain full employment.

There was also a significant contribution to GDP from government demand, something that flies in the face of the government’s obsession with budget repair. It is unclear where economic policy is currently being aimed.

The policy priority is to reduce spending to ensure the deficit is as low as possible and to return to budget surplus. Such policies take money from the economy and by definition, growth slows and with that, the rate of job creation softens and unemployment is higher than it would otherwise be.

The positive influences of expansionary fiscal policy are summed up well in the current year 12 high school economics text book (Australia in the Global Economy 2016 edition; Tim Dixon & John O’Mahony): “An expansionary fiscal policy involving increased spending or tax cuts would accelerate economic growth” in stimulating aggregate demand, expansionary fiscal policy can help reduce unemployment. It is base-case economics.

What is concerning is that the current “slack or underutilisation” in the labour market is about as severe as during the early 1990s recession. This is because the highly flexible labour market, with an increasingly skilled and talented workforce, has been limited to achieving annual pay increases of just 2%  – about the same as the low point for wages in and around the last recession in the early 1990s.

The duration where the economy has seen sub-2.5% wages growth is longer than at any stage during the early 1990s recession. The degree of slack is now extreme.

With the unemployment rate having been stuck above 5.5% for four years, it may simply be the case that policy makers are complacent about unemployment.

Given a choice between a return to budget surplus in three years, or entrenching unemployment below 600,000 people (or 5%) of the workforce, the government is choosing the budget surplus.

As the former treasury secretary Ted Evans once noted, policy makers largely choose the unemployment rate they wish to live with.

In other words, policies can be implemented that will lower the unemployment rate. They may involve spending on education, skills and training, or dealing with wage rates and industrial relations reform. Or it could be a simple fiscal stimulus where money is injected into the economy in infrastructure building programs.

Take your pick if your goal is full employment.

Scott Morrison has indicated that budget repair is his priority. On the latest projections, the existing policy framework has the unemployment rate holding at a high 5.5% over the next few years.

If there is any attempt to hasten the return to surplus outside the automatic stabilisers, or “repair” the budget via spending cuts, the outlook for people without jobs will remain bleak.

The Coalition’s slogan during the election campaign revolved around “jobs and growth”. It can deliver on that pledge with some job-friendly policies over the next few months but it may mean delaying a return to surplus.

It is likely that many of those now unemployed and underemployed don’t give two hoots whether the budget deficit is $6bn or $16bn and would prefer a government that was able to provide a framework where more jobs could be created.