The government has erred in “betting the house” on business growth at the expense of shoring up consumer confidence and demand, according to Grattan Institute chief executive Danielle Wood.

Presenting a keynote this morning at the Morningstar Investment Conference on fiscal policy, Wood said that while the Federal Budget hit some of the right notes, including “really positive” wage subsidies for unemployed young people, the emphasis on recovery via massive tax cuts to businesses is based on flawed reasoning.

“My real question is this: Is it right to bet the house on an investment led recovery?” Wood said.

The think-tank CEO, who took over from inaugural chief executive John Daley in July, said the government has “really backed the idea” of a private sector-led recovery, as evidenced by tax cuts such as the temporary instant asset write-off for new capital purchases, worth $27 billion over 4 years.

“We know that before the crisis business investment was weak and a real reason for that was a lot of uncertainty about economic conditions and consumption,” Wood explained. “There is not much here that makes me think we’re going to see a boon in economic activity.”

The government is placing the horse before the cart, Wood argued. The budget’s own forecast, she noted, predicted almost zero wage growth for the next four years. With no wage growth consumer spending will remain stifled, which is an issue that needs to be tackled before the government looks to promote private sector activity.

“My concern is that we’re putting that business investment part before the consumption,” she said. “I would have liked to see more measures to shore up consumer confidence and spending before we start really thinking about how we’re going to encourage business investment.”

No regrets, no zombies

Wood, who is also the National President of the Economic Society of Australia, explained how there are three phases to the economic response to the pandemic; rescue, recovery and rebuild.

The Federal Budget focused on the recovery stage, she said, but questions remain as to whether they use the lever of fiscal stimulus effectively.

“In a world where government is using fiscal policy a lot more we still need to think about what good fiscal stimulus looks like,” the CEO said. “You don’t just want to be throwing money around, you want to have a set of principles to make sure you’re getting the best bang for your buck.”

Wood explained that good stimulus should generally have four principles; be cost effective, targeted, have no regrets and no zombies, which she said means staying away from stimulus that could end up blocking long-term structured change.

Missed opportunities

There were some glaring omissions from the Federal Budget that represented missed opportunities, Woods argued. Chief among these was a lack of attention paid to a services sector decimated by the pandemic that is key to increased employment in young people.

“The government could have done more in terms of services jobs,” she said, noting that hospitality, administration, tourism and retail were all among the hardest hit industries yet among the lowest in terms of government stimulus. “I would have liked to see more targeted support for those sectors that are hard hit.”

Woods also criticized the income tax cuts delivered by Treasurer Frydenberg as being “not as well designed as they could be”.

The changes in the thresholds take effect as soon as the legislation is passed and the ATO can make the adjustment, she said, but the tax offset – “which is really where the action in for low and middle income earners” – won’t be received until tax returns are completed next year.

“That for me is the real kicker in the package,” Wood said, noting that tax offsets tend to work better as stimulus rather than payments. “We know that lower and middle income earners are the ones that are spending more as a percentage of income relative to high income earners during this crisis so my concern is [that] holding off those tax offsets to July… we’re not really going to get that kicker when we need it.”

Not enough certainty has been given around Jobkeeper either, Wood argued, with the government waiting on the prevailing economic conditions before deciding how to taper down payments. “My argument would be… what is the basic minimum people need?” she said.

The budget also missed an opportunity to make progress on the issue of childcare, Woods lamented, which has the potential to provide a direct boost to employment.

“It’s a really important long-term reform… particularly for women,” she said. “There’s very little incentive for people to work more than 3 days per week.”

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