Frydenberg presents Myefo as sunshine and rainbows but workers don't benefit

Extract from The Guardian

Grogonomics

Australian economy

Greg Jericho

The budget might be back in surplus but this seems incredibly divorced from the reality of people’s lives

@GrogsGamut

Mon 17 Dec 2018 16.27 AEDT Last modified on Mon 17 Dec 2018 21.59 AEDT

‘The Myefo now predicts sunshine and rainbows and budget surpluses for as far as the eye can see.’ Photograph: Mick Tsikas/AAP

Budget balances are always about revenue, and in Australia mostly about company tax revenue, and company tax revenue is mostly about the terms of trade. So it is with Monday’s mid-year economic and fiscal outlook (Myefo). The boom in company tax revenue from higher prices for our iron ore and coal exports has enabled the government to forecast a budget surplus even while it also intends to offer more tax cuts worth $9bn over the next three years.
The big picture message the government hopes people will look at and not enquire further is that the budget is now projected to be back in surplus in 2019-20 to the tune of $5bn – an increase from the $2.2bn predicted in the May budget.

The timeline of budget balances for 2018-19 out to 2021-22 is one of initially predicting larger deficits, before things turning good from the 2017-18 Myefo onwards:

The Myefo now predicts sunshine and rainbows and budget surpluses for as far as the eye can see. So good is the view for the next decade that government net debt is expected to go from the current level of 18.2% of GDP to just 1.5% by 2028-29.

And that is despite the Myefo also including some pretty big tax cuts.
In the press announcing the Myefo figures, the treasurer, Josh Frydenberg, was asked about the $9.2bn worth of tax cuts in the Myefo figures projected for the next three years.
Frydenberg dodged the question, replying that “we have important decisions to take as a government in terms of ensuring that this positive trajectory continues, that we continue to strengthen the Australian economy”.
Someone should have pointed out to him that they had already taken this decision as it is in the Myefo papers under “decisions taken, not yet announced”.
What these tax cuts will entail are up for debate – clearly they will be announced in the run-up to the next election. Either they will be more income tax cuts, or (more likely) a bringing forward of the tax cuts that have already been legislated.
But so sweet are the figures looking that even this extra splurge apparently will enable the level of net debt to be reduced almost as fast as occurred from 1995-96 to 2004-05 when the biggest mining boom in recent times saw a massive surge in government revenue.
And revenue is the big factor for whether or not a budget is in surplus.
The government is forecasting the total revenue in the 2019-20 and 2020-21 surplus years of 25.2% of GDP before rising to 25.5% of GDP in 2021-22.
To put that in context, had the Rudd-Gillard ALP government had that level of revenue at its disposal during its time in government, every year but one would have delivered a surplus:

Consider that in 2019-20 when a surplus is projected, revenue will be 2.7% of GDP higher compared to 2013-14 when the government delivered its biggest deficit of 3% of GDP (which they erroneously like to credit to the ALP). By contrast government spending will be just 0.6% of GDP lower.
Had this government had revenue stay at the level it was in 2013-14, rather than looking at a surplus of 0.2% of GDP in 2019-20, it would be projecting a deficit of 2.5% of GDP – equivalent to around $50bn.
Revenue matters.
And where is this extra revenue coming from?
Companies are the big driver. While the increase in employment has helped improve the amount of income tax being paid (and also reduced the cost of Newstart to the government), the improvement is pretty marginal.
In this financial year the level of individual income tax is expected to be 1.9% above what was predicted in the May budget, and for 2019-20 it is only an extra 0.8% higher than expected.
But company tax revenue this year is expected to be 3.8% greater than anticipated in May, and the treasurer has also increased the expectation for company tax in 2019-20 by 2.7%.
In total terms personal income tax greatly outweighs company tax – $222.1bn to $92.5bn – but the growth in extra amount of company tax is almost in line with that of personal income tax.
And the boost is what is important. The reality is unless we have a massive economic downturn as occurred during the global financial crisis, income tax can be relied upon to grow pretty steadily. Because of the amount of money involved small improvements or slowing of growth matters a lot, but it is less variable than company tax.
During the mining boom years company tax grew steadily, then it fell during the GFC and then remained relatively flat from 2011-12 to 2016-17.
And then, boom:

The reason was after four years of falling terms of trade (the ratio between what we get for our exports over what we pay for our imports) things began to improve. And huzzah, back came the profits, and the tax revenue.
It says something about what is driving these improved figures that the Myefo estimates for the growth of real GDP, household consumption, mining and non-mining investment, dwelling investment, and wages have all been revised down from the May budget.
And yet the estimate for the growth of the terms of trade has gone from a fall of 5.25% to an increase of 1.25%.
It paints a picture of an economy where the boon is for the companies and not for households.
Whereas in May the government was predicting wages by June next year would be growing at 2.75%, now they predict 2.5%.
But don’t worry, the government still predicts wages growth will get to 3.5% by 2020-21:

And yet it does not predict unemployment falling below 5%.
So wages will apparently get back to pre-GFC average levels despite the unemployment rate not improving at all? Good luck with that. Perhaps the Treasury is assuming the ALP will win the next election and actually change industrial relations laws to improve the ability of employees to bargain for higher wages?
So yes, the budget looks to be back in surplus. But perhaps more than any other budget update, this improved budget balance would seem incredibly divorced from the reality of people’s lives.
And the reason for that lies in those very same budget figures – strong company profits, improved employment but weak wages growth.
It depicts an economy mostly doing well out of Chinese demand for our minerals leading to a boom that this government has decided is worth locking in tax cuts that will be in existence long after this sugar hit has passed.

• Greg Jericho is a Guardian Australia columnist