The Australian government's decision to cut benefits is based on feelings, not facts
by Richard Denniss
[Originally published by Guardian Australia, 22 July 2020]
In Australia, policy is far more likely to be based on feelings than facts. While there is much talk about the importance of evidence-based policy, ironically, there is scant evidence that such an approach exists. Take the government’s decision to cut the incomes of around five million jobkeeper, jobseeker and other benefit recipients, for example.
The one thing virtually every economist can agree on is that cutting government spending in the middle of a recession will lead to a contraction in the size of the economy and an increase in unemployment. The idea is so uncontroversial that cutting government spending is called “contractionary fiscal policy” while increasing government spending is called “expansionary fiscal policy”. It’s not complicated.
Despite some headlines suggesting Tuesday’s extension of the jobkeeper and jobseeker supplement is a new injection of money into the economy, in reality the announcement is a cut in the incomes of millions of people and a cut in government spending on those programs after September. The result will be lower consumer spending, lower business investment and higher unemployment than if the income supplements had been maintained.
But while the ability of fiscal stimulus to create jobs in the short term is almost universally accepted, economists do like to argue about the long-run consequences of changes in government spending. It is obviously possible for governments to waste money, and for governments to spend “too much” money. Needless to say, economists – and plenty of others – love to argue about the definition of “waste” and “too much”.
Scott Morrison and Josh Frydenberg are arguing both that it is “wasteful” to keep jobkeeper and the jobseeker supplement at their current levels and that they “can’t afford” to keep spending at the current rate. When it comes to income support for the vulnerable, such a two-pronged attack is standard fare for conservative governments. First, attack the motivations of “dole bludgers” by saying lower benefits give people greater incentive to look for work, then argue that welfare cuts are essential for the national economy.
The lack of evidence to support this one-two sucker punch is irrelevant. Saying it makes conservatives feel good and hearing it makes some voters feel good.
But let’s pretend that evidence did matter, just for a few minutes.
According to the Australian Bureau of Statistics (ABS) there are currently 992,300 million unemployed people, 1.6 million underemployed people and a further 375,000 who have temporarily stopped looking for work. Many have stopped searching because they think there are no jobs to be found, or they have new caring responsibilities which make working difficult.
The ABS also estimates there are around 129,100 job vacancies at the moment, which means there are eight potential applicants for each job – 11 if we count those who have temporarily stopped looking for work. Let’s be clear, it doesn’t matter how poor and miserable we make the unemployed, or how “motivated” they become to search for work, there is nothing – absolutely nothing – the unemployed can do to create enough jobs for themselves. Sickeningly, by cutting the incomes of the unemployed and cutting consumption spending in regions of high unemployment, the Morrison government’s efforts to “motivate” the unemployed will inevitably result in a reduction in the number of jobs available.
The latest ABS labour force data showed that in the month of June, employment surged by 210,000 jobs. How could that be, if the generous (by historic standards) level of the jobseeker supplement was stopping unemployed people for searching for work?
Morrison and Frydenberg are quite concerned that some (unnamed) business owners have found it difficult to get a (unquantified) number of their employees to work additional hours because jobkeeper is “too generous”.
The Treasury officials whose review of jobkeeper and jobseeker allegedly informed the government’s decision to slash the incomes of the unemployed clearly took their ministers’ feelings seriously when they wrote:
"For businesses that are beginning to recover and rehire staff who they may have made redundant, or looking to hire a replacement for a jobkeeper-eligible employee who has quit their position, this floor may limit the available supply of labour depending on the hours and wage rate on offer".
The key phrase is “may limit the available supply of labour”. May. Or may not. Treasury went on to caution that there is “no quantitative evidence” regarding part-time, casual or stood-down employees refusing work. No evidence.
But what if there was? What if 100,000 people in the unemployment queue of almost a million were happy to stay at home and binge watch 80s television series? How would that harm the economy? If there are hundreds of thousands of people that are desperate for work and a small number of people who aren’t, isn’t it better to give the jobs to the people who want them the most?
Deciding that we want to cut the incomes of millions of people in order to motivate a small number of people has nothing to do with evidence or efficiency, it’s simply downward envy.
The second plank to the government’s argument is that cutting spending on welfare is necessary because we “can’t afford” to keep being generous to those who have lost their jobs. But, of course, there is no evidence to support that argument either. In the words of the governor of the Reserve Bank of Australia, Philip Lowe
"The biggest policy mistake to make at the moment would be to withdraw support too early. The government can play an important role here by using its balance sheet to smooth things out and reduce the severity of the downturn. In doing so, it helps not only in the present but in the future as well," the RBA governor went on to say, “For a country that has got used to low budget deficits and low levels of public debt, this is quite a change. But it is a change that is entirely manageable and affordable, and it’s the right thing to do.”
The clearest evidence that money is no object is that the Coalition went to the last election promising $300bn worth of income tax cuts on the basis that strong economic growth would make them “affordable”. But now that the economy has plunged off the biggest cliff in modern history, the same government now argues –wait for it – that we need to bring those tax cuts forward.
Australia is one of the richest countries in the world. As Lowe makes clear, we have low levels of national debt and no need to fear government spending. Yet, in Australia, the rightwing ratchet applies: when times are good, cut taxes for your friends and when times are bad, cut spending on your enemies.
There is no good economic reason to cut the incomes of those who are bearing the brunt of this recession and no good economic reason why we should bring forward tax cuts for those who are lucky enough to have kept their jobs. But economics and evidence don’t determine policy in Australia, they are just used to justify it. The feelings of our elected representatives matter far more than facts.
Richard Denniss is chief economist at independent thinktank The Australia Institute