COVID-19 has proven to be one of the biggest economic catalysts in history, in the worst way. In late July, Treasurer Frydenberg released catastrophic data reflecting the following
- The bleakest Fiscal Outlook since the Great Depression (1929-1933)
- Federal budget position has now deteriorated to $85.8billion in deficit for 2019-2020, and an estimated -$184.5 billion position in 2021.
- Real GDP expected to reflect the largest downturn in recorded history in the June quarter and projected to fall by 2.5% in 2020-2021.
To combat this, the government has been immense in its rapid expenditure. As a direct contrast to the neo-liberal fiscal theory it believes in, which is centred around stronger debt positions and fiscal consolidation (policies aiming to gradually reduce budget deficits and public debt levels), the Morrison government has spent $289 billion since the beginning of the pandemic on borrowed funds, equating to 14.6% of Australia’s 2019-2020 GDP.
This expenditure has continued in Mid-July through the introduction of JobTrainer - in an effort to aid COVID induced economic restructuring and reduce the threats of greater unemployment spikes as school leavers enter educational institutions and the labour market, they have Promised $1.5 billion to subsidise the jobs of an additional 100,000 apprentices in small and medium businesses. Further, they have also contributed $500 million to reskill 340,000 school leavers and unemployed individuals in sectors of high future demand. Alongside federal contributions, state governments will also contribute $500 million to what Frydenberg announces as;
“a substantial boost to Australia’s training system, ensuring Job seekers are able to reskill and upskill, getting back into work as soon as possible”
This JobTrainer effort will be in conjunction with the $1.3 billion the government directed toward supporting apprentice and trainee wages, up to 50% in value for 9 months. Alongside the JobTrainer relief, it was also announced that this measure would extend to March 2021 for small and medium businesses, costing an additional $1.5 billion.
Apprentices, youth, school leavers and trainees have all been therefore presented as integral to Australia’s economic recovery through these policies. These are the individuals who have the capacity to deliver the most economic value, by utilising their specialised skills, developed through government backed training programs, to help drive infrastructure development and aggregate supply, fuelled by discretionary fiscal expenditure.
First and foremost, the JobTrainer Policy responses are strongly focussed on addressing Australia’s concerning unemployment direction.
The government has explicitly revealed that this expenditure will curb the existent 7.4% unemployment rate (June 2020) and the 13.3% effective unemployment rate (which includes existing unemployed alongside those who have been discouraged looking for work, ‘hidden unemployed’). Australia’s unemployment rate is still considerably better than other large developed economies (USA 11.1%, 9% OECD average), however, this metric alongside labour market underutilisation (combining unemployment and underutilisation, now at 19.1%) is still concerning because it represents a significant economic spare capacity . This functions in direct contrast to the government’s outlined recovery plan, which intends to increase business confidence and activity through job creation, spending confidence and tax adjustment under a supply side strategy.
JobTrainer is projected to create 340,000 new training places and work alongside the national skills commission and states to ensure training is being directed toward areas of current and future demand. Under this policy, reskilling is centred on improving Structural Unemployment, where the skills of the labour force do not match the skills demanded within the economy. All new training places are projected to translate into real work, backed by future government spending on infrastructure, education, healthcare and energy projects.
The fantastic benefit JobTrainer has for unemployment is that it provides training support via low cost or free opportunities to all ages, irrespective of their labour market position or employment life cycle. This will therefore target significant concerns of growing youth unemployment and the absence of 50+ in the labour force, who have great experience to offer. More than 50% of VET students are older than 30, and 15% older than 50. There is significant value to be extracted from these people, supported by JobTrainer.
The significant level of Job creation projected under this policy also looks to add to the restoration of 210,000 jobs created by JobKeeper and Jobseeker.
Simply put, stronger employment both informs a stronger economy, but also drives growth in the positive direction. The Morrison government, in accordance with a liberal economic approach, sees self-sustaining growth as the key to
By maintaining employment and encouraging adaptability during structural change through re-skilling, the government is facilitating increases in labour productivity, efficiency and industry competitiveness. Being able to produce a greater volume of product, at a higher quality, with better use of resources will expand Australia’s Aggregate Supply, driving long term growth and reducing inflationary pressures.
JobTrainer will guide the labour market into skills of future demand, helping individuals gain experience in valued sectors where Australia can develop future strong productive capacity and a greater comparative advantage compared to international competition. This in itself will support a more efficient labour market, but the government’s use of resources is also efficient in this way. By focussing on where demand will be in the future, the government sets the foundation for people to be in higher paying jobs, for a longer period of time, with strong demanded skill sets. This translates into higher future taxation receipts and a lower future transfer payment/pension cost. Saved expenditure from welfare costs can then be redirected into improving training programs or creating more real jobs. This sense of efficiency is identical to the government cutting protection to manufacturing, transferring funds to mining and services where Australia can earn stronger export returns in the future.
Smaller unemployment benefits on the back of JobTrainer will also stimulate economic growth through Aggregate Demand. Greater employment in higher paying positions leads to higher income earned for employees. This income is then ‘re-spent’ in the economy through consumption and investments, driving Aggregate Demand further, and circulating into employment growth as labour is a derived demand. Further, building a reliable workforce will also increase Australia’s export levels in key sectors. Outside of strongpoints in resources and services, more skilled apprentices will not only support the government’s future infrastructure expenditure but may also improve the quality and competitiveness of Australian manufacturing, reintroducing quality, well-priced elaborately and simply transformed manufactured products to the global market.
JobTrainer much like the other pandemic fiscal responses represents a significant cost to the government budget.
On a cost front, the underlying cash deficit, according to Treasurer Frydenberg, is expected to be $85.8b in 2019-2020 (4.3% of GDP), which will balloon out to 9.7% of GDP in 2021. Furthermore, gross debt was $684b on June 30, 2020 (34.4% of GDP) and will grow to 45% of GDP in 2021. Net Debt in 2021 is modelled to grow to $677b. This includes the expenditure costs of JobKeeper, JobSeeker, JobMaker and now JobTrainer.
Government revenues, largely from the progressive taxation system, are also expected to decline by $14b, although will not increase as a share of GDP due to projected economic growth emerging out of a global lockdown in 2021.
External stability is also being jeopardised by the increasing costs of Automatic Stabilizers. The absence of healthy taxation receipts and the growth of long term transfer payments mean this aspect of fiscal expenditure will provide an extended weight on the government’s ability to reduce its debt. Personal income tax and capital gains tax are very sensitive to cyclical changes to economic activity. Thus, the government expects that its key revenue source will not provide the injection it needs.
Despite Frydenberg’s announcement that “all Australian pandemic expenditure is on borrowed money”, Australia have still been selective where funds are being directed, ensuring allocative efficiency. JobTrainer and other support measures have not appeared to damage lending confidence, or investor sentiment much at all. Australia has still convincingly maintained its AAA credit rating, and the government is exploiting record low domestic interest rates (0.25%) to minimise the costs of servicing debt. Once emerging from this pandemic, encouraging projected growth and economic restructuring is expected to stabilize government debt as a share of the economy. Consequently, Australia is on track to “service its external foreign financial obligations without sacrificing internal stability”
In his MYEFO (Mid-Year Economic and Fiscal Outlook), Frydenberg regards historical low bond yields as key to Australia’s absence of external stability concerns, and confidence in servicing debt.
Bond Yields are the simply the expected returns an investor receives each year over the bond’s maturity (how long it exists for). Bonds are loans made by investors to institutions who issue them, largely businesses and the government, who use bonds in order to borrow money, usually over a long period of time.
Bond yields in Australia are below 1%, and are expected to fall even further below 0.5%, and Treasury bonds (borrowings issued by the US government) are projected to fall to 0.8% by next year. This represents extremely low debt servicing costs, and will allow the government to extensively borrow and continue to support the benefits of automatic stabilisers without serious concern for how to service interest payments.