MARK HUMPHERY-JENNER: Don’t fall for Albanese Government’s spin on health of economy

At first glance, the economy looks rosy. It looks like unemployment is low, GDP is growing, and there have been surpluses. However, if you scratch beneath the surface, it is not so pretty.

Beneath the glossy veneer, we can see what is really happening in the economy. About 80 per cent of jobs created are in the non-market sector. The Budget is forecast to go deeply into deficit for years on the back of higher spending, despite a present surplus due to commodities and hither taxes. That higher government spending can also make headline GDP look less bad, papering over an anaemic private sector.

These concerns are made even bigger heading into an election, where governments have an incentive to score rhetorical points even at the expense of the economy’s underlying health. Let’s look at some of the issues and solutions.

Jobs and a bloated non-market economy

At least 80 per cent of new jobs created over the past two years have been in the “non-market” sector. Thus, Peter Dutton has vowed to slash the public service. But, the public service is not the only source of non-market jobs. Non-market jobs are also linked to the NDIS, which is growing at 12 per cent annually, only falling to 8 per cent by 2026-2027. This growth rate is more than double that of Australia’s GDP, rendering it unsustainable and unaffordable.

But why does this happen? There are several reasons. One is that the top 1 per cent of earners pay 20 per cent of all taxes, but only have 1 per cent of the votes. This leads to a classic principal-principal conflict: People can vote to spend other people’s money. Another aspect of it is that the government rhetorically gains from a low unemployment rate. But, this presents an obvious problem: the government can engineer a low unemployment rate by simply hiring more people.

Australia’s poor data quality exacerbates the problem. The ABS reports unemployment statistics. But, the proportion of government and non-government jobs is nowhere to be seen on the relevant web page. Rather, people must dig for this data. This creates information asymmetry: only people with the time, inclination, and know-how will dig. Given that people are time-pressed, and finding the information is time-consuming, the amount of government-linked labour is buried. The Government can thus safely trumpet headline unemployment figures even if it has cooked the books by spending taxpayer money to bloat the non-market economy.

The solution: the ABS must clearly report market and non-market job creation. It must clearly report private sector job growth. This is akin to the US reporting system. The government has this data. It should not be hard to improve the reporting.

GDP growth due to government spending

GDP growth is a rhetorical flash point. There are concerns the Government can manipulate up GDP by spending money. This is a problem as it can lead to the government spending money on pork barrelling, special interests, or simply inefficient projects. It is a classic “money chasing deals” problem: when there is more money to be spent than there are good projects, you start funding bad projects. In this case, the Government wants to spend money to raise GDP, so it starts funding more inefficient projects.

It is sometimes claimed that government spending might not change GDP if it simply involves moving money from the market sector to the non-market sector. For example, employing a person to dig roads can increase GDP whether they are employed by (or funded by) the government or the private sector. However, this misses the underlying problem with reported headline GDP.

The problem with counting government spending is that it can lead to inefficient projects that are a waste of money but nevertheless increase headline GDP. This is a classic agency conflict. It has been well documented in the corporate sector: CEOs of companies with large excess cash holdings tend to waste money on bad acquisitions. This is because they exert inadequate effort, are not properly disciplined for bad spending, or simply feel that they must spend on something, but have run out of good opportunities. In the government, if the feeling is that the government must have a higher headline GDP, there is a clear incentive to spend money on anything to prop up GDP. This increases aggregate demand for goods and services. But, it does not improve productivity and it does exacerbate inflation.

The solution: when reporting GDP, we should also report GDP excluding government. The ABS already reports this data. But, it is buried in the report. Thus, it is harder for the general public to disentangle. The US has already floated the idea of changing how GDP is calculated. We can simply report headline and non-government GDP with minimal changes to current systems.

What lies beneath a surplus

Jim Chalmers likes to tout his two surpluses. But, there are several major issues: surpluses can arise due to increasing taxation (think bracket creep); commodities windfalls (ie iron increasing in price means more tax); shifting expenditure “off balance sheet”; and deferring expenditure and promises until the budget after the election.

In Australia’s case, Jim Chalmers has lucked into surging commodity taxation, reduced the size of the stage three tax cut (effectively rendering it a tax hike), and moved to increase taxation on superannuation. Furthermore, MYEFO predicts deficits as far as the eye can see, which conveniently start just after the election. This can result in a present surplus, but should we reward higher taxation with rhetorical points?

Disentangling the impact of commodities is possible, although there is no perfect solution. One way to do this is to develop a measure of “underlying surplus”, which rebases commodity-related revenue based on a rolling average price. Naturally, there might be a debate if the Government were to say “we had this commodities windfall, but we spent it on a one off productive item”. In which circumstance, the Government should be forced to justify its expenditure. On the other hand, we do not want to encourage the Government to spend on discretionary items during a commodities lull. Thus, a headline surplus-measure is still necessary and informative.

Disentangling the impact of tax hikes is also challenging. After all, due to the aforementioned principal-principal conflict, you can engineer a surplus by simply hiking taxes or even following bracket creep. Solutions to this could include a focus on expenditure growth, rather than surpluses.

Mitigating the impact of promises to be paid for with future budgets can be challenging. It relies on focusing on projected surpluses, rather than merely the present surplus. Similarly with expenditure. For corporations, this is standard. Analysts routinely forecast corporate earnings. The value of a stock is simply the present value of all future expected cash flows. Thus, it is standard financial practice to look at projected earnings and expenditure, rather than merely the current financial report. The solution here relies on a greater focus on budget forecasts as they tell us the long term impact of the government’s current decisions.

The net result is that we must be vigilant to ways that the government can score rhetorical points through activities we ought not encourage. The Government should not be able to pull the wool over our eyes. There are some simple fixes, often coming down to improved reporting of data we already have.

Mark Humphery-Jenner is associate professor of finance at UNSW Business School