Saturday, May 16, 2015

Media get budget wrong

As an exercise in media manipulation, this week's budget scores top marks. The government's spin doctors managed to convince the media it was a "stimulatory budget" when it was actually mildly contractionary.

With financial markets trading virtually continuously, the old need to lock the media up on budget day until the markets had closed disappeared decades ago. The only reason for continuing the practice is to maximise the government's ability to influence the media's initial reaction to its budget.

It does this by keeping journalists locked up for six hours, during which time the only experts they can approach for opinion and clarification are Treasury and Finance officers. Then you let the journos out just before deadline, when it's too late to contact independent experts.

The theory is that influencing the media's initial reaction is half the battle in influencing the electorate's ultimate reaction. Didn't work last year, of course.

If you wonder why governments habitually leak or announce so many of the budget's measures ahead of time, it's all part of the media manipulation. You announce measures you know will be popular so they get more attention than they would if you announced them all together on budget night.

You announce unpopular measures ahead of time to soften voters up and also so the media will regard them as old news on budget night and thus won't say much about them.

This year, the good news announced early was the changes to childcare subsidies, plus the decisions to make savings in the cost of pensions and Medicare in much less painful ways than had been proposed in last year's budget.

But you always save a bit of good news to act as the "cherry", taking care not to breathe a word of it in advance. Making this the only measure the media regards as "new" ensures they make it the centrepiece of their coverage. And, of course, you've made sure it's good news.

This week the cherry was the "Growing Jobs and Small Business package". And, boy, didn't the media go to town. The cut in the rate of tax imposed on small business was terrific, but the plan to allow multiple asset purchases of up to $20,000 each to be "written off against tax" was mind-blowing.

The next day's headlines showed how easily the media were manipulated: Joe's Jumpstart, Kickstarter, and Road to Recovery?

Don't be misled. The 1.5 percentage-point cut in the company tax rate for small businesses is itself small. The equivalent cut for unincorporated businesses will yield a maximum saving of less than $20 a week.

And the two-year offer of an immediate 100 per cent write-off for newly purchased business assets costing less than $20,000 each is nothing like the rort-inducing "bonanza" imagined by innumerate journos and economists who don't know as much accounting as they should.

You don't get up to $20,000 a pop taken off your tax bill - making the asset essentially free - you get it taken off your taxable income, meaning the taxman picks up 30 or 40 per cent of the cost, leaving you to pay the rest.

In any case, the cost of assets purchased for business purposes has always been 100 per cent deductible. The difference is that usually this "depreciation allowance" is spread over five years or so, whereas this special deal accelerates the full deduction to the end of the first year.

So it will probably induce a noticeable increase in small business investment spending, but that's unlikely to be big enough to make much difference to the economy's rate of growth.

It's a classic example of the things governments do when they're trying to apply fiscal stimulus, being similar to a measure in Kevin Rudd's stimulus package of 2009 after the global financial crisis.

But note the measure's downside: because it's temporary, its main effect will be to draw forward into the next two financial years spending that would otherwise have occurred in subsequent years, leaving a vacuum in those years. And because most motor vehicles and business equipment are imported, much of the increased investment spending will "leak" into imports.

Another part of the hype is the government's claim that small businesses are "the engine room of the economy". Nonsense. Big business is. As the budget's fine print admits, small business accounts for only about 38 per cent of the workforce and about a third of production.

The most important point, however, is that just because a budget contains a few small but sexy measures doesn't make it a "stimulatory budget" to anyone but a journo after a good headline.

To an economist, you have to put the few stimulatory measures into the context of the net effect of all the new measures taken in the budget.

When you do that you find they are expected to add $2.2 billion (or 0.13 per cent of gross domestic product) to the budget deficit in the coming financial year, but subtract $1.6 billion from the deficit over the five years to 2018-19.

Either way, the expected net effect of the budget's measures is too tiny to matter. That's the old, strict Keynesian way to determine the "stance" of fiscal policy adopted in the budget.

The Reserve Bank's way of determining the budget's overall effect on the economy (which adds to the above change in the discretionary or "structural" component of the deficit the expected change in the "cyclical" component caused by the operation of the budget's "automatic stabilisers") shows that, measured as a proportion of GPD, the coming year's deficit is expected to be 0.5 percentage points lower than for the financial year just ending, with expected falls of 0.6 points, 0.7 points and 0.4 points in the following years.

In my book, a change of 0.5 percentage points is right on the border between insignificant and significant. That makes the budget only mildly contractionary.