Why Mark Twain Would LOL At The Liberals' Budget Number Crunching

Mark Twain famously identified three kinds of mistruth: lies, damned lies, and statistics.

For Australian workers, whose wages are growing more slowly than at any time since the end of the Second World War, Twain might have added a fourth: government wage forecasts.

Since 2013, wages have crawled along at just two percent per year – about half their traditional pace. That’s barely enough to match consumer price inflation, and hence there’s been no improvement in living standards for five long years.

But even as wages sagged, each Commonwealth budget tabled through this entire period included a forecast of wages that was downright giddy. From its first budget in 2014-15, the Coalition government confidently and repeatedly predicted an immediate and sustained upturn in wages.

Don’t worry, successive Treasurers comforted us: better days are just around the corner.

Unfortunately, every one of those forecasts was completely wrong. In each of five successive budgets, the government predicted wage growth four years out -- and it missed the mark in every year of every forecast. If this was a school exam, the government’s score would be zero percent.

Source: Jim Stanford and Troy Henderson, The Australia Institute

Each Treasurer surely knew these forecasts were wildly optimistic; independent economists universally derided them. But erring on the happy side served two useful purposes. First, it supported his narrative that the economy is in good hands, and prosperity is coming soon. Second, it underpinned growing revenue forecasts: if wages are growing strongly, then taxes will too, thus accelerating deficit reduction.

But these forecasts lost credibility with each passing year.

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So when the new Treasurer Josh Frydenberg tried the same old trick in his 2019-20 budget, not one published economist took him seriously. In fact, Mr Frydenberg’s wage forecast was exactly the same as the erroneous forecast from the previous budget -- just delayed by one more year.

That’s a fitting conclusion to the whole sorry saga. We know your wages have been flat. But don’t worry: there’s always next year.

We know your wages have been flat. But don’t worry: there’s always next year. (Image: AAP)

Mr Frydenberg provided no justification as to why this rosy wage forecast should be believed, when the last five missed the mark entirely. There is no plan to directly boost wages -- perhaps by lifting the minimum wage, or restoring collective bargaining rights, or even lifting the pay of government employees (whose wage gains have been suppressed at two percent for several years running).

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Instead, the Budget just drew a pleasant, upward-sloping line, and left it at that.

As small compensation for workers who haven’t had a real pay rise in half a decade, Mr Frydenberg offered what he calls “additional tax relief for hard-working Australians.”What is this relief? An unusual tax offset program first introduced last year will be expanded. That will provide between $255 and $550 additional disposable income to workers earning between $20,000 and $90,000. The offset is gradually reduced for higher-income earners, falling to zero above $126,000.

(Source: 2019 Federal Budget)

The savings are modest by any definition: averaging about 0.5 percent of pre-tax income for those who get it (and nothing for those earning under $20,000). At most, a worker saves $10 per week. And since lower taxes are inevitably reflected in reduced public programs and infrastructure, the ultimate impact on living standards is annulled – as Peter’s public services are robbed to pay for Paul’s tax cuts.

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Sensing a need to spruik these modest impacts, the Treasurer’s spin doctors went to work: invoking several statistical tricks to make them seem bigger and better.  Mark Twain would be laughing out loud.

He's laughing on the inside.

For example, government officials continually refer to the combined value of the old offset plus the expansion: now worth up to $1080 in total. (Those two weasel words, “up to,” appear again and again.) But the old offset (rebating “up to” $530) was already there. The additional saving is only worth “up to” $550.

Then the government claims that if two workers qualify (and perhaps those two happen to live together), the combined saving is $2160: twice the already-exaggerated $1080.

Apparently the Treasury department can multiply things by two!

But why stop there? Families can have many wage earners living under one roof. Imagine an extended family with 10 people working, each of whom could qualify for the maximum. Gadzooks: now the offset’s worth “up to” $10,800 per family.

Government documents also add up the combined offsets (old plus new) many years into the future. For example, over the four years covered by this budget’s projections, the government boasts it’s worth “up to” $4320. But again, why stop there? After all, Mr Frydenberg projects other variables (like net debt) all the way out to 2030 -- by which time Australia will have had at least three more federal elections.

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So let’s add up the combined offsets for a family of 10 through to 2030: it’s now worth “up to” $130,000 per family. Pop the champagne corks!

Virtually no-one is still swallowing the government’s rosy wage forecasts, sixth time around. And few will be roped in by this statistical trickery about the offset.

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In reality, just a single year’s wage increase at the normal rate would boost disposable income three or more times as much as the new offset. And that advantage gets bigger -- since the beauty of wage increases is they generate exponential increases over time. After three years of regular wage increases (the length of a government’s term in office), workers would receive dozens of times more income than they could “save” from the new offset.

Cutting through the statistical spin, the hard numbers are clear. If we want sustained improvement in living standards, wage increases are the only way to go. Tax cuts, no matter how much the spin doctors magnify them, won’t do the trick.