On Monday we had a look at how the unemployment rates have changed at the regional level since the 2007 election, while on Wednesday we had a squiz at the growth in government transfer payments by electorate. Today, we’ll bring this all together.

If we overlay the change in the unemployment rate at the regional level since the 2007 election (where the cross-hatched lines represent a reduction in unemployment, the horizontal lines represent a zero to 3% increase in unemployment and the vertical lines represent a greater than 3% increase) on top of the growth in government transfer payments by electorate (where blue is the smallest growth while bright red is the largest growth) — what stands out, is that the places with the largest increases in unemployment are also generally the places where there has been only small to moderate growth in government transfer payments. To see this, we’ll have a look at the two largest population centres in Australia — the greater Sydney and Melbourne areas.

This is largely a consequence of the income distribution and dual income household nature of where unemployment has been increasing the most. Unemployment in Australia over the last 18 months has been hitting hardest those places that are financially best equipped to cope with it — being able to privately draw upon alternative income sources rather than having to largely rely on government transfer payments as jobs become lost.

This is a far different experience than what occurred in the recession of 1991, where the places with the largest growth in unemployment were also the places where median income was moderate to low, and where the fallout from unemployment for most people required government financial assistance. As unemployment went up in the early 90’s, so too did government transfer payments in a much more proportional way than we are currently witnessing.

This has some pretty big ramifications for the budget bottom line. Government transfer payments are a natural part of the automatic stabilisers, where as growth slows and unemployment rises, government expenditure naturally increases through the growth in welfare outlays — adding a bit of fiscal stimulus to the economy and taking the hard edge of any downturn.

Yet this time, unemployment is rising the most in places where transfer payments are increasing the least. The welfare outlays will be smaller than expected in the budget because a much larger proportion of people than usual that are losing their jobs, aren’t requiring (or qualifying for) government assistance. The welfare side of the automatic stabilisers are working in slow-mo. We’re effectively getting a good chunk of unemployment growth that the government doesn’t have to pay for.

Combine this smaller than projected welfare outlay with higher than projected GDP growth, higher than projected PAYG tax receipts deriving from employees having their income (and hours) merely reduced rather than abolished from unemployment, and consumption holding up relatively strongly — the budget deficit will come in at a much smaller number than is currently being projected.

Much smaller.

Peter Fray

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