Frydenberg FOFA banking royal commission
Treasurer Josh Frydenberg (Image: AAP/Lukas Coch)

Tucked in the middle of yesterday’s Mid Year Economic and Fiscal Outlook is an explanation for the current state of the economy and why it is expected to behave in the way Treasury believes it will over the next couple of years.

Much of the MYEFO coverage has — rightly — focused on the $10 billion war chest of tax cuts the government has armed itself with. That represents Scott Morrison’s last roll of the dice — offering a big tax cut to voters ahead of an election, albeit not as big as the one Labor is offering. But for a glimpse of the real economy and the federal government’s role in it, turn to page 77, which describes government spending by function.

There, defence spending is forecast to grow from $30.6 billion this year to just under $35 billion in 2022 — but that’s a little under the budget forecast last May — i.e. projected defence spending growth will be a little lower. Education spending, however, will be faster than previously forecast — it will grow from $35.2 billion this year — a figure higher than forecast in May — to just under $40 billion. By the way, that’s not going to the higher education sector, which has been belted with a $200 million cut to grants.

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Defence and education, however, aren’t the big areas of spending for the Commonwealth. Those are social security and welfare — which will cost just under $175 billion this year — and health, which will cost over $80 billion. Social security and welfare growth has slowed considerably in the last couple of years. In the 2015-16 budget — Tony Abbott and Joe Hockey’s second and last — the government thought it would have to find $186.9 billion for social security and welfare this year. Instead, it will be over $10 billion less than that. That’s because unemployment is lower, but also because inflation has been lower than expected, meaning indexation has increased welfare payments by less than projected.

That’s a key reason why the government has been able to bank most of the additional revenue it has received from higher commodity prices — it has been able to redirect major savings from social security to other spending initiatives instead. Even small changes in forecast growth in welfare payments can have big impacts on the budget bottom line.

Which brings us to health. The Turnbull and Morrison governments have pumped large amounts of extra funding into health: the 2015 budget projected health spending this year of $77 billion. In the budget in May, the government ended up allocating $78.8 billion. Yesterday that was raised to $80.2 billion. Next year it will be $81.2 billion, also higher than previously budgeted.

The point of the extra spending is to nullify Labor’s incessant claims — or, more accurately, lies — that the government has cut health spending, which have proven so effective. But the economic impact will be to make the health sector, already our biggest employer and one of the fastest growing — grow even faster. That’s one of the reasons the government can confidently forecast lower economic growth — 2.75% this year instead of 3% — this year, lower business and housing investment and lower household consumption, but also lower its forecast unemployment rate to 5%. There will be more jobs, because it will be funding them, in health.

That also means there’ll be more wages growth in the health sector — the only sector where wages growth has been well ahead of inflation over the last five years. That’s good news for the health professionals and the temporary migrant workers who fill so many positions within our health and aged care system, most of whom are women.

But people in pretty much every other sector, especially private sector workers, will be stuck with wages growth at about, or only slightly ahead, of inflation; or in several professions, real wages will continue to fall. Josh Frydenberg yesterday, bizarrely, referred to skills shortages and wage pressures in construction. Plainly he hasn’t looked at the recent WPI data, which showed construction as one the lowest-wage growth sectors of all.

For most workers, this will continue to be an economy that fails to deliver an increasing standard of living.

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Peter Fray
Peter Fray
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