Weekly economic briefing: Newstart needs a new lease on life

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Newstart needs a new lease on life

At under $39 a day for a single person, Newstart allowance (unemployment benefits) is far from generous. Even taking into account the full rate of rent assistance and the energy supplement, that amount only rises to $49 (it’s even less generous for those who are on youth allowance). This compares to $75 a day for a single pensioner, $89 for a full-time worker on the minimum wage1,2 or $135 for someone on average earnings3,4.

This stark difference in generosity has not always been the case – it is a policy choice. The incomes of pensioners and most other beneficiaries are benchmarked to wage growth so that recipients receive broader real wage increases. That ensures that their ‘standard of living’ keeps up with the rest of society.

However, those on working age payments aren’t as lucky. These are adjusted in line with price inflation – meaning that, in real terms, recipients of these payments are no better off. This has seen a growing divergence between average earnings (AWE), the pension and Newstart over time (Chart 1).

Chart 1: Average wages, the age pension and Newstart per week over time ($2000-01)

Source: Department of Social Services; Deloitte Access Economics

Benchmarking payments to prices rather than wages would be less of a drama if these payments were still doing the job that they were designed to do – acting as a stopgap measure to help unemployed Australians get by while they find work.

As the Centrelink website states, Newstart allowance is “the main income support payment while you’re unemployed and looking for work.”5 It was designed to supplement other savings which would help unemployed Australians and their families through periods of unemployment.

Yet a significant number of recipients spend longer and longer on these payments. Chart 2 shows that, for many recipients, being on unemployment benefits is not a temporary state. Some 46% of Newstart recipients and 27% of Youth Allowance recipients have been on their respective payments for at least two years. There are also a bunch of Youth Allowance recipients who simply transition from Youth Allowance to Newstart when they turn 22 (or 25 pending the passage of legislation before the Senate6).

Chart 2: Share of Newstart and Youth allowance recipients by time on payment

Source: Department of Social Services

Yes, it would be nice if unemployment were temporary. But for many it isn’t, and there are a range of reasons for this, which have very little to do with welfare payments encouraging people to stay out of work. Australia has very low Newstart payments at the same time as we have high wages and, by global standards, very high minimum wages. The financial incentives to work are very strong.

Yes, increasing Newstart will cost the taxpayer, but Deloitte Access Economics has argued in our latest Budget Monitor, that is absolutely a choice we should make. That is both to address the societal failure of long term welfare dependency, and to allow unemployed people to live in a circumstance which actually allows them to be job ready as opportunities arise.

We estimate that the direct cost of giving every recipient of a working age or student payment an extra $50 a week at around $3 billion. With stronger Commonwealth taxation revenues coming in, an increase to Newstart should be top of the list in how that additional revenue is spent.

 

For more information on the Australian brief, please contact co-authors David Rumbens and Ben Guttmann.

1Social security payment rates are as at 20 March 2018 and are from the Australian Government Guide to Social Security Law.
2Minimum wage rate is as at 1 July 2017 and is from the Fair Work Ombudsman Minimum Wages Fact Sheet.
3http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6302.0Main+Features1Nov%202017?OpenDocument
4Figures for full-time minimum wage and average earnings are net of tax.
5https://www.humanservices.gov.au/individuals/services/centrelink/newstart-allowance
6https://www.humanservices.gov.au/organisations/about-us/budget/budget-2015-16/budget-measures/disability-and-carers/growing-jobs-and-small-business-increasing-age-eligibility-newstart

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

What’s up with oil prices?

  • The oil price has had a turbocharged run in the last year, rising almost 60%. Last Friday it closed at a three year high of $77 a barrel. From the, early 2016, lows of under $30 the oil price has risen by over 160%.
  • Three factors explain the rebound in oil prices.
  • First, the global economic upswing has come faster than expected fuelling demand for oil and bolstering prices. Despite a first quarter wobble, the global economy is likely to grow at the fastest rate in seven years in 2018.
  • Second, a 2016 agreement between OPEC and Russia to reduce output has helped work off a large amount of the previous glut of oil and has led to a tightening in the market. (This surprised me. I had thought that OPEC’s ability to get its members to limit output in pursuit of higher prices was weakened).
  • Third, geopolitical developments threaten supply. America’s withdrawal from the Iran nuclear deal and the re-imposition of sanctions, would hit Iranian oil sales. Yemen’s Houthi rebels, who are allied to Iran, have been firing missiles into Saudi Arabia, including targeting a supertanker carrying oil and oil storage facility on the Red Sea coast. A direct missile hit on Riyadh, or an oil facility, would represent a material escalation of the proxy conflict between Iran and Saudi Arabia. Meanwhile, Venezuelan oil production has fallen by a third since 2015, the industry a victim of the mismanagement of the nation’s economy and Libyan output, though recovering, remains well below pre-revolution levels.
  • In thinking about where prices are heading in the longer term we need to be wary of the tendency, at extremes in the price of any asset, to extrapolate recent trends into the indefinite future. When the oil price reached an all-time peak of $144 in 2008, the talk was of how declining reserves and endless demand from China meant permanently high prices. Instead prices collapsed.
  • The fundamentals of global oil supply have been changed by rising US oil production. Fracking has enabled US crude production to double in the last ten years, making the US the world’s largest oil producer last year. The global supply curve for oil has, in the jargon, shifted to the right.
  • In time, higher oil prices boost exploration and investment, just as the sharp decline in prices in 2014/15, hit investment. The number of rigs exploring for or developing oil or natural gas in the US and Canada has risen almost three fold in the last three years. Improvements in horizontal drilling and hydraulic fracturing have brought costs down sharply. The breakeven price for US frackers appears to be in the range of $50, giving them plenty of incentives to invest at current prices.
    Global levels of capital investment in oil and gas have also been rising for the last year.
  • If I knew where oil prices were heading I’d be an oil trader, so what follows are guesses. Supply-demand dynamics and geopolitics point to upside risks to oil prices in the near term. But, on a one year view I think it’s more likely that softer global growth and increasing supply will drive prices below current levels.

OUR REVIEW OF LAST WEEK’S NEWS

 

The FTSE 100 ended the week up 2.0% at 7,725.

International economic briefing by Ian Stewart

Economics and business

  • President Trump removed the US from the Iranian nuclear deal and announced new sanctions on the country
  • Donald Trump ordered a U-turn over US sanctions against Chinese telecom equipment maker ZTE Corp after talks with Chinese counterpart Xi Jinping
  • Israel launched strikes on what it said was Iranian military infrastructure inside Syria, raising tensions in the Middle East
  • The Bank of England kept interest rates unchanged after a recent softening in growth and inflation
  • UK retail sales fell sharply in April according to the British Retail Consortium, with like-for-like sales recording their biggest fall since 2005
  • British voters support higher taxes on top earners by a ratio of 5:1, according to a Financial Times survey looking at Labour’s policies
  • The majority of economists surveyed by the Wall Street Journal think the next US recession will begin in 2020
  • The number of US job openings rose above expectations in March to its highest level on record
  • Japanese wage growth beat expectations in March, rising at 2.1%, their fastest annual pace since 2003
  • Argentina asked the International Monetary Fund for emergency financial support to stabilize its economy
  • The Argentinian peso depreciated rapidly against the dollar as the economy struggled with higher oil prices and interest rate rise in the US
  • Argentina’s turmoil is a reminder of the fragility of some heavily indebted emerging markets, who are vulnerable to a change in global credit conditions
  • Similar pressures saw emerging market equity funds suffer their worst outflows in almost a year last week and bond funds lose money for the third week running
  • The FT reports the average credit rating of US investment-grade debt has fallen sharply in recent years
  • There has also been a notable increase in ‘cov-lite’ issuance – debt that is not subject to the normal level of credit-risk scrutiny – according to S&P
  • British Telecom is to cut 13,000 jobs over three years, about 12% of its workforce, as it slims down its management and back office operations
  • The Resolution Foundation recommended a £10,000 “citizens inheritance” for 25-year olds to help them buy their first home or reduce their student debt

Brexit and European politics

  • The two eurosceptic, anti-establishment Italian parties, Five Star Movement and the Northern League made ‘significant steps’ towards forming a government
  • The mayor of Manchester, Andy Burnhan, said devolution was the ‘best answer’ to the challenges presented by Brexit
  • The House of Lords voted to keep Britain in the European Economic Area, meaning that MPs will have a vote on effectively staying in the Single Market
  • The percentage of the UK voters who consider immigration to be one of the top three biggest issues fallen from 60% in June 2016 to 40%, according to YouGov
  • Following disagreements within the Cabinet, Prime Minister Theresa May asked civil servants to work up new versions of the two proposed customs models before a decision is taken on which is the preferred model
  • The UK Treasury will make an emergency £10m cash injection into the trade department headed up by Liam Fox, the UK trade secretary, to safeguard jobs

And finally…

  • blogger Dan Mirvish spotted that when Hollywood actor Anne Hathaway makes headlines, the stock for Warren Buffett’s Berkshire-Hathaway goes up. Mirvish figured that algorithms were scouring the internet and picking up chatter about the famous actress and assuming it was positive news for the investment fund – stage of Omaha

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