The economic case for increasing Newstart

Now suppose this policy has longer-term benefits: that it could automatically boost the economy during times of weakness without the time lags associated with infrastructure and other stimulus spending; that it would automatically withdraw from the economy when times were good without the permanent cost of tax cuts and other stimulus measures; and that it would boost GDP growth and reduce economic volatility.

And suppose the cost of this policy was only 0.6 per cent of the federal budget, meaning it could be funded without losing the politically cherished budget surplus.

Sound good? Then, congratulations, you support increasing Newstart.

Newstart is the main income support payment for people who are unemployed. Compared to the age pension, disability support payments, the minimum wage and average wages, it has shrunk dramatically over the past 25 years. This is bad news for the economy, and even worse news for the 723,000 people who are forced to live off it.

While the age pension has doubled in real terms since 2000, Newstart has remained unchanged. The reason is simple, but illogical. Newstart is indexed against inflation, whereas other government payments are indexed against wages, which more accurately measure living standards. If inflation and wages moved together, this wouldn't be a problem. But wages have outgrown inflation by 40 per cent over the past 25 years, meaning that Newstart recipients, in real terms, have fallen far behind.

By any measure, people on Newstart are among the most disadvantaged. If a society can be judged by how it treats its most vulnerable, Australia is not looking good. An analysis by ANU economists Ben Phillips, Matthew Gray, Cukkoo Joseph and Richard Webster shows that the poverty rate among households that depend on allowances as their primary income rose from 39 per cent in 1993 to 80 per cent in 2017.

Before we get onto the economics, it's worth rebutting some of the common misconceptions about Newstart.

The idea that people on Newstart are lazy young urban-dwellers is not only factually incorrect (the typical Newstart recipient is a middle-aged woman living outside the big cities) but ignores the fact that, across the economy, there is only one vacant job for every 4.4 unemployed people. It's hard to take a job that doesn't exist. And despite all its controversy, Newstart happens to be one of the cheaper welfare programs around, costing less than one-seventh of the age pension. Increasing Newstart is also the quickest, easiest and most effective way of reducing poverty in Australia.

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The argument that increasing Newstart reduces the incentive to find a job is similarly baseless. Newstart is so low that the Grattan Institute has found that it stops people looking for work. Many people on Newstart already have jobs but cannot get enough hours. And if you're aware of research findings on intergenerational disadvantage, you'll know that your childhood postcode shapes your life outcomes. Demonising the poor, in other words, is a bit like demonising someone who didn't win at a game of luck.

There is also a strong economic case for increasing Newstart.

Consider the short-term benefits first. You didn't have to go to the Boxing Day sales to know that the economy is not doing well. And it's little wonder. Compared to the first half of the decade, retail spending growth over the past five years is down 30 per cent, quarterly wage growth is down 40 per cent and consumption growth is down 15 per cent. The rate at which the economy creates new businesses has fallen from 14 to 11 per cent. Investment now contracts each quarter by an average of 0.4 per cent and productivity growth has flatlined. GDP growth remains around global financial crisis levels.

What the economy needs is more demand. While businesses have stopped investing and expanding, their profits are at record highs, the ASX200 has broken new ground, bond yields and interest rates are at record lows and share buybacks and dividend payouts are at unprecedented levels. The message from the data is clear: businesses are awash with cash, and can easily get more if they want it, but they will only invest and hire if there is demand for what they sell.

Enter Newstart. The ANU's economists show that the poverty gap for people on Newstart - the absolute difference between a household's income and the poverty line - has increased fivefold from $25 in 1993 to $124 in 2017. This means that every dollar spent on Newstart goes straight into the demand side of the economy, rather than being saved. In normal times, this stimulus would be offset by rising inflation, rising interest rates and an appreciated exchange rate (as well as more spending on imports). But these effects are dramatically weaker in the low-inflation, low-interest environment in which we live, meaning the stimulus effect is even larger.

The economists at Deloitte Access Economics estimate that, even with these offsetting effects, increasing Newstart by a meagre $75 per week (ANU modelling suggests $100 would be optimal) would boost GDP by $4 billion and create an additional 12,000 jobs by 2021. They show that the benefits disproportionately flow to regional and remote communities (given that's where most Newstart recipients live) and would boost wages, corporate profits and government coffers through the increase in demand in the economy.

But it's in the long run that an increase in Newstart makes the most economic sense.

Newstart is what economists call an automatic fiscal stabiliser: it automatically increases government spending when the economy is weak (through payments to the rising number of unemployed people) and reduces demand when the economy is strong, thus stabilising the economy over the long term.

Economists like automatic stabilisers because politicians have demonstrated an inability to manage fiscal policy responsibly. They either spend too much when the economy is strong (Howard) or cut back when the economy is weak (Gillard, Morrison). The IMF shows that more than half the fiscal stabilisation observed in advanced economies is because of automatic stabilisers rather than government decisions.

More importantly, the IMF shows that Australia could do much better in strengthening our automatic fiscal stabilisers, hence boosting growth and reducing volatility. Australia lags behind the United States, Japan, Canada and most others. We are more than a third behind New Zealand. By having stronger automatic fiscal stabilisers through measures like an increase in Newstart, annual Australian GDP growth could be up to 0.3 percentage points higher and economic volatility could be reduced by up to 20 per cent.

The macroeconomic case for increasing Newstart is just one of many reasons to do it. As the acclaimed American poet, Maya Angelou, once said: "When we give cheerfully and accept gratefully, everyone is blessed." The same is true in economics.