Sydney Morning Herald December 19, 2013
A common mistake has been to describe Tuesday’s MYEFO economic outlook as “bleak”. For the vast majority of Australians, it’s actually predicting an improvement on the present – and the present is pretty damned good for most of us, if we’re capable of a little perspective.
Treasurer Hockey is partly to blame for the misconception with his lingering political message about Labor trashing the economy, bankrupting the nation, murdering all firstborn etc, but mostly it’s a problem of confusing the threat of growing government debt with a “bleak” economy. In Australia’s case, the former is there to prevent the latter.
There’s a substantial body of opinion that Treasury’s mid-year economic and fiscal outlook assumptions have been tweaked to present a “bleaker” vision of the next few years, so that all the upside from this “Labor” starting point can be claimed by the coalition. It’s the opposite of the idea that Treasury’s assumptions under Labor were on the Polly-Anna side, so the outcomes inevitably were the downside for that government.
But even with taking the forecasts at face value and avoiding that argument, MYEFO means most of us should be better off.
Allowing for some gross simplification, the base line is that real GDP growth remains around 2.5 per cent for the next 18 months and then picks up in the next two years to about “trend” of 3 per cent. So for a start, Treasury is saying the next 18 months should be more of the same – our annualised growth for the June and September quarters was 2.6 per cent. While acknowledging that many people are finding life difficult, especially and always the socially and educationally disadvantaged, and that the unemployment rate will drift up as jobs growth fails to keep pace with population growth, you’d still have to be from a very strange planet or with a mindset locked back in the pre-GFC bubble period to think Australia right now is “bleak”.
There are still more jobs being created than lost, the unemployment starts with a 5, wages and social welfare payments are still rising, retailers are expecting (another) record Christmas, we’re still in the lower third of the OECD when it comes to paying tax yet we’re in the top half dozen when it comes to our social safety net. The restaurants are buzzing, holiday bookings are soaring and there’s a barista for everyone and everyone for a barista.
And that’s just the starting point. As confirmed in yesterday’s RBA House of Representatives economics committee meeting, the MYEFO forecasts are Treasury catching up with what the Reserve Bank published on November 8.
That November 8 RBA forecast was based on the technical assumption that the Australian dollar would stay where it was on November 7 – 94.5 US cents. Thus the RBA forecast was based on an assumption that the RBA itself expected and hoped would be wrong. So with the Aussie around 88.5 US cents today, down 6 per cent, there’s already a considerable fundamental running the right way.
But wait, there’s more.
Where the 2.5 per cent growth comes from makes a difference to how people feel about it. During the first two stages of the commodities boom (the terms of trade jump and construction), there was plenty of whinging from people who (mistakenly) thought they were getting no benefit from the surge in Chinese demand, that only those rich miner bogans were having good time at the expense of the rest of the nation. Less competitive parts of the economy did have to make room for the construction boom, but we all still benefitted, if only from the greater buying power of the stronger dollar and the tax cuts funded by mining profits.
No we’re about to see a switch the other way. Much of our GDP growth has depended on resources construction that’s going to taper in 2014 and then fall quickly. (http://www.smh.com.au/business/comment-and-analysis/downside-of-the-mining-boom-resources-sectors-jobs-crisis-20131215-2zfbd.html ). So if Treasury and the Treasurer say growth is going to remain steady for 18 months, there has to be a better performance kicking in from the broader economy – where most people work and play.
If you’re dependent on the activity that goes into building a new mine, the economic outlook for the next couple of years is worse than it has been. If you’re not in that game, Joe Hockey effectively is saying the outlook is better – but he can’t say that when he’s setting the scene for cuts in various politically sensitive parts of government spending; he still requires some of his “budget crisis” persona to sell it.
Joe has to be very careful in the way he goes about that. MYEFO also demonstrated the great value of running a decent deficit this year. As previously explained, this is the deficit we had to have (http://www.smh.com.au/business/comment-and-analysis/the-deficit-we-had-to-have-joe-hockey-needs-to-drop-the-santa-claus-act-20131217-2zil5.html ).
Again according to the Treasury and Treasurer, growth in private sector final demand is forecast to be down to 1.25 per cent this financial year, compared with hopes of 2.25 per cent in August and the last financial year’s outcome of 2.8 per cent. Just as well then that public final demand growth is up to 1 per cent in MYEFO from 0.75 per cent in the PEFO and minus 1.3 per cent last year.
Beyond that, it is indeed tempting to get into the argument over how pessimistic the forecasts are, especially in the vital area of dwelling investment. MYEFO downgrades the dwelling investment growth expectations this financial year to just 3 per cent from 5 per cent in August. That’s the result of a surprising result in the September quarter national accounts – one that might have been election effected as it’s simply not in keeping with what’s going on in the overall housing environment.
Encouragingly, the Master Builders Association believes Treasury is being much too pessimistic. It’s survey of members thinks the original budget and PEFO forecast of 5 per cent was too low. I suspect the MBA has its ear closer to the tools than Treasury on this one.
There are other things to quibble about, but for the big picture, they can be let go. The car industry job losses are still four years away – a very long time in economics and an age in politics. The political performance itself of the Government has become a worry as it is capable of eroding business and consumer confidence. For now, based on what the Treasurer said, the outlook for the vast majority of us is an improvement.
Make mine a large flat white double shot.
Michael Pascoe is a BusinessDay contributing editor. Twitter @michaelpascoe01