Five things that matter, The Australian, 28 October
A few months before the 2013 federal election, the Australian economist Stephen Koukoulas issued the incoming Liberal Government what he called ‘a very simple and professional challenge’. Fed up with all their rhetoric about fixing the budget and turbo-charging the economy, Koukoulas challenged the Liberals to improve Australia’s economic performance on five key indicators.
The indicators he picked were the ones any good economist looks to when taking the temperature of an economy: GDP growth, unemployment, inflation, wages and interest rates.
As Treasurer 2.0 Scott Morrison starts work on the upcoming Mid-year Economic and Fiscal Outlook, it would be worth him returning to those key indicators. If he does, he’ll find problems on all five fronts. The mid-year budget update is Scott Morrison’s chance to show his government has any kind of plan to get the dials on Australia’s economic dashboard moving the right way again.
First, that plan must lift growth. The latest National Accounts show that in the past financial year, the economy scraped by with the lowest level of growth since the Global Financial Crisis. More worryingly, our growth trend is going the opposite way to other developed countries which are now in a strong recovery from the crisis. As a result, we’ve tumbled from seventh to 19th in the OECD’s growth rankings just in the past two years.
We can’t continue with listless growth because that’s what drives the creation of new jobs, and this country badly needs more jobs. The unemployment rate was 5.7 per cent in the middle of 2013, but it hit 6.3 per cent in winter this year. Over that period the unemployment rate in the US has plummeted from 8 per cent to 5 per cent, while the United Kingdom has done almost as well as the Americans at getting people into work. Ideas for generating more jobs should be at the centre of Treasurer Morrison’s budget update.
A new Treasurer might be tempted to look at Australia’s rock bottom inflation and interest rates and see these as bright spots. That would be a mistake. The Reserve Bank has held the official cash rate at just 2 per cent for six months now and inflation is running at 1.5 per cent, below the bank’s target range.
Interest rates this low indicate the Reserve Bank is pulling out all the monetary stops to try and stimulate spending. When the bank cut rates to 2.5 per cent back in 2013, then-Shadow Treasurer Joe Hockey described this as ‘beyond emergency levels’. How must he feel about having left the job with rates fully half a per cent lower again?
Having inflation down so low isn’t just a worry because it raises the possibility of sliding into outright deflation. It also means nominal incomes grow more slowly, making everyone’s debts harder to repay. No government should aim for soaring inflation and sky-high interest rates. But having both of these indicators so low is a clear sign the economy is struggling.
Finally, wages are currently growing at their slowest rate this century. The past year saw an increase of just 2.3 per cent, as all these factors – combined with low business investment and confidence – combined to press down wages. When Labor left office, wage growth was just shy of 3 per cent; at one point during our term it lifted as high as 3.8 per cent. Members of the Coalition often warn about wage ‘spikes’ and ‘breakouts’, but their time in office has actually been marked by a decisive wage slump.
Beyond Koukoulas's five indicators, there's the Liberals’ favourite economic metric: public sector debt. They might have held press conferences in front of debt trucks when in opposition, but in government they went ahead and scrapped the debt cap. When the government took office, debt was forecast to peak at 13 percent of GDP. It is now forecast to peak at 18 per cent instead.
So more hangs on this year’s budget update than usual. Will this be the point when the government starts to turn things around?
Perhaps it’s time for Scott Morrison to look at Labor’s positive proposals on multinational taxation, top-end superannuation, boosting infrastructure and encouraging entrepreneurs. If the government is committed to building a stronger economy and a fairer society, they’ll find Labor willing to work constructively for the long term.
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