17 January 2016
by Stephen Koukoulas
In terms of economic policy, it’s been a barren four months since Malcolm Turnbull became prime minister and drafted Scott Morrison into the Treasury.
And it is not as if there is not a lot to be done, including now to prepare the economy for the risks emerging from the market ructions in China. There are also the unresolved issues relating to the budget deficit, sub-trend economic growth, record low wages growth, unemployment, housing affordability, infrastructure and tax, among others.
Since becoming treasurer in September, Morrison has overseen more than $32bn of new borrowing, a clear sign of the policy struggle compounded by the high level of spending and revenue writedowns as commodity prices drift lower. Yet the policy urgency to either raise more revenue or trim government spending is confined to policy green and white papers that will not yield policy progress for many years, if at all.
Economic policy has not been a strong point of the current federal government, with precious little legacy and reform after more than two years in office. Sure, the economy has continued to grow but real GDP growth has not once been above 3%. Unemployment also remains higher than when it took office. Productivity growth is slowing alarmingly, yet industrial relations changes are nowhere to be seen, other than in occasional op-ed pieces from advocates of what would be growth-limiting wage cuts.
Despite the Coalition’s promises to run a budget surplus “every year” and “pay off government debt”, the budget deficit is getting larger with each update, while gross debt smashed through to a new a record of $400bn and net debt is on track to reach a peacetime high of 18.5% of GDP. On current estimates, a budget surplus will not be registered until 2021. By way of a benchmark, government debt was $273bn at the time of the last election, with net debt just 10% of GDP.
While there have been some recent snippets of good news on the economy, especially with a decent rate of growth in employment and consumer spending, the risks are building. The glass-half full is now looking like it is half empty.
Setting the scene for strong, employment-generating economic growth is the key. The national accounts released last month showed public sector construction work has fallen to levels just a fraction above record lows and have fallen as a share of GDP in every quarter since the coalition was elected to be “an infrastructure government”.
At a time of what appears to be entrenched sub-trend economic growth, weakening productivity and record-low interest rates, a ramped-up level of infrastructure would seem appropriate, if not an essential arm of economic management. Like so many aspects of this government, the aggressive rhetoric on economic policy, in this case infrastructure investment, is actually the opposite of what is happening.
There are some reasons to be hopeful, if not optimistic, about the Australian economy in 2016, of which none are linked to government policy. Importantly, the low Australian dollar, which has sunk below US70 cents, is providing a substantial boost to the export sector.
Low borrowing costs are also proving a boost not only to consumers, but to the business sector where cash flows are being enhanced by sharp falls in debt servicing costs. Low rates should also give a boost to investment projects outside the mining sector where conditions are still reasonably favourable.
The federal and state governments need to manage the economy with dexterity, pragmatism and vision. Some policy tweaks can be useful for short term gains, others will not yield economic benefits for many years, but still need to be pursed.
Hockey’s stint as treasurer was dogged by laziness and misguided policy settings, which is why he is no longer in that role. The early signs from Morrison are, unfortunately, hinting at more of the same.