A budget for higher unemployment

A budget for higher unemployment

The Guardian, 13 May 2014

Having been in government for eight months and with plenty of advice flowing and time to think about policy priorities, the Abbott government has presented a budget which forecasts a significant rise in unemployment.

In his budget speech, Treasurer Joe Hockey said that “unemployment is too high with over 700,000 Australians looking for a job”. He is correct, yet Mr Hockey framed a budget which forecasts unemployment to rise to approximately 800,000 people by 2016.

The most recent labour force data for April 2014 confirmed the unemployment rate at 5.8 per cent, which was down from what might be termed a mini-peak of 6.0 per cent in February. The recent pick up in economic growth has spilled over to a solid pace of job creation and the lower unemployment rate. Many forecasters are of the view that the unemployment rate has peaked and as a result will be lower over the medium term.

The budget is less optimistic and Treasury is forecasting the unemployment rate to rise to 6.25 per cent in June 2015 and it stays at that higher level through to June 2016. The projections then assume the unemployment rate eases back to 5.75 per cent by June 2018.

In other words, in the four years to June 2018, the government has delivered a budget where the unemployment rate is forecast be higher for many years and to then ease back to a level exactly where it is today.

The reason for the relatively poor outlook from Treasury is an on-going soft outlook for economic growth. Real GDP growth is forecast to slow from 2.75 per cent in 2013-14 to 2.5 per cent in 2014-15, making it six out of the last seven years where economic growth has been below trend. It is very odd to have the economy performing so poorly for such an extended time. But such is the expected fall away in business investment and the decline in the terms of trade, that Treasury is forecasting real GDP growth to remain subdued.

One curious aspect of the budget forecasts, and a fact that points to this budget having a one foot on the accelerator and the other on the brake, is that public final demand will grow at the same pace or faster than the expansion in private final demand. This rarely happens. The increase in public sector demand is linked to the increase in infrastructure spending at both the Commonwealth and State government level and curiously, without it, the pace of GDP growth would be moribund at about 2 per cent.

Public final demand is forecast to rise 1.75 per cent in 2013-14 and a further 1.5 per cent in 2014-15. Private final demand is forecast to grow at a very subdued 1.25 per cent in 2013-14 and then 1.5 per cent in 2014-15, highlighting a particularly weak outlook for the private sector. Even in 2015-16, private demand is forecast to rise just 2 per cent, well below the long run growth trend of 3 per cent.

The weakness in the private sector is business, not consumer, based.

Consumers seem on song, with household consumption expenditure accelerating to hit a peak growth rate of a solid 3.25 per cent in 2015-16. Housing construction is also strong, with dwelling investment rising 7.5 and then 5.5 per cent in the two years to 2015-16.

Reflecting the glum position for the business sector, business investment is forecast to fall 4 per cent this year, 5.5 per cent in 2014-15 and a further 3.5 per cent in 2015-16.

This shows how the economy is in the transition from the mining investment boom towards domestic demand.

The budget outlines a less than rosy view of this transition, with ongoing weakness in private demand which underpins the rise in unemployment.

If this view from Treasury is correct, the budget has done little to address the economic imbalance. This means that the heavily lifting to support private sector demand may yet fall to the Reserve Bank. The interest rate outlook is swinging back to neutral and if Treasury is correct, the probability that interest rates will be cut has just increased.

References

Coalition has delivered a budget for higher unemployment

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