Budget 2015: Growth needed to achieve Government’s projected surplus

May 13, 2015

The World Today, 13 May 2015

ELEANOR HALL: Economists are also closely pouring over the details of the Government’s second budget.

Joining us now to drill down on some of the economic forecasts that underpin the Treasurer’s predictions in his budget is economist Nicki Hutley, who is the director of consulting firm Urbis.

We’re also joined in the Sydney studio by David Hetherington, the executive director of think tank Per Capita.

Thanks to you both.

First to you Nicki Hutley, how credible are growth forecasts in this budget?

Many of them have three in front of them which is not necessarily the way the Reserve Bank sees it.

NICKI HUTLEY: Look, I do have a problem and do think they’re optimistic but I think the Government needs this growth or to have this growth come through for them to achieve their outcomes on the fiscal setting.

So if we don’t get big growth then we don’t also get the improvements in revenues that are required to get the budget down and back to surplus by 2019-20.

ELEANOR HALL: So are you saying…

NICKI HUTLEY: I think there are a lot of problems. Sorry.


NICKI HUTLEY: I think there are a lot of problems, I think obviously there’s some risk around the iron ore price although they have done, put it in quite low and that is difficult.

If you look at though what they’re saying about wages and employment growth, there’s an assumption if we’re going to get household spending as high as they’ve said, we’re going to have to have more drawdown in household savings.

I think we need to see business investment pick up and they’ve suggested it will but whether there’s enough in this budget to give business confidence, I really don’t think so.

ELEANOR HALL: So are you saying that we’re unlikely to see deficits then fall from $41 billion to $7 billion over the next four years?

NICKI HUTLEY: I think there is a very significant risk that these outcomes will not be achieved.

ELEANOR HALL: David Hetherington, are these forecasts for growth optimistic?

DAVID HETHERINGTON: I think they are.

I agree with Nicki, it’s hard to see how Australia returns so quickly to long-term trend growth which is really what they’re saying.

If you look at what has driven the economy over the last decade or two, clearly the rapid industrialisation of China has been enormous but what’s going to be happening there is that China is trying to move its economy from investment to consumption so that means for us less iron ore for their steel.

It’s also been a case that there’s much more competition, now much more supply for the kind of minerals that we provide, so Brazil is much stronger in the iron ore market, Canada in the coking coal market.

This is a result of the high prices but it’s hard to see where our growth comes from to get us back to that path and I think the big task economically for the budget last night was to make that story in terms of infrastructure, skills, innovation and I’m not sure it has.

ELEANOR HALL: Staying with you David Hetherington, there may be no more talk of a budget emergency but stimulus in this budget is at a similar level as Labor had in 2009, the Global Financial Crisis emergency, I mean do you think this government is concerned actually about a recession?

DAVID HETHERINGTON: I think the Government recognises the task of having to return Australia to trend growth.

The labour market is weak, wages are flat, these are the kind of macro-indicators that the punters are looking for when they go to the ballot box.

So the Government will have an eye on those things and I think one of the balls it’s been trying to juggle over the last 24 hours in this budget has been to get growth back, it’s trying to undo some of the mistakes from last year and it’s trying to make a claim around fairness.

So I think the measures on small business for example will be somewhat stimulatory but I think it’s making a trade-off around spending now to stimulate short-term growth and getting the budget back in balance and I think it could have done more around the short term stimulation.

ELEANOR HALL: Nicki Hutley, should the Government be worried about a recession?

NICKI HUTLEY: Look, I think it probably premature to use the R-word but we are certainly sluggish and one of the things research tells us is that there’s a critical point when business investment and confidence start to really stagnate, that there can be almost a black hole if you like and that it’s very difficult for them to get out of.

And you get into this permanent cycle where they never believed that it’s things are going to pick up enough and that’s a real concern for the Reserve Bank and probably for the Government.

So yes I agree with David, this will in some senses stimulate a little bit of activity related to small business but when you think about the sorts of things that they’re going to go out and buy, whether its tools for tradies or a cheap car that’s going to get under the $20,000 limit, you know, I do think there is scope for rorting with big flat screen plasma TVs for your “home office,” quote, unquote.

Those are imported items so the flow on of impacts to the local economy are much more muted than if you have direct stimulus that even goes to households for example.

ELEANOR HALL: Kate Carnell, let me bring you in again here, I mean a lot does hinge on business confidence.

What do you make of this talk of recession?

KATE CARNELL: Look, it is about business confidence and our research, we do regular surveys of quite large numbers of business – small, medium and large – and it really has shown that no matter what the Government has done or the Reserve Bank’s done with interest rates, it just hasn’t budged business confidence much at all.

Businesses, business expectations for the next 12 months were really really flat in the first quarter of the year, so government needed to do something to get business confidence back and I think focusing on the small business sector is a smart way to go because it’s a part of the economy that can move very quickly, can make decisions quickly, can invest quickly, employ quickly and grow quite quickly.

So I think it’s the way to go.

Look they’re having to do this with very very little money, you know, they’ve got a big deficit that they’re trying to, they have in this budget put in place a plan to get the deficit down over the next four, five years and that’s something we wanted them to do.

So they didn’t have a lot of money to deal with and investing in the small business sector I think is smart way to get that business confidence happening.

ELEANOR HALL: Kate Carnell, David Hetherington and Nicki Hutley thanks so much for joining us.