Joe Hockey’s unemployment strategy will be test of second budget

April 28, 2015

By Stephen Koukoulas

23 April 2015

The March labour force data brought mixed news. The unemployment rate edged lower to 6.1%, yet some 750,000 people are unemployed. It is also clear that commodity prices are lower now than was assumed just a few months ago and it has now been more than two years since the economy registered economic growth at or above trend.

This is the backdrop as the treasurer Joe Hockey prepares for his second budget in three weeks’ time. Hockey has indicated that the task of budget repair is more difficult than he thought in opposition, to the point where he will not commit to delivering a budget surplus, even though he promised surpluses prior to the election.

The budget will generally be viewed through a political prism, with policy tinkering that impacts on the household sector and small business likely to garner scrutiny as the 2016 election looms.

There will, however, be other aspects of the budget that will allow for some commonly held perceptions about the size of government and success in tackling unemployment to be tested and analysed.

One of the most important will be the outlook for unemployment. Critical in that fiscal framework will be whether the government will blithely accept the Treasury forecast for the unemployment rate to remain above 6% for the next couple of years, or will the policy settings take aim at the unemployment problem and be set with an objective of seeing Australia once again move towards full employment. An unemployment rate of about 4.5% to 5% is consistent with full employment.

If the budget contains forecasts for the unemployment rate to remain above 6% for the next two years, the government will be guilty of framing its policies whereby 800,000 and more people will be unemployed.

Australians have enjoyed an era of low unemployment from about 2003, in part due to the mining boom, and because of some astute policy changes as the global banking and finance crisis exploded in 2008. Indeed, in the period from 2003 to 2013, every month saw the unemployment rate below 6% and for most of the time it was at or below 5%.

Disconcertingly, unemployment rose to 6% early in 2014 and has stayed at that level or higher for the past 10 months. Other than the RBA clipping interest rates to try to underpin the rate of economic growth, the Abbott government has not tried to tackle the problem. No one is forecasting a return to 5% unemployment for perhaps half a decade.

The budget will also expose the hard and unchallengeable data on tax and government spending. After all, that is what the budget numbers are all about.

The recent spat between former treasurer Peter Costello and the current government over the budget and increasing revenue to return the budget to surplus has opened fiscal issues to closer scrutiny.

Contrary to Tony Abbott’s rhetoric about his government wanting to deliver “lower taxes” and the Coalition parties having low tax and small government “in their DNA”, the current budget data reveal the opposite is true.

In the context of budget data back to 1970-71 as presented in the December 2014 mid year economic and fiscal outlook, the Coalition is high-taxing. Indeed, the seven highest years for the tax to GDP ratio have all been delivered by a Coalition government, and the five lowest by Labor governments.

Those budget numbers also reveal the Coalition has never once delivered a budget that cut government spending in real terms. Never once.

By way of contrast, Labor has in five years delivered government spending cuts in real terms – three by Paul Keating and two by Wayne Swan.

It seems Labor are more active managers of the budget – spending up when the economy is weak and cutting hard when the economy is stronger. The Coalition seems happy to recycle whatever money is saved through cuts to other parts of the budget so that spending keeps growing in real terms.

Hockey’s budget will add some key data and policy substance to just how the Coalition government uses the budget as a macroeconomic policy tool in the current climate of falling terms of trade, high unemployment and a sluggish economy. Its targets for unemployment, tax receipts and growth in government spending will no doubt add some more substance to which side of politics is about big spending and high taxes and whether, for the first time in many years, a government will be content to see unemployment stay high for an extended period of time whilst doing little to address this social and economic problem.