The Coalition’s addiction to cuts ignores Australia’s growing economic problems

December 15, 2014

By Stephen Koukoulas

Joe Hockey’s budget update in the mid-year economic and fiscal outlook (Myefo) statement shows unthinking and inflexible economic policy.

The treasurer suggests he is allowing the budget’s “shock absorbers” to cushion the economy from the impact of what looks like being the sharpest fall in the terms of trade since at least the 1960s.

This should mean fiscal policy is adding to economic growth, but Myefo encapsulates a policy agenda entrenched in the deficit reduction obsession, with little regard to the challenges unfolding in the real economy. Those challenges are a slowing growth rate, falling national income and rising unemployment.

Hockey is a long way from using fiscal policy as a shock absorber for the economy when he is forecasting the unemployment rate to reach fresh highs over the next two years.

It is also unthinking because it takes little account of the pending impact of the falling terms of trade and the sluggish domestic economy, which is being held back by chronic weakness in consumer sentiment and fickle business conditions.

Hockey seems to have forgotten or ignored that budgets and fiscal policy are about the government managing the business cycle, not perpetually striving for the smallest budget deficit possible. Such policy zealotry ignores the subtleties of the cycle.

There are no specific policies in Myefo aimed at lifting economic growth back above trend to make up for the past few years of weakness. As a result, there is nothing to address the rising unemployment rate, which last week was confirmed at a 12-year high of 6.3%. That disregard for the almost 780,000 people now unemployed reflects the budget deficit minimisation obsession, not a policy approach that lifts growth and tackles the jobs deficit. If the economy even marginally underperforms Hockey’s Myefo forecasts, the Coalition will be going to the next election with unemployment at close to one million people.


It is unthinking because fiscal policy remains restrictive. The budget’s automatic stabilisers of lower revenue and higher government outlays, inevitable events when an economy slows, have been deliberately wound back with an array of spending and public service cuts which will lead to government demand hurting economic and job growth.

Indeed, Hockey’s economic forecasts show GDP mired well below trend for 2014-15 and 2015-16, hindered by government demand growth at a puny 1.5% in 2014-15 and just 1% in 2015-16. It seems the Treasury has not told Hockey of the problems of many Eurozone countries in the past five years or so, where the governments that chose fiscal austerity for economies with weak private demand have created protracted misery.

Hockey has presented Myefo content with a forecast that has the unemployment rate hitting fresh 12- and 13-year highs of 6.5% into 2016.

A legitimate policy question would be to consider the trade-off of a slightly larger budget deficit for this and the next year and a lower unemployment rate. Recall that each 0.1 percentage point on the unemployment rate is about 11,500 people. Implementing policies that delivered a 0.5% lower unemployment rate would mean about 55,000 people would remain in jobs.

Hockey would be wise to learn the macroeconomic management lessons of Labor’s former treasurer Wayne Swan. Presented with Treasury forecasts for a stronger economy and solid growth in national incomes, Swan set the budget to return to surplus. But when those economic forecasts were materially downgraded due to falling export prices, a softening in the global economy, a high Australian dollar and easing domestic business and consumer confidence, Swan rightly ditched the surplus objective and implemented policies that underpinned growth and employment.

In doing so, he copped a political firestorm, even though it was obvious, or should have been, that sustaining economic growth and employment is always more important than the zealotry of always focusing on a smaller budget deficit. Politically this hurt the Labor government, but economically it was the right thing to do.

The unemployment rate remained below 6% right through 2013 as the budget remained in small deficit.

In every month since the May budget, the unemployment rate has been above 6%, with the trend clearly moving higher. That should have been a wake-up call for Hockey.

Economic policy is about flexibility. Interest rates go up and down, often by quite a lot, as economic conditions change. It should be the same for the budget, with deficits and surpluses in place according to economic circumstances. It is a pity Hockey has ignored the rules of prudent economic management and stuck with a position that says spending cuts and tax rises are more important than economic growth and a lower unemployment rate.