A golden road to surplus? Tell Abbott he's dreaming

With consumer confidence stuck far too low and an overpriced housing market, money will not be falling from the sky under an Abbott administration. Sunny illusions won't fuel Australia's growth.

It feels good, doesn’t it? A new government and — dare one say it — new hope, reward and opportunity. (Mr Loughnane, please send the cheque via the Business Spectator office.)

The ASX200 is up a bit over 2 per cent in a week. House prices are booming. The Abbott government is preparing to pay down the debt and, though unemployment is rising, that will soon be turned around. Just you wait and see.

As Stephen Koukoulas pointed out yesterday, leading indicators (the ASX and house prices in particular) usually lead the lagging indicators (jobs and profits) out of the doldrums.

Indeed, our share/house assets have grown by $700 billion in 18 months. That’s approximately equal to all federal government spending over the same period. And to think we’ve just had an election in which a $9 billion improvement in the budget over four years was thought by some to be a significant move to fiscal conservatism. Pooh!

What this columnist and many others would most like see is return to the sunny years of the late John Howard era when money, in the form of free-and-easy mortgage debt and tax-cut/benefits largesse, fell from the sky.

And I’d like a Porsche and a birthday card from Scarlett Johansson.

The sun was so bright back in the Howard days that we couldn’t see the source of that lovely money was a price-based mining boom filling the government coffers, one off asset-privatisations including the three Telstra sell-offs, and the gushing geysers of mortgage credit pumped up by securitsed debt and deposits from overseas investors.

The Rudd/Gillard years dealt with not only the global credit crunch and asset deflation in just about every other national economy, but the hangover from the Howard/Costello cash splash. Income tax rates had been cut too aggressively and mining boom mark I was over. The $20 billion surplus left from the last Costello budget was a nice gift for Labor, but not enough to fund the two stimulus splashes Rudd used to insulate Australia against global depression. Together they cost more than $50 billion. 

Both were announced within the single financial year of 2008/09, but Rudd/Gillard/Rudd presided over  six financial years and racked up a net federal debt of around $170 billion. So even pushing the stimulus money to one side, that leaves about $20 billion a year of spending beyond our means.

And that’s why a return to the sunny Howard years is a monstrous delusion, though there’s still hope of me driving Scarlett down Sunset Boulevard in a new 911.

We are moving into the final stage of the investment boom in mining and looking ahead to more modestly profitable volume-based years.

Abbott won’t cream the top off those mining returns, and Labor failed to take much through the MRRT due to its front-ended investment write-off provisions. He will have to look elsewhere in the economy for growth to boost federal tax revenue.

But where? Those leading indicators of house prices and share prices, if the economy was based on sound logic rather than emotional optimism, would be getting way ahead of two of their key determinants – wages and profits.

Indeed the last reporting season saw a record-breaking drop in profits (not good for company tax revenue), employment and hidden unemployment continue to rise (bad for income tax revenue) and even those in jobs should expect union claims for pay rises to make less progress in the next three years.

Unions had been celebrating Labor’s Workforce Compact, which put up to $1.5 billion of government money into the pockets of 350,000 low-paid workers, most working in the aged care sector.

Although that was a hit to the budget, it also was contingent on each recipient signing up to a union-negotiated enterprise bargaining agreement. More power to unions, in theory, leading to better wage outcomes for workers (and more Audis and Beemers for union leaders, presumably).

Not now. Under Abbott wage restraint will be the order of the day, but there will be equal restraint on ‘bracket creep’. That’s the silent, ongoing tax reform that says whenever the economy grows, more earners will be pushed into higher tax brackets – meaning more money for the federal government without it doing or saying anything.

Nor can Abbott expect a rebound in GST revenues. The tax, which was one of the landmark achievements of the Howard era, captured large slices of the equity-withdrawal frenzy of the mid to late 2000s.

But consumer confidence is stuck way too low, households are saving 10 per cent of their income, and even the house price ‘boom’ will provide little opportunity for equity withdrawls.

In the 2000s, households consumed at 30 or 40 per cent above their actual incomes because they were seeing equity materialise at unprecedented rates – in some suburbs houses bought for $150,000 could be revalued at $400,000 or $500,000 within the space of three or four years.

But the current generation of homeowners bought their houses for $400,000 or $500,000. The ‘boom’ simply means house price growth is a little ahead of GDP growth, but it’s not a differential that will reach the heights seen in the 2000s. And sensible young workers in a weak job market will want to pay down debt, not buy a new jet-ski.

Abbott rode to power with a furrowed brow, reassuring us about the stability he would offer and the slow, methodical pace of policy change. Good. That’s what we need.

But warnings from abroad suggest that elated voters, who craved any government but Labor, should be equally cautious.

In Alan Kohler’s video interview with Paul Schulte, CEO of Hong Kong-based SGI Research (The problem facing Australian banks, September 13), Schulte reminds us that five of the most expensive housing markets in the world are in Australia cities. He thinks our CPI measure of inflation, because it excludes the cost-of-living hit that comes from higher house prices, is not the right target for the RBA, and hence rates in Australia are far too low.

Another warning signal comes from the UK, where house prices have also taken off in a low-interest-rate environment. Bank of England governor Mark Carney has warned that his bank’s own loose monetary policy will require “vigilance” in realtion to house prices, and that the government may have to cap loan-to-valuation ratios to prevent a bubble.

Optimists – are there are plenty of them – currently see the rising paper-value of assets as being the boost consumer and business confidence needs to get non-mining parts of the economy moving again.

I hope they are right. But the slow, steady grind upwards of profits, wages, and consumption that will fuel real growth – rather than sunny illusion – could take two terms of government, not one.

In the meantime, Messrs Abbott and Hockey have a problem with the budget.  Hitting a surplus within the forward estimates period (as they’ve promised) looks devilishly difficult.

Perhaps they’ll do better with boats or carbon? 

Then again, perhaps Scarlett is, at this very moment, writing a cheque to go into my Porsche fund.

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