Gear up, Hockey – it's time to get on the roads

Many sectors of the economy are teetering on the edge of deflation, although you'd never know it from the Coalition's bluster. But 15 years of inadequate infrastructure spending might change Hockey's tune.

The release of the TD Securities/Melbourne Institute monthly inflation gauge yesterday was a reminder of what an extraordinary era of political spin Australia is experiencing. 

The figures continue to show an economy resisting expansionary monetary settings and most likely in need of further stimulatory spending – particularly on the infrastructure front.

Both headline and underlying inflation were at 2.1 per cent for the year to September. While that’s in the Reserve Bank's target band of 2 per cent to 3 per cent, in a choppy global context it would be comforting to see it closer to (or above) the top of that band. The looming US government shutdown and the inevitable tapering of Fed asset purchases aren't going to help confidence much (Shutdown: be afraid, but not very afraid, October 1).

Surprisingly, despite the Australian dollar tumbling from $US1.05 in March to around 93 US cents today, tradable sector inflation is still not showing 'pass through' of the increased cost of buying goods from abroad.

That means retailers in sectors such as electrical goods are absorbing the added costs. As TD Securities’ head of Asia-Pacific research Annette Beacher put it: there is still “no appetite for price rises” in the shops, with domestic inflation mostly coming from less visible sources such as healthcare, education and utilities.

And yet in the political world, you’d never guess we were teetering on the edge of deflation in many sectors of the economy. In Canberra, bragging rights to a clean set of books are more important.

The rhetoric of the Coalition (both before and after the election) was based largely around the notion that we’ve spent enough, need to make large cuts to balance the budget (well yes, but only if you have a mandate not to touch the haemorrhaging tax system), and don’t dare borrow more lest we end up like Greece.

It is a thunderous, roaring waterfall of spin.

The "worst government ever" – as the Coalition was fond of calling Labor in power – allowed the budget to balloon to 26.1 per cent of GDP in 2009-10 when we were wetting our pants over GFC fallout, then brought it in to 25.2 in 2011-12 and 24.3 in 2012-13.

That is a shift back to the fiscal conservatism of the last years of the Howard era.

Moreover, as that figure contains around $20 billion in ‘money-go-round’ family payments, the actual government spend – excluding recycled tax revenue in family tax benefit, baby and school bonuses and so on – is a bit more than 1 per cent of GDP lower still (Both sides ignore our $20 billion con, August 6).

This presents a huge problem for Treasurer Joe Hockey as he looks for fat to trim – a lot of the real fat is in the state budgets, with Western Australia last month downgraded to a AA credit rating, and Victoria in danger of following suit. (The other states lost their AAA ratings much earlier.)

So Hockey wants to tighten a federal budget that is already tight by world standards, because all sides of politics currently agree that fixing the tax system is too hard – the Coalition won't present new policies until closer to the next election following a root-and-branch review. 

But the Treasurer faces another, bigger problem – 15 years of inadequate infrastructure spending at the federal level. Labor made good gains in this area (Abbott's do or die infrastructure play, April 12but more needs to be done. To get the economy moving again, we need better roads, rail, port and a solid fibre-based national broadband network – with or without a copper last mile.

All up, that will require several percentage points of GDP to be added to federal gross debt. But having created such a stink over ‘debt and deficit’ before the election, the rather weak proposition by Hockey is that issuing infrastructure bonds doesn’t count as ‘debt’.

TD Securities’ Beacher told me yesterday that there is “no clear-thinking economist who doesn’t agree” with Saul Eslake’s suggestion that net debt, which is currently around 11 per cent, be allowed to swell to 13 to 15 per cent of GDP to start plugging the infrastructure gap. Beacher says that would pose “no threat whatsoever” to the cheap financing rates the government enjoys through its AAA credit rating.

That’s exactly what Hockey wants to do, but we’re just not allowed to call it ‘debt’.

So here’s my call to all “clear-thinking” commentators. In the interests of Australian productivity growth, could we please just let Joe to call the first $100 billion of bonds to finance sound infrastructure projects ‘Clayton’s Certificates’ – the ‘debt you have when you don’t want to borrow’.

The inflation gauge figures should be a wake-up call. Low rates alone are failing to ease the fear in the community caused by, among other things, the overblown 'budget crisis' talk of the Coalition before the election. Consequently, businesses that wish to invest, create jobs, and sell things to those terrified consumers are too scared to move.

Hockey’s challenge is to start talking things up, not down, and perhaps to add ‘Clayton’s Certificates’ to the financial vernacular. If the Coalition can turn the 'debt and deficit' narrative around in this way – a mighty political task – we'll all win.

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