Hockey’s green light for fiscal austerity

IMF forecasts will be read in some quarters as a carte blanche to slash the budget. But they also warn gravely on the risks this would involve.

There are two political bombshells in the latest International Monetary Fund World Economic Outlook forecasts – one that lends support to the Abbott government’s plans, and one that points to their potential fragility.

The first is a dramatic revision of the Fund’s view of Britain’s much-criticised austerity program.

UK Chancellor of the Exchequer George Osborne became the whipping boy for Keynesians everywhere in the past year for forging ahead with harsh budget cuts when the British economy looked to be on the edge of a precipice.

But now Osborne is wearing a smirk of success, with the IMF revising its growth forecast for Old Blighty next year from April’s 0.7 per cent forecast to 1.4 per cent now.

The man who previously singled out Osborne for “playing with fire” with his ambitious cuts, IMF chief economist Olivier Blanchard, isn’t exactly conceding defeat. He is right to point out that we don’t know what growth would have been without the cuts.

Blanchard told reporters at the Fund’s annual meeting in Washington: "It doesn't settle any of the debates. It doesn't tell us whether growth would have come back earlier with a different fiscal framework. When we see risks, we warn. And if the risks are avoided, all the better."

Nonetheless, this figure will be seized by fiscal conservatives everywhere – not least by Treasurer Joe Hockey, who so far looks much more conservative than his profligate boss Tony – as evidence that cutting when an economy is fragile is okay.

So put on the apron Joe. Sharpen that knife. Let’s remove some fat from that bloated heifer, the budget. You won’t kill it, honest.

But wait a minute – the IMF has more.

For one thing, it is still urging Osborne to spend more. It thinks borrowing up to £10 billion to spend on infrastructure, and to fund business tax cuts, will get things moving as well as providing long-term productivity gains.

Joe Hockey would love to do the same, but having made ‘debt’ the ultimate bogey-man while in opposition, in government he is trying to find a way to use the government’s AAA rating to underwrite private money to fund infrastructure spending. This was one topic of discussion with major credit ratings agencies in New York this week at part of Hockey’s first globe-trotting trip as Treasurer.

In essence, then, the IMF has not given a clear green-light to the Abbott-Hockey fiscal austerity program.

Moreover, the forecasts contain a further nasty for the government – a cutting of the Fund’s growth estimate for China next year from 7.7 per cent to 7.3 per cent.

There is potential for that to hit commodity prices, and thus federal and state corporate-tax and royalty receipts respectively.  

But that won’t be calamitous. What would be far worse is if China’s growth tumbles to around 6 per cent due to the actions of the bone-headed Tea Party extremists currently holding Congress to ransom in the US.

If the current impasse on the US government shutdown is not ended, or worse, if the debt ceiling is not lifted and the US begins to default on its trillions of dollars in debt, world markets will experience seismic shocks that will hit China’s exports, and thus ours as well. Indeed the Fund notes that Australia is more geared to fluctuations in Chinese growth than any economy other than Mongolia.

In that kind of catclysm all semblance of fiscal conservatism will be thrown to the wind as governments try to manage economic chaos. We've all done that once, after the Lehman Bros meltdown, and there is little chance it would work again.

So overall, the lMF figures can be read three ways.

One – Osborne was right, so Australia should follow his lead and slash away.

Two – There’s no way of knowing whether or not Osborne was right, so let’s ignore Britain’s experience and just do what we were going to do anyway.

Three – Austerity is probably not as dangerous as first thought, but given our huge vulnerabilty to China-shocks, it would be prudent not to test that theory too heavily.

It’s that third reading that should inform Hockey’s actions as Treasurer. Or he could just do what John Howard did – claim austerity is the way forward, and then spend, spend, spend. 

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