How Abbott's jobs plan jumps the gun

Tony Abbott's pledge to create one million jobs in five years doesn't add up without significant economic or industrial relations reforms.

Tony Abbott’s plan to create one million jobs in five years doesn’t stack up. Either he will have to do it by overheating the economy, which will push inflation and interest rates higher, or there is something yet to be revealed in his industrial relations reforms that will help him meet his ambitious target.

The reason for the doubts surrounding Abbott’s 'one million jobs in five years' pledge is a simple look at the Treasury economic forecasts and projections that have been included in the budget and last month’s Mid Year Economic and Fiscal Outlook.

Let’s look at the employment numbers first.

It is implicit in the Treasury forecasts that the level of employment is to rise to around 11,619,000 by the June quarter 2013. This is the starting point for Abbott’s pledge. It could be six months later, but that is of no consequence for the figuring outlined below.

The MYEFO then forecasts employment to grow by a healthy 1.25 per cent through the year to June 2014 and then 1.5 per cent per year thereafter. These employment projections, it must be emphasised, are consistent with the economy growing at trend. That is GDP growth of 3 per cent per annum, which in turn is consistent with inflation remaining in the middle of the Reserve Bank's target band of 2.5 per cent. This all means that the unemployment rate stays at 5 per cent, the level every economist around considers to be full employment.

In other words, the Treasury projections of employment growth are based on the economy running at full capacity, with a tight labour market and steady, well contained inflation. If GDP grows any faster to generate even stronger employment growth, inflation will by definition be higher than the mid-point of the Reserve Bank's target, which of course would mean higher interest rates.

Now for some simple maths.

Using forecast employment growth of 1.25 per cent for the year to June 2014 and projected growth of 1.5 per cent per annum thereafter, total employment will rise to 12,486,000 by June 2018, a full 1.1 per cent below the 1 million target set by Abbott. This is a large variance – some 133,000 fewer than the number of jobs Abbott promises.

If the Treasury forecasts and projections are right – and it needs to be emphasised that these will be the projections that any incoming Coalition government would get from Treasury – Abbott must pull something out of his hat to create an extra 133,000 jobs over and above the 867,000 already factored into the outlook.

Of course, there could be some economic reform Abbott has in mind for the economy or industrial relations that will help achieve those 133,000 additional jobs. Maybe there is. Otherwise he will have to implement some stimulatory policy settings to grow the economy at a more rapid pace. But if he has a plan to do that without generating inflation pressures, then he should put that policy in front of the electorate. At the moment, the cupboard is bare.

Stephen Koukoulas is an economist and financial market strategist who between October 2010 and July 2011, was economic policy advisor to Prime Minister Julia Gillard.