The growth target set out by Treasurer Joe Hockey and the G20 nations is a victory for symbolic gestures over practical action. With no action plan and no punishment for missing targets, this is an agreement that may galvanise G20 participants initially but has few long-term implications.
In his concluding remarks at the G20 Meeting of Finance Ministers and Central Bank Governors, Treasurer Joe Hockey announced that countries in the G20 will aim to increase global real GDP by an additional 2 per cent, or around $US2 trillion, over the next five years.
Pushing for more growth and job creation is an admirable aspiration. Many countries in the G20 are still recovering from the global financial crisis; some countries in the eurozone face the prospect of more than a lost decade of economic growth. Growth and jobs have unfortunately been ignored by the G20 in recent years, with the focus on austerity driving the global agenda.
Hockey’s comments are a clear indication that the G20 has moved on from the infighting and disagreement that plagued the St Petersburg meeting last year that focused on austerity. The existence of a growth target is a sign that countries recognise the need to work together to achieve economic growth and development.
But while greater growth and a faster recovery is desirable, a growth target itself seems naïve and impractical. It makes for good sound bites but it is the least worthy agreement arising from the G20 meetings.
Here is the problem: there is no central bank in the world that can forecast effectively. There is no Treasury department or investment bank that can do so either. Our own Reserve Bank of Australia cannot forecast growth with anything resembling accuracy – it admits as much itself.
The Federal Reserve severely underestimated the effects of the global financial crisis and frequently overstated the strength of the recovery. The Bank of England has recently looked foolish, setting an unemployment target as part of its new forward guidance doctrine that will be reached two years ahead of the BoE’s expectations. Multiple columns could be dedicated to the European Central Bank’s failures.
So if central bank forecasts are nonsense – and they are – how exactly do you measure the success of the G20 growth target? If we cannot forecast growth for the immediate year ahead what use are forecasts for 2018? How exactly would you determine that growth is a cumulative 2 percentage points higher?
The unfortunately reality is that we cannot measure the success of the growth target – instead we can simultaneously succeed or fail to meet our objectives depending on what counterfactual the authorities use as an assumption. The growth target is therefore nonsense.
The more practical concern for Australia is, how do we boost economic growth anyway? The government has recognised the importance of infrastructure investment and labour market participation but what about government spending? How can the government promote a growth target on one hand while simultaneously reducing growth via austerity on the other?
With an ageing population, austerity measures and mining investment set to deteriorate, it appears unlikely that the Australian economy will achieve above trend growth in the medium-term. A widespread reform agenda would prove beneficial but most reform is a slow burn that has long-term implications but typically only a minor immediate effect on the economy.
Does this mean that the heavy lifting would be done by the Reserve Bank? Should it immediately drop the cash rate to zero per cent and get the ball rolling? Perhaps not.
Australia is not the only country that might struggle to generate stronger growth. History suggests that the eurozone will find it difficult to work together to generate growth – particularly if it comes at the expense of Germany. China appears likely to slow and emerging economies may very well be facing a new and daunting crisis.
Ultimately I applaud the Australian government for focusing on growth and jobs at the G20 meetings over the weekend. Increasing infrastructure investment, boosting productivity and labour market participation and reforming the global tax system are all worthy aspirations. They are all important factors in generating domestic and global growth.
But a growth target is a mostly symbolic gesture that has little practical merit. It makes for a good sound bite and makes G20 members appear serious about growth but it means little in practice.