On the face of it, the MYEFO is a fairly harmless document. At a basic level it simply delays the job of budget repair by a year or two.
Back in May, the government forecast a modest surplus of 0.1 per cent by 2017-18 (on a fiscal basis). This is now expected to be a deficit of 0.3 per cent -- a surplus is now expected around 2019-20.
Either way, not a big deal. It simply reflects weaker commodity prices and an obstructionist Senate. Even so, the overall effect from those two influences on revenues is small -- about $7 billion off the total by the time 2017-18 rolls around (about 1-1.5 per cent of revenues or expenditures).
This is about what you’d expect. As the government correctly notes, “the Australian economy continues to grow solidly”. It does. Indeed, the best characterisation is that the economy is growing at a trend to above-trend rate, with low unemployment and solid employment growth.
The terms of trade itself are nowhere near as important to the economy as popular mythology makes out. Which is why revenues only fall about $7bn over the forecast horizon despite sharp commodity price falls. About 90 per cent of the economy and 98 per cent of jobs lay outside the mining sector, with export volumes of commodities set to surge in any case.
Moreover, the commodity price slump actually represents a huge stimulus for an already accelerating global and domestic economy.The government, for its part, hasn’t changed any of its forecasts since the budget: 3 growth in 2015-16 expanding to 3.5 per cent over the following two years. So far so good, and no reasonable person could describe that as an overly optimistic scenario.
The bigger picture issue remains: how the government proposes to restrain spending to 3.5 per cent of GDP over the next four years when efforts to date have failed. Spending has instead increased at an average annual pace of 5 per cent.
Already the government is looking at a 2.22 per cent spending overshoot next year versus expectations for a 0.1 per cent fall. In the more likely scenario that spending growth is around 4-5 per cent, then the projected deficit expands from $39bn to $46bn next year -- nearly 3 per cent of GDP. By 2017-18 the expected deficit of 0.3 per centis more like 1.6-2 per cent -- and that assumes benign global and economic outcomes.
The rhetoric to date has not been positive. The government has already shown a willingness to restrain spending when under pressure. Indeed the Treasurer has noted repeatedly that the economy couldn’t handle spending cuts. That’s worrying; it’s the same attitude that saw the previous Labor government fail to fix the budget. It’s the kind of attitude that eventually turns small budget deficits and low government debt, into a large budget deficits and a sizeable public debt burden.
That the economy has been growing at a sold trend pace since the 2009 makes it worse. There is no reason why the budget is not in surplus now; achieving it would not have cost the economy much in the way of growth or jobs. It is now five years since the GFC and still, the nation is no closer to a healthy budget position than we were in the aftermath of that great disaster.
If this government wishes to avoid the failures of the Rudd-Gillard years, they must present a clear and actionable plan now. Monetary policy is spent. It is crucial that a fiscal buffer is built up over time to deal with any future downturn when that should eventually happen, and the problems posed by an ageing population.
When the Howard government began the job of fiscal repair in the mid-1990s, Australia had an unemployment rate around 8.5 per cent, which peaked at 8.7 per cent. Jobs growth was weaker than what we see now, and the cash rate was 2-3 times higher. The difference was that policymakers had the gumption to get in and do what had to be done. This generation is just too weak and fearful. Consequently, more effort is put into communications or PR to give the impression of action when none has been taken.
One of the key lessons of the GFC was that seemingly harmless and modest deficits can suddenly morph into unsustainably large deficits, adding rapidly to the national debt. It is in this way that political weakness now jeopardises what is currently a very healthy fiscal position.