Their number's up: Figures provide little comfort for Labor
On Friday Labor continued to argue that a $10 billion hole existed in the Coalition's budget savings plan including a $2.4 billion shortfall on an estimated $5.2 billion saving from cutting 12,000 public sector jobs.
With Treasury, the Department of Finance and the Parliamentary Budget Office all out with statements making clear that advice given to the government at its request before the election did not amount to costings of Coalition policies and the Coalition privately circulating a PBO costing that backed up its own number work it was a lost cause, however.
Labor's decision to release the confidential advice it received from the departments betrayed growing desperation as the polls point to a comfortable Coalition victory.
The Coalition's decision not to release PBO costings of policies shadow Treasurer Joe Hockey said Wednesday would save $31.6 billion over four years gave it an opportunity, but it seems to have ignored a crucial timing issue.
The advice it sought was based on 12,000 job cuts, but it was sought and received before June 30 this year. It projected out four years, but stopped one year short of the four-year assessment that the Coalition sought from the PBO after June 30: the year that Labour's assessment missed generated savings of $2 billion.
As Treasury secretary Martin Parkinson and Finance Department secretary David Tune put it in their joint statement distancing their departments from the $10 billion hole claim, "different costing assumptions, such as the start date of a policy, take-up assumptions, indexation and the coverage that applies, will inevitably generate different financial outcomes." Deputy Prime Minister Anthony Albanese argued on Friday that was all that Treasury and the Department of Finance were saying - that different inputs produce different outcomes - but that of course was the problem: the time period for the calculation Labor sought was different, and as a result, Labor's $10 billion hole claim was wrong.
Next Tuesday the Reserve Bank's board meets. It has taken its cash rate down from 4.75 per cent to 2.5 per cent in less than two years and has cut it by a half a percentage point this year, including a quarter of a percentage point on August 7.
Another cut would be a double-edged political sword for Labor. The Coalition would argue that the Reserve was taking the cash rate down because Labor had mismanaged the economy. It argued that after the August cash rate cut, however, and ran into an obvious question: was it suggesting that a rate cut was bad news? A rate cut would, on balance, be a plus for Labor on election eve.
There is, however, next to no prospect of it happening next Tuesday.
Under the leadership of governor Glenn Stevens the Reserve underlined its independence in 2007 by raising its cash rate in the middle of the election campaign that resulted in a Rudd Labor victory. The vote this time occurs only five days after Tuesday's meeting, however, and the cut in August may have been pulled forward to avoid it.
The Reserve remains on an easing bias after the August cut, but the equation it is examining contains several moving parts. The national accounts are due the day after the Reserve meets, for one thing, and the fate of the Australian dollar is also crucial.
It has fallen about 15 per cent since mid-April, and the Reserve still believes it is too high. Its direction is, however, unlikely to be decided until the US Federal Reserve meets on September 18 to consider when to begin the withdrawal of its $US85 billion ($95 billion)-a-month "quantitative easing" liquidity injection into the US economy.
A retraction of QE will tighten money flows and set the $A up for further declines as US bond yields continued to rise and $A fixed interest assets became relatively less attractive.
Until the Fed confirms a QE easing timetable and Australia's June quarter economic report card is issued it is difficult for the Reserve to move, however, and the minutes of its August 7 meeting signal as much by reporting that the board decided to word its rate cut announcement to "neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further".
The national accounts on Wednesday offer Labor limited political upside, and some risk.
The consensus estimate of market economists is that the economy grew a subdued 0.6 per cent in the three months to June, and by 2.5 per cent in the year to June, about half a percentage point below the longer-term trend as the non-resources economy continues to resists a baton-change from the retreating mining and oil and gas invest-
ment boom.
Labor would be open to attack if the growth number disappoints, and it might. Retail sales that account for about a third of consumption for example have been weak. They fell 0.1 per cent in April, rose 0.2 per cent in May and were unchanged in June.
A growth result that hits expectations would still be growth that is sub-par. There is no political mileage in that for the government. Growth could surprise and beat the predictions, of course. But it would have get back up to the 3 per cent trend to be political game-changer, and that's unlikely.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
The article describes a dispute in which Labor claimed a $10 billion hole in the Coalition's budget savings plan, including a $2.4 billion shortfall on an estimated $5.2 billion saving from cutting 12,000 public sector jobs. Treasury, the Department of Finance and the Parliamentary Budget Office (PBO) all issued statements saying advice given to the government before the election did not amount to formal costings of Coalition policies, and the Coalition circulated a PBO costing that supported its own numbers.
Different inputs — such as the policy start date, take-up assumptions, indexation and coverage — can produce very different financial outcomes. The article notes a timing issue where advice about 12,000 job cuts was prepared before June 30 and projected out four years but stopped one year short of the four-year PBO assessment the Coalition sought, with that missing year accounting for about $2 billion in savings.
Budget claim disputes create political uncertainty that can affect market sentiment, fiscal policy expectations and investment decisions. For investors, clarity (or lack of it) about projected government savings, spending and job cuts matters because it influences forecasts for economic growth, interest-rate outlooks and potential changes to taxation or public-sector demand.
The Reserve Bank had been cutting the cash rate (from 4.75% to 2.5% in under two years) and remains on an easing bias, but the article says another cut was unlikely at the immediate meeting because of timing around the election and other moving parts. Investors should watch RBA decisions because changes in the cash rate influence borrowing costs, bond yields, bank margins and equity valuations.
A rate cut can be a double-edged political sword: the Coalition could argue cuts reflect economic mismanagement by Labor, while a cut close to election day is generally politically positive for the incumbent because it eases borrowing costs for households. For markets, rate cuts usually lower fixed-income returns and can boost risk assets, but the broader context — currency moves and growth data — also matters.
The national accounts (GDP) report was due the day after the RBA meeting and is a key input to the Bank's decision-making. Investors should also watch the Australian dollar's direction and international cues such as the US Federal Reserve's timetable on withdrawing quantitative easing, since these factors affect the RBA’s assessment and market reaction.
The article notes the Australian dollar had fallen about 15% since mid‑April. A retraction of US quantitative easing (QE) would tighten global money flows, push US bond yields higher and could put further downward pressure on the Australian dollar as US assets become relatively more attractive.
Consensus estimates in the article suggested subdued growth of about 0.6% in the June quarter and 2.5% year‑on‑year — roughly half a percentage point below the longer‑term trend. Retail sales, which account for about a third of consumption, had been weak (down 0.1% in April, up 0.2% in May and unchanged in June), indicating downside risk to growth and limited political upside for the government if figures disappoint.
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