Weakening growth puts pressure on future prospects
So just how tough will the next budget have to be?
Not as bad as you think, even though in just a few months the deficit has blown out 65 per cent almost entirely due to the weakening economy, which, while we're on the subject, Treasury didn't see coming.
Never mind that for six months the economy has been as close to a recession as you can get without being in one; GDP per head is growing at an annualised rate of less than 0.5 per cent.
But get this. One reason the economy is on the skids has been the hit from the contracting budget deficit, as shown by the fact that in the past financial year, it dragged down growth by 1.5 per cent.
Imagine what more deficit slashing, which both sides are committed to, or say they are, will do to growth.
Every economist knows the folly of aggravating an already softening economy by squeezing it fiscally.
That's why the government should have been running surpluses until now. Instead, it was reluctant to rein in the GFC stimulus once it was clear it was no longer needed, which was a year or so on.
Its only concession to the subsequent China-driven resources boom was a botched mining tax.
The legacy is an empty ammunition room when more fiscal firing power would have come in handy.
Needless to say, a budget perceived to be out of control, even with weeks of election pork barrelling to go, is a confidence killer.
Mind you, with low economic growth continuing to be a prospect, hanging on to a job could be a bigger worry than what might be in the next budget.
At least the Reserve Bank is on the case, though rate cuts are proving to be agonisingly slow in achieving anything other than higher property prices.
Don't get me wrong, it's not all bad.
Easy money and the weak dollar will do wonders for the sharemarket, which couldn't ask for more. Then again, it probably will.
It will, of course, be looking for higher profits. Well, it'll just have to be disappointed there.
And it'll take more than ultra-low interest rates to push property prices on the up and up when weaker economic growth must threaten jobs.
Anyway, it's the states you need fear most. They face the mother of revenue crunches as unemployment rises just as they're being railroaded into lifting their spending - more what you might call a quid pro quid - for the government's Gonski education spendathon, which has suddenly become bipartisan policy. That can only mean higher council, hospital and transport charges as well as job cuts.
Higher health insurance premiums will also get government approval since they are a given in our ageing society.
Then there are power prices. No respite here, even without a carbon tax, I'm afraid.
If Labor wins, there's no guarantee the European-determined carbon price really will be $6 a tonne next year since it's likely to be pushed up as power companies bulk-buy pollution permits as the easy way out, and the dollar drops against the euro.
True, the Coalition will abolish the emissions trading scheme. But the far bigger impact on electricity prices than on carbon has been the 2020 renewable-energy target.
Trouble is, both sides swear by it.
Twitter @moneypotts
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Frequently Asked Questions about this Article…
The article says the budget deficit has blown out by about 65% in just a few months, largely because the economy weakened unexpectedly. Treasury didn’t anticipate the slowdown, which left fiscal positions much worse than expected.
Growth is very soft — GDP per head is growing at an annualised rate of less than 0.5%, and the economy has been close to a recession for months. For investors this means higher uncertainty: weaker growth can threaten jobs, limit corporate profit growth and make some asset classes more volatile.
Yes — the piece warns that squeezing an already soft economy with tighter fiscal policy is risky. The article notes that a contracting budget deficit previously dragged growth down by about 1.5% in the last financial year, and aggressive deficit slashing now could further undermine growth and investor confidence.
Rate cuts are happening but their stimulatory effect is slow. According to the article, the Reserve Bank’s easing has so far mainly supported higher property prices rather than delivering a broad economic lift.
Easy monetary policy and a weak dollar are supportive for the sharemarket and could lift asset prices, but the article cautions that companies will still need higher profits to justify gains — and weaker economic growth may make those profit gains hard to deliver.
Low rates help demand, but the article points out that when growth is weak and jobs are under threat, that limits the upside for property. Sustained property gains typically need stronger economic growth and job security, not just ultra-low interest rates.
States face a major revenue crunch as unemployment rises while being pushed to lift spending on policies like the bipartisan Gonski education program. The result, according to the article, could be higher council, hospital and transport charges, job cuts at the state level and upward pressure on household costs — all factors that can weigh on local economic activity and investment sentiment.
The article warns there’s likely no respite in power prices even without a carbon tax. If Labor wins, a European-influenced carbon price could end up higher than expected if power companies bulk-buy permits and the dollar falls versus the euro. The Coalition would abolish the emissions trading scheme, but both major parties back the 2020 renewable‑energy target, which the article says has an even bigger impact on electricity prices.
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