While not giving an explicit commitment to reaching a budget surplus, Treasurer Scott Morrison nonetheless penciled one in for 2021-22 in Monday’s mid-year budget update.
That will be reassuring to many voters, because ‘debt and deficit’ has become a national obsession in recent years – though one divorced from economic reality.
Yet continuing to feed this political monster is one of the surest ways to scupper Australia’s transition from mining boom to whatever is supposed to come next.
The national credit card
That will strike many people as counter-intuitive. Isn’t the economy like a household, and national debt like its credit card?
Actually no. Not at all. Not even a little bit.
One of the best debunkers of that myth is Bill Mitchell, economics professor at the University of Newcastle, who told me last week that “conservatively speaking, we should be running deficits at least double the current figures”.
Whether or not one accepts Mr Mitchell’s “double” call, he is right to point out that this government’s strategy is based more on ideology that economics.
The mid-year economic and fiscal outlook (MYEFO) statement lists four pillars to that strategy:
— redirecting government spending to quality investment to boost productivity and workforce participation
— controlling expenditure to reduce the government’s share of the economy over time in order to free up resources for private investment to drive jobs and economic growth
— supporting revenue growth by supporting policies that drive earnings and economic growth
— and strengthening the government’s balance sheet by improving net financial worth over time.
So let’s look at those in the current Australian context.
The Australian economy has oodles of spare productive capacity right now –especially the 18 per cent or so of the workforce who either have no job, or want more hours of work.
The government’s first objective then, is half good and half bad. The good bit is spending on infrastructure that will indeed “boost productivity”.
However, the bad bit is the “redirecting” – code for grinding welfare recipients into poverty to incentivise their “workforce participation”.
With the investment phase of the mining boom winding down, the auto industry closing and the apartment construction boom ending, for around two million unemployed or underemployed the job market is just getting tighter.
In that context ‘incentives’ aren’t much help.
Another persistent myth is that government spending has to be cut as low as possible so as not to ‘crowd out’ private investment and job creation.
That may hold true in boom times, but it’s just wrong in an economy full of spare capacity, where business is investment-shy, and in which inflation is sagging ever closer to zero.
And yet the MYEFO papers note: “Government payments as a share of GDP have declined since the 2016 PEFO from 25.8 per cent of GDP to 25.2 per cent of GDP in 2016-17 and remain at that level over the forward estimates.”
Growth from nowhere
The third pillar of the government’s plan is pure pie-in-the sky. While it’s cutting back public spending, the private sector is expected to jump in and pick up the slack.
And yet this week’s figures show this is not happening. Employment growth was revised down again from 1.75 per cent to 1.25 per cent, which is below even the population growth rate of 1.4 per cent.
The government’s optimism is based on ‘Laffer curve’ economics, which says that if you cut taxes, the economy will grow so much that the government will reap even greater volumes of revenue.
That’s why the Turnbull government plans to give $50 billion in tax cuts to businesses over a decade – a plan that has a snowflake’s chance in hell of working in the current global and domestic economic environment.
Debt and deficit revisited
Finally, the last pillar is just a restating of the old ‘debt and deficit’ mantra.
Federal net debt is approaching 19 per cent of GDP, which is very low by world standards.
With such a long string of budgets, and budget updates, showing downward revisions in GDP growth, jobs growth, inflation and so on, the government should be using debt wisely to breath some life into the economy.
That should, in theory, go hand in hand with more tax reform. But important debates around the GST or negative gearing reform have been shut down by the Turnbull government.
So borrow it must.
Time to reboot
The economic orthodoxies still being pushed in the MYEFO papers make even less sense in light of the promised infrastructure stimulus plans of President-elect Donald Trump.
On present settings, Mr Morrison will most likely face a worse economic and fiscal outlook in next May’s budget. The plan for ‘jobs and growth’ and a surplus of 2021/22 will look increasingly flimsy.
And this unpopular government will be left trying to explain why it can’t stimulate the economy, when voters of all stripes here and abroad start to put their jobs and household budgets ahead of promises of trickle-down prosperity.