No surprise the headline reports of the Reserve Bank deputy governor’s Tuesday speech concentrated on the chance of another interest rate trimming, but they missed the most important part.
Fortunately – hopefully – it seems Treasurer Josh Frydenberg did hear what Guy Debelle was saying. To paraphrase Dr Debelle’s key message:
“That stuff about this debt being ‘a burden on future generations’ is BS. Borrowing big now will mean less debt later and the debt will be easier to manage.
“So pin your ears back, Joshy, and get spending.”
The chance of the RBA finding a nail file to smooth a final 15 points off its cash rate excited markets and headline writers, but the welfare of the nation depends much more on the government understanding that massive borrowing to finance intelligent spending now will end up saving us money down the road.
The RBA has told the government before that it doesn’t have a problem running up debt, but Dr Debelle’s speech contained the corollary: Not borrowing big, not grabbing a bold and expansive vision, will cost us dearly later.
Here’s what the deputy governor actually said:
“The increase in debt is definitely manageable. Moreover, there is not, in my judgement, a trade-off between debt and supporting the Australian economy in the current circumstance.
“Absent the fiscal stimulus, the economy would be significantly weaker and debt levels even higher.
“This is particularly so with interest rates at their historically low levels, where the growth benefit from the fiscal stimulus will improve the debt dynamics and help service the debt in the future.”
He went further in response to a subsequent question about “the long-term impact of the debt burden on the economy over the next coming decades”:
“I think we’ve got to be careful how we think about the debt situation, on the public side in particular, in the sense that the counterfactual doesn’t obviously lead to lower debt.
“So if there was less fiscal support, the economy would be in worse shape and, potentially, debt levels would be even higher.”
And there was a nice slap at those who like to look serious and chant about burdening future generations, the line about the young being punished:
“The other point to note is, with debt servicing costs as low as they are, and considerably lower than any plausible path for nominal GDP from here, that makes the debt eminently serviceable.
“So I don’t see it so much as – it’s not a burden that we’re leaving to future generations.
“Absent the stimulus that’s been put in place now, those future generations would be inheriting an economy which would be a hell of a lot worse than it would be without that stimulus.”
Two days later, there were signs Josh Frydenberg might understand.
In his Thursday speech, the Treasurer stayed away from the ‘burden for future generations’ stuff, instead indicating the government will keep borrowing and stimulating until the unemployment rate is “comfortably back under six per cent”.
That is some years away, at least beyond the years to be forecast in the October 6 budget.
“Only through repairing the economy can we repair the Budget,” Mr Frydenberg said.
If leopards can change their spots, it doesn’t happen overnight. So there were inevitably some risible aspects to the Treasurer’s speech – he couldn’t help continuing to carry on about a once-upon-a-time budget “in balance”, or pointing to 2019-20 MYEFO forecasts as if they were credible when they were overly optimistic before COVID hit.
But there were sobering home truths once the usual ideological palaver was out of the way. Better Treasury briefings are getting through.
Mr Frydenberg acknowledged that key three Ps of our economic growth – population, participation and productivity – had all caught a bad dose of the ’rona.
The most stunning preview of budget bad news was on the population front.
Back in July, the government thought net overseas migration would plunge from 154,000 in 2019-20 to about 31,000 this financial year. It’s going to be much worse than that.
“The Budget is expected” – well, the Treasurer should know – “to reveal a substantial decline in net overseas migration, compared with the figures in the July update, with net migration outflows now likely in both 2020-21 and 2021-22,” Mr Frydenberg said. And the emphatic italics are his.
“While migration will eventually return to the levels we are accustomed to, lost migrants will not be replaced.
“And given our migrant workers tend, on average, to be younger, this will lower labour force participation and average hours worked across the economy into the future.”
The negative migration impact comes on top of the forecast that our fertility rate is dropping to its lowest level since World War 1.
The most popular word in economics at present is “scarring”. Our economy will carry the ’rona recession’s scars for many years.
The loss of jobs and employment prospects mean fewer people will be participating in the workforce because of unemployment, underemployment and discouraged job seekers.
“With high levels of spare capacity in the economy, it will be some time before inflation returns to the mid-point of the Reserve Bank’s target range,” said Mr Frydenberg with considerable understatement.
“And wages growth is also likely to remain subdued for at least the next few years, until the jobs market tightens.”
You don’t say! Wages growth has been “subdued” for the past half dozen years – our biggest domestic economic problem, one the government had not faced up to. That already “subdued” growth is now to be poleaxed.
Consumers without wage rises and with employment uncertainty are cautious about spending, meaning lower profits for companies that are themselves scarred and uncertain, meaning companies have spare capacity and are less likely to invest, meaning lower productivity.
So it looks like the money will indeed flow on October 6. There remains the question, though, of how wisely it will be spent, how much stubborn neoliberal ideology overshadows the most effective investments.
Tax cuts for the relatively well-off as our progressive tax system is flattened or investment in our future? Handouts for a few developers or employment-rich extra social housing?
Mr Frydenberg’s speech remained rich with conservative dogma for the base, still sticking with the nonsense “magic number” of 23.9 for the ratio of tax to GDP, still promising to maintain “our emphasis on fiscal discipline, lower taxes, containing the size of government and investing in a strong economy”, still refusing to see that tax revenue used for public investment can be a particularly fine thing when private investment is weak.
But with the Three Ps in such deep trouble, the government has no choice but to try to stimulate the economy, both for Australia’s sake and the Coalition’s.
Recessions have a habit of changing governments. The last three all played major roles in dispatching prime ministers Whitlam, Fraser and Keating (whose political demise was delayed for three years by John Hewson’s GST birthday cake).
It will be a very interesting budget.