How much growth will Joe Hockey's deficit focus knock out of the economy in the 2014-15 financial year?
According to AMP Capital's investment strategy head and chief economist, 0.3 per cent.
With the Reserve Bank predicting sub-trend economic growth of 2.75 per cent based on existing fiscal tightening, that would take the nation back to the rising unemployment and dull business conditions prior to the federal election.
If the twin forecasts by the RBA and AMP's Shane Oliver are correct, the danger is that wobbling business confidence will take a hit and the country won't get the investment it needs to offset the fall off in resources construction. That would put further pressure on the RBA to "do something" when the housing market is already running hot.
And this when the RBA's monetary policy statement on Friday observed that the contribution to growth by the government sector was already running at about half its long-term average.
Going too hard
Shane Oliver summed it up the budget threat nicely in his weekly economic update:
"Our concern is that the government has exaggerated the budget problem – it's a problem, but far from an emergency - and that this combined with the political cycle, which argues in favour of getting the budget pain over with early, will result in the government going too hard in terms of the fiscal austerity.
"The OECD has rightly warned Australia that 'heavy front loading of fiscal consolidation should be avoided'," Oliver says.
"Right now the economy is still a bit fragile with only tentative signs of improvement in the non-mining economy. But this could be snuffed out if the budget is too tough. The key is to put policies in place that bring long term spending growth under control, as opposed to adopting too much austerity in the short term. Hopefully this will be the case."
Some of the foreshadowed policies are aimed to bringing that longer-term spending growth under control – changing the indexing method for pensions and scrapping Family Tax Benefit B and tightening the Benefit A means test. But on what the government has so far leaked, there's still a sharp fiscal contraction for a domestic economy that is only just getting back to trend and for which with the full impact of the resources construction fall remains unknown.
The all-important confidence question hasn't been helped by Treasurer Hockey persistently talking the economy down, focusing on deficit gloom and doom and nearly ignoring the welcome growth surge we have experienced over the first three quarters of the current financial year.
That better growth has long since meant the government's December MYEFO (mid-year year economic and fiscal outlook) figures have been outdated, something Hockey has persistently refused to acknowledge.
Aside from the improved growth since December, Shane Oliver expects tomorrow night's effort to show a steeper decline in the budget deficit than currently projected in December's MYEFO.
He predicts a return to surplus by 2019-20 on the back of spending cuts and tax hikes, along with slightly more optimistic growth assumptions. (That would allow the Coalition to promise a surplus in its next term of government.)
"The budget deficit for 2014-15 is likely to be cut to $26 billion (from $34 billion in MYEFO) and that for 2015-16 to $18 billion (from $24 billion in MYEFO)," says Oliver. "Additional fiscal tightening in the budget is likely to be 0.3 per of GDP for 2014-15 building to 0.8 per cent of GDP by 2017-18.
"The main budget savings are likely to be a phased cut in the income threshold for family benefits from $150,000 to $100,000; tougher means testing for the pension; co-payments for GP visits; a further shrinkage of the public sector; the resumption of fuel excise indexation; a temporary 2 per cent increase in the top marginal tax rate which kicks in at $180,000; moves to increase the cost of higher education; a further increase in the pension age to 70 by 2035; and a possible delay in the start-up of the National Disability Insurance Scheme."
Adding to that fiscal impact would be the reported axing of 16,000 public service jobs when the previous government was already shrinking the public service through its imposed "productivity dividends".
Meanwhile the only "growth" promise in the budget is more road building. What won't be known until the details are released is how much of the $40 billion federal road spend over six years is new money and now much is a rehash of existing programs. For example, there seems to be no limit to the number of times Sydney's Westconnex project can be announced without a jack hammer being lifted or any concrete poured – construction won't actually start until next year.
The government's deficit attention order leads one to suspect the promised building stimulus won't start to flow until the extra cash from the increased fuel levy has been banked – and that will take time to build up through CPI indexation.
It therefore promises to be a particularly strange budget, promising growth while cutting it back in the name of dealing with an immediate crisis that doesn't exist.
Meanwhile, more important medium-term reforms for the longer-term problems are off-limits due to dubious "promises" made during the win-at-any-cost election campaign.
At least those who like word games may be amused – how many alternatives to the word "tax" might be found in one budget speech? Levy, co-payment, excise...anyone for a tithe?
Michael Pascoe is a BusinessDay contributing editor.