Australia’s mini fiscal cliff seems obvious to everyone except the federal Treasurer and his shadow, both pointing everywhere else as they wrestle each other over the edge.
It’s printed plainly in today’s national accounts: the 0.5 per cent private sector investment contribution to gross domestic product neatly cancelled out by the minus 0.5 per cent contribution from government sector investment, leaving it to inventories and household consumption (0.3 and 0.2 per cent respectively) to provide the 0.5 per cent bottom line lift for the September quarter.
And Wayne Swan and Joe Hockey both promise further tightening of fiscal policy. With Hockeynomics, it could be a dramatic further tightening, unless there’s dramatic further spending as well – it’s hard to tell from the opposition’s promises to spend more and spend less and tax less, except when taxing more.
Bernie Fraser thinks the government’s pursuit of an immediate surplus is stupid, but it seems to be the only federal bipartisan goal.
With the government wedded to a sharp fiscal tightening, the Reserve Bank is playing catch-up in its attempts to stimulate the economy.
The policy choice to pursue sub-trend growth of a little below 3 per cent is far from hardship. It just means a more difficult economic environment than we had been used to with growth around trend.
If the world is kind and the incentive of cheap money to spend and invest takes hold, it will eventually work out, but the hypocrisy of simultaneously wanting the government to do more and less will have to be left behind.
Beyond the political noise, the Treasury has been sending the clear message that there are bigger and unavoidable demographic challenges fast approaching that will make the present tiff over a nominal surplus look easy indeed. Looks like we’ll just have to get used to the cliff face.
Michael Pascoe is a BusinessDay contributing editor