JavaScript disabled. Please enable JavaScript to use My News, My Clippings, My Comments and user settings.

If you have trouble accessing our login form below, you can go to our login page.

If you have trouble accessing our login form below, you can go to our login page.

A weakened economy is another budget casualty

Date

Peter Sheehan

Low consumer confidence will wipe out any chance of reducing the budget deficit.

The elephant in the 2014-15 budget room is not Clive Palmer but the economy, which has been barely mentioned in dispatches.

Australia faces many economic challenges after the resources boom. Resources investment is falling sharply, major closures are occurring in manufacturing and many trade-exposed companies face severe pressures from a stubbornly high Australian dollar. Employment growth has been sluggish for some time, with hours worked rising by only about 1 per cent per year for the last five years.

A scenario based on consumption-led growth has been derailed by the nature of the budget and by the fierce public reaction to it. 

In the budget papers the Treasury forecasts below-trend growth of GDP of 2.5 per cent in 2014-15, with rising unemployment. Much of this growth comes from mining production and exports, which generate very little employment. The implied rate of growth in the critical measure, non-mining GDP, is 1.5-2 per cent.

Treasury’s key premise is that household spending will increase quite strongly, from 2.0 per cent growth in 2012-13 to 3.0 per cent in 2014-15, in spite of sluggish household income growth. This is because it expects the savings ratio to fall, reflecting low interest rates and improving consumer confidence. Treasury also expects dwelling investment to grow strongly and that non-resources investment will start to rise from 2015-16.

Until recently this had been a plausible scenario. Both consumer and business sentiment improved after a further cut in interest rates in August 2013 and the election of the Abbott government in September. The economy followed suit, with housing, retail sales and employment all picking up somewhat. Nor is there anything in the overall financial impact of the budget to derail this scenario. The net effect of policy measures in the 2014-15 budget is $2.1 billion, or only 0.1 per cent of GDP.

Nevertheless, a scenario based on consumption-led growth has been derailed by the nature of the budget and by the fierce public reaction to it. This reaction has been evident across many forms of media, but most clearly in recent polls. In the latest Nielsen poll 74 per cent thought the budget left them worse off, while only 8 per cent thought they would be better off. In the latest Newspoll the figures are 69 per cent and 5 per cent respectively. One has to go back to 1992-93, in the depth of severe recession, to find a budget deemed more adverse to household finances.

It is much more likely now that consumer spending will slow as sentiment falls, compounding rather than off-setting the impact of falling resources investment and manufacturing closures. If the economy does slow further this will not only hurt many individuals and families but also eliminate the government’s prospects of reducing the budget deficit.

How did we come to this parlous situation, and what can be done about it?

Apart from the unfairness of many of the measures, the main problem is confusion about what specific problem the government is addressing. 

The government is clear that we face a national crisis in terms of deficits and debt, and that budget repair must take priority. But what is the nature of this crisis? Is it an immediate problem, requiring urgent action to achieve a surplus within two or three years? Or is it a longer term problem over a decade or more, because our fiscal path is unsustainable? Or must we reshape Australia into a society more driven by price signals and individual self-reliance, and hence with a smaller role for government? The government may well say all three, but that just illustrates the lack of focus.

Because its objectives are not tightly specified, the government finds itself fighting on many fronts and many time-frames. Some measures, such as the tax levy and fuel indexation, take immediate effect. Others stretch out to and beyond the next election. The big changes foreshadowed in payments to the states for health and education take effect in 2017-18, but a pension age of 70 years doesn’t cut in until 2035.

One might well argue that getting the budget into surplus in 3-4 years is a good way to address the long term also. Viewed from this perspective the budget is, in aggregate, a modest and reasonable approach.

But the government needs to do two things to limit the adverse impact on the economy: reach an early resolution of the budget in Parliament and reduce the number of warring parties, by leaving some of the longer term issues for a later date.

Nothing will be worse for the economy, nor for the government, than a long period of uncertainty, stretching into 2014-15. Many of the measures that are most opposed on grounds of fairness are unlikely to go through the Senate, even after July 1. These include the changes to Medicare, to the Newstart arrangements for young people, the increase in the pension age to 70 years, cutting off the Family Benefit for children aged over 6 years and the changes to university fee arrangements. 

But these measures have limited financial benefit to the budget out to 2016-17. Thus the government could accept these changes but still achieve the financial outcomes in table 1 if it was prepared to delay the paid parental leave scheme until after the next election. This would be a difficult step for the Abbott government to take, but it would get it considerable credit. And it might help to save the economy.

Peter Sheehan is a professorial fellow at the Victoria Institute of Strategic Economic Studies at Victoria University and a former head of the Victorian Treasury..

7 comments so far

  • All quite true Mr.Sheehan, but please confuse the Treasurer or PM with these facts.
    Truth will never win against ideology

    Commenter
    srg
    Location
    nambucca heads
    Date and time
    May 22, 2014, 9:07AM
    • But I thought Abbott was all about the economy. And this is the rub, because, no kidding, since this budget was passed down, we've had a noticeable decline in sales at the front desk.

      !!

      Too much too soon Abbott.

      Own goal.

      Commenter
      Not good.
      Date and time
      May 22, 2014, 9:38AM
      • Want to know about the economy? Forget your degrees, experience and statistics and go for a walk along any suburban strip shopping centre. In this direction truth of here and now lies and I don't mean lies as in Abbott! Ask any of the hundreds of thousands of small retailers in this Country how business is and has been for the last few months. But if you're sensitive to expletives it would be best not to ask but just notice the lack of shoppers.

        Commenter
        rext
        Date and time
        May 22, 2014, 1:36PM
        • Household spending can't increase because household debt is at an all time high. It will take years for that to change. Probably another 5 years at least. Economically Australia is now doomed. China's economic slowdown and this budget spell that out loud and clear.

          Commenter
          JB
          Date and time
          May 22, 2014, 2:59PM
          • Labor haven't presented and alternative budget, YET ! - and why should they? This is not an election year. Prior to August last year Abbott had NO POLICIES, and there was certainly no public debate about what he has dragged out in this budget. Does the LNP expect lessons from Labor on how to run the country fairly and productively, with a vision for the future ?

            Commenter
            adam
            Location
            yarrawonga
            Date and time
            May 22, 2014, 3:52PM
            • Adam, Perhaps you were on a different planet to me at election time. The Labor Party have no policies to have a surplus budget, just look at their record. The Labor Party only know one thing, spend, spend and more spending, they will never have a surplus budget.

              Commenter
              Dr Malcolm
              Location
              South East
              Date and time
              May 22, 2014, 6:11PM
          • I'm on my own and I have an elderly mum to care for as well as two young ones half way through their first degrees. Cuts to the Public Service affect the financial situation of my employer. You don't need to be a finance whiz to know that my purse will be staying firmly shut for the foreseeable future.

            Commenter
            Cg
            Location
            Canterbury
            Date and time
            May 23, 2014, 4:22AM

            Make a comment

            You are logged in as [Logout]

            All information entered below may be published.

            Error: Please enter your screen name.

            Error: Your Screen Name must be less than 255 characters.

            Error: Your Location must be less than 255 characters.

            Error: Please enter your comment.

            Error: Your Message must be less than 300 words.

            Post to

            You need to have read and accepted the Conditions of Use.

            Thank you

            Your comment has been submitted for approval.

            Comments are moderated and are generally published if they are on-topic and not abusive.

            Featured advertisers