Tony Abbott's confused pre-budget narrative has few ideas for economic recovery
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Version 0 of 1. We are now just seven weeks away from the budget and you would be hard-pressed to have a clue what cuts or spending the government will make. After over five years of painting debt as the most evil of economic bogeymen, Tony Abbott moved away from this narrative of austerity by suggesting last week that the budget would be “dull” but “frugal” and that Australia’s debt compared with other countries was a “good result”. It suggests the government has awoken to the fact that economic growth is struggling to return to pre-global financial crisis (GFC) figures. However, rather than suggest fiscal stimulus and spending, and still trapped within the mantra of living within its means, the government seems unsure of what to do to improve growth and reduce unemployment. In the first episode of George Megalogenis’ excellent program on the ABC, Making Australia Great: Inside Our Longest Boom former prime minister, Paul Keating, said about the GFC that “Australia sailed through ... without losing any skin.” Such a view is perhaps a bit more common than it should be, because it vastly undersells the GFC’s impact. Yes, Australia avoided a recession – but only if you class recessions as being two quarters of negative GDP growth in a row. We actually did lose some skin, but compared to other nations we needed a few band-aids on our knee rather than to put our whole leg in plaster. It’s worth noting that the GFC hit these shores around August-September 2008 – six and a half years ago. And yet, if you have looked around lately you would have noticed that we are not exactly booming. For Australia, the GFC has been in two phases. When everyone thinks of the GFC, the first things they think of are banks crashing around the world, emergency meeting of central banks and the G20, interest rates slashed and a massive fiscal stimulus. But while Australia recovered much more strongly than other nations, from the middle of 2011 we entered the second phase of our GFC. The recovery stalled and unemployment began to rise. During the first phase, unemployment rose 1.6 percentage points, from 4.2% to 5.8% in nine months. But then the recovery kicked in, and by July 2011 it had fallen to 4.9%. Given that over the past 37 years we have only experienced an unemployment rate below 5% in 34 months, this was an amazing effort. But it didn’t last. As much a victim of our own success, while the rest of the world was foundering we powered on and mining investment absolutely soared and so too did the value of our currency. The high value of our dollar hurt the non-mining sector as our exports became more expensive and, as a consequence, employment in these sectors began to slow. And since July 2011 – the month when our dollar reached a value of US$1.09 – the unemployment rate has risen 1.4 percentage points, from 4.9% to 6.3%: One of my favourite measures of the health of the employment sector is the employment to population ratio. And in an attempt to negate the effects of the ageing population and the greater tendency of younger people to stay in education, I like to focus on the prime working age of 25-54 years. Prior to the GFC hitting in 2008, we reached a record of around 80.3% of people aged 25-54 in Australia being employed. During the GFC first phase that fell 1.4% pts in 21 months, before it began improving from May 2010 until the middle of 2011. But as with the unemployment rate, from the middle of 2011 the ratio of prime-aged workers employed also began to falter. In July 2011, 79.9% of prime-aged workers were employed. By last month this had fallen 1 percentage point to 78.9%: Australia’s employment situation for nearly four years has been a long period of torpor – an unprecedented long period. It has also been a period where we have seen interest rates fall to near unprecedented levels. And yet last week the governor of the Reserve Bank, Glenn Stevens, reaffirmed in a speech that relying on low interest rates to spur economic growth ain’t going to cut it. It has also been a period where governments have done their best not to stimulate the economy. Deficits mostly occurred due to falling tax revenue rather than increased expenditure: Dealing with the first phase of the GFC was rather straightforward – pump growth enough to get through the dark period until things got back on stable settings. While the first part of the equation worked well, the second part hasn’t. And in seven weeks Joe Hockey and Tony Abbott will be outlining their vision for the next four years. But that vision seems to be rather confused at the moment. Last year talk was all about a budget emergency, about the evil debt left over by the ALP spendthrifts. Last month, Joe Hockey’s Intergenerational Report suggested rocky weather ahead over the next 40 years. It all seemed to be building up to another budget of “tough choices” and the continuation of Hockey’s version of the ending of the age of entitlement. But then last week Abbott told 3AW’s Neil Mitchell that the budget would be “pretty dull and pretty routine”. When asked by journalists if this meant he was resting on his laurels regarding structural reform, he replied that the budget would “certainly... be much less exciting than last year’s budget because the task this year is at least 50% reduced from the task last year”. That 50% measure was based on the absurd debt and deficit projections in the intergenerational report, which suggested that by 2054-55 Australia’s debt to GDP would have reached 122% if the former ALP’s policies had continued – but under the current budget projections it would be only 60%. Now, as dopey as those figures were, it still reinforced Abbott’s mantra that debt is evil. Except the prime minister then appeared to say that the debt wasn’t that bad after all, telling the media that “a ratio of debt to GDP at about 50 or 60% is a pretty good result looking around the world”. Suddenly the prime minister has discovered context. Rather than continually reference the debt situation to that under the Howard government, now he was comparing it to the rest of the world. He told the media that the budget would be “prudent, frugal, responsible, there’ll be something in it for families, a better childcare deal in particular, and there’ll be much in it for small business.” It is all rather confusing. The narrative of austerity has been replaced with “prudent and frugal”, which in budget parlance doesn’t really suggest either big cuts or spending. It suggests a government struggling in the polls, led by a leader with little if any political capital to spend – certainly not enough to spend to pay the price of another austere budget. But there is also no sense that the government believes it needs to do anything to lift the economy out of its current docile state. Prior to the 2013 election, the government banked its economic performance on lifting confidence. And while there was initially some improvement, it hasn’t lasted. Even though the NAB business conditions index remains in positive territory, it hasn’t translated into jobs: The budget narrative is not the be all and end all, and often times in the months leading up to the second Tuesday in May there is an oversupply on spin about what it will entail. When a government less than two months out from the budget changes a major policy thrust, it does not suggest a government with its hand firmly on the tiller – rather one unsure of which way to go – whether for stimulus or austerity. |