This article first appeared in The Guardian: https://www.theguardian.com/commentisfree/2014/jul/11/why-the-abbott-budget-was-the-perfect-political-poison
Why the Abbott budget was the perfect political poison
The Abbott government has learned the hard way that a wide-ranging policy agenda of small ticket savings annoys almost everyone. Take note, Labor
The net savings to the budget over the three years to 2016-17 totalled $18.2 billion – or around 0.3 per cent of GDP each year. Such a puny fiscal tightening leaves the budget in deficit in that time, and the bottom line is worse than the budget numbers left by the previous government in the pre-election fiscal outlook.
The first issue that the budget had to deal with was covering Tony Abbott’s spending spree on paid parental leave, roads and the medical research future fund. Next, it had to cover the huge loss of revenue from abolishing the carbon price and the mining tax, and cutting the company tax rate by 1.5 percentage points to 28.5%. The challenge in the budget was getting back to square one after these expensive pet projects were funded.
One of the most basic economic issues overlooked when it comes to the extra cost for businesses from the carbon price is that those costs have been passed on the consumers.
It was actually how the carbon pricing scheme was meant to work as the Treasury modeling from a couple of years ago made clear.
This is why electricity prices rose – the electricity generators passed on the extra cost from the carbon price to their customers. It is the same story with the airlines and no doubt fish wholesalers and other businesses with big refrigeration units and a high proportion of their business input costs in the form of energy.
The direct impact on the net profit margin of businesses from the carbon price was so trivial it probably rounded to zero as those costs were recouped from an increase in selling prices.
Since the election in September 2013, the Abbott government borrowing levels have exploded, as it has issued $87.05 billion worth of government bonds and T-Notes. On average, this new government borrowing has been around $2 billion a week.
The borrowing has been necessary as it needs to fund or cover the budget deficit plus maturities of debt (bonds and T-Notes) that were issued in the past. Netting this out means that the level of gross government debt has reached a record $322.687 billion which is $49.5 billion higher than when the Abbott government was elected.
As the government flounders with its budget in terms of the misguided measures that were designed to help the budget return to surplus and, linked to that, getting its policy agenda through parliament, it seems likely that the budget deficit will be wider than assumed at budget time and worse still, even at the time of MYEFO which saw Treasury fudge a range of estimates to make the budget bottom line look as bad as possible.
The less than robust news on the Australian economy continues to roll out – this time it is the labour force release which confirmed a moderate 15,900 rise in employment in June with the unemployment rate ticking back up to 6.0 per cent - this is equal to the highest unemployment rate in over a decade.
The employment data are a little disconcerting – the net change in employment in the last three months is just 20,100, well below the growth in the labour force which neatly explains why the unemployment rate has ticked up. Jobs growth needs to average close to 20,000 a month for there to be meaningful and lasting inroads into the unemployment rate.
This article first appeared in the Melbourne Review on 6 June 2014. https://www.melbournereview.com.au/commentary/article/falling-real-wages
It is rare in Australia to see falls in real wages but in the last six months the annual rate of inflation has been higher than the rate at which wages are increasing.
This loss of purchasing power for households, plus a hopelessly mismanaged and poorly framed budget, is driving consumer confidence sharply lower, towards levels not seen since the Global Financial Crisis was threatening to plunge the world economy into an economic depression.
Falling real wages are a sign of slack in the labour market. In other words, real wages are weak or actually fall when there is a sufficiently large pool of unemployed workers for potential employers to trim wage levels to entice people into a job. This wage moderation then filters through to those in employment and the path to real wage weakness in entrenched at least until the economy grows more rapidly and demand for labour increases with it.
It is crunch time for monetary policy in Australia with the data flow between now and the 5 August meeting of the RBA Board to largely determine whether it will cut interest rates or not.
This Thursday, the labour force data are published and another weak month for job creation (note employment is up a tiny 5,500 in the last two months) and / or a tick back up in the unemployment rate towards 6 per cent would suggest the nice spurt to economic growth and jobs in the March quarter was more a blip than a trend.
On 23 July, the June quarter inflation data are released and after a low reading for the March quarter, a further gain of around 0.5 per cent would be hinting strongly that inflation is likely to ease back to within the 2 to 3 per cent band by the end of 2014. The outlook for lower inflation is enhanced by the still strong Australian dollar and the fact that wages growth is meandering at record low levels. Softer economic growth is also a disinflationary factor.
The recent run of data continues to point to a stalling of economic growth after the stellar start to 2014 which saw annual GDP growth hit 3.5 per cent.
Indeed, the odds are rapidly building that June quarter GDP will be negative, driven by falling retail sales, a stalling in housing construction, a moderation in net exports and of course a further fall away in mining investment.
In December last year, I outlined my forecasts for parts of the economy and financial markets. As the first half of 2014 draws to a close, it is worth having a look at how those forecasts are travelling, notwithstanding the fact that over the past six months, my views on a range of factors have changed as news and events have unfolded.
The 10 points from December 2013 are reproduced below, with comments in italics after each item.
So the smart people like Louis Christopher from SQM Research and Pete Wargent from AllenWargent property buyers were right – the dip in house prices in the 6 week people around May was seasonal. The housing market was still strong and prices were still robust even though the RPData was showing what at face value were notable price falls.
The RPData house price series now shows that prices are up 1.3 per cent so far in June (just one day to go) to largely reverse the 1.9 per cent price drop in May. In recent weeks, the price rises have been solid which suggests further seasonal increases are likely in the near term, especially with interest rates remaining near record lows.
Even the RBA was caught up, a little, with the house price fall discussion, when it noted after the June Board meeting that "dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently".
The chances that the next move in interest rates will be a cut have increased with a raft of news pointing to a moderation in the pace of economic growth, a renewed decline in commodity prices and a clear abatement in inflation pressures from the record low pace of wage growth and the stubbornly high Australian dollar.
While the most likely outcome for monetary policy in the next little while is the RBA holding interest rates steady, another lowish inflation result next month (low being 0.5 per cent or less) would signal a moderation in inflation from the quite worrisome lift evident through to the end of 2013. Indeed, a 0.5 per cent rise in the CPI would see inflation on track to fall to the bottom half of the RBA's 2 to 3 per cent band by the end of 2014.
Such an inflation pull-back fits with very recent news of less robust economic growth since the stellar 3.5 per cent annual GDP result in the March quarter. While it is early days yet, the partial indicators for retail spending, building approvals, employment, job advertisements and business investment have all taken a step lower.