When they’re framing budgets, treasurers have two roles: a political role, which everyone focuses on, and a far less prominent role as architect of the fiscal contribution to the economy. The roles should normally complement each other but can, bizarrely, end up at odds.
For example, the David Cameron Tory government in the UK, with George Osborne as chancellor, had a shocking reputation as an austerity government when it engaged in massive deficit spending to keep the British economy afloat. Joe Hockey and Tony Abbott did the same thing here in 2014: they massively increased deficit spending from the trajectory planned by Labor in 2013, and in doing so protected Australia from a serious downturn. But politically, they were all about slashing spending and ending the age of entitlement. And it killed them politically.
Different forms of budget spending have different stimulatory effects — increasing transfer payments to low income earners go straight into the economy, whereas handouts to the wealthy, or corporations, have far less effect because they get banked or sent overseas. But a key indicator overall is how much deficit spending the government is engaging in. And in recent years, the government has been slowly reeling in the deficit — that is, reducing the level of fiscal stimulus to the economy. And next year, notionally, the government is preparing to end any stimulus at all and move to a neutral setting, with a tiny surplus planned. Exactly how much stimulus the government provides to the economy, or withdraws from it, is a key question for the treasurer wearing his fiscal architect hat.
Last year, with the economy enjoying strong jobs growth and the Reserve Bank flagging that the next movement in monetary policy was going to be a tightening, the answer to that question was simple — just keep going with the return to surplus.
Now, the answer is more complicated. GDP growth declined significantly in the second half of 2018, mainly as a result of the government-endorsed war on wages-growth being conducted by business. The RBA is now talking about the possibility of a further cut in rates. Falling house prices are undermining consumer sentiment. The banks have tightened lending considerably. Financial markets are warning of a slowing economy: the yield on Commonwealth 10 year bonds fell to 1.78% on Monday, according to Bloomberg data (in December’s MYEFO, Treasury assumed an average cost of 2.5% on the nation’s future borrowings — down from 2.8% in the May budget). Internationally, the global economy has slowed, the US Federal Reserve has reversed its rate rise regime and won’t increase again for some time.
But jobs growth is still above average; NSW and Victoria had substantial unemployment rises in February but there were sharp falls in other states. Jobs are a lagging economic indicator but it’s also the RBA’s primary guide to whether further rate cuts are needed at the moment. Exports continue to run at record levels. The terms of trade are still higher than expected and nominal GDP is running at more than 5% — producing a flood of tax and other revenues.
This mixed economic data has undoubtedly made Josh Frydenberg’s job much harder. It has certainly troubled the Reserve Bank. In the minutes from its March board meeting, the bank added some words (in bold below) to its previous language about its monetary policy consideration:
Members agreed to continue to assess the outlook carefully. Given that further progress in reducing unemployment and lifting inflation was a reasonable expectation, members agreed that there was not a strong case for a near-term adjustment in monetary policy. Rather, they assessed that it would be appropriate to hold the cash rate steady while new information became available that could help resolve the current tensions in the domestic economic data.
Unlike the RBA, Frydenberg and Treasury don’t get to revisit their decisions every month in light of new data. They have had to make their big fiscal decision for the year — as well as their political decisions about how to win an election — with the same confusing data that the RBA has been struggling with.
That means the budget’s economic forecasts for the rest of this year and 2020 will be every bit as interesting next Tuesday as whatever spending and tax cuts Frydenberg deploys to try to save the government.
Does it matter what sort of fog?
Form? Surely, it’s only a “Sucker Bait” budget after all – “unforeseen circumstances” can always be mustered after the election of a “Non-Core Promises Party” government?
Tax cuts for votes =
* Less government revenue to spend on the infrastructure necessary to make life that smidgeon more bearable for the underemployed/working plebs? Or
* A longer stick from which to dangle that carrot of promise?
It’s not only a “statistical fog”. It is also a deliberately created financial fog, which somehow suggests that the “budget” with its final surplus/deficit position is the work of the treasurer, with minor changes caused by external events. This is just nonsense. Simple financial accounting will tell anyone that there are 3 major sectors involved and the surplus/deficit in each of these sectors must sum to zero. Only one sector is the government. The other two are the private sector, whose desire to save or borrow is crucial, and the external sector which usually has a surplus. The final result is therefore endogenous to the whole, particularly when government revenue and spending themselves are not entirely under control. Oh, the same accounting usually implies increasing private sector debt if there is a government “surplus”. With private debt now in multiples of the GDP, why would you want a government surplus?
this governments ideological ultra right mantra is driving Australia into a U.S/ U.K working poor nation of recession and depression WHICH WILL BE WORSE THAN THE 1929 CRASH, because there are no closed factory`s that a progressive or labor government can stimulate fiscally to reopen like Roosevelte did in the 1930`s as the greedy /wealthy have sent them to Asia to take advantage of slave labor rates to increase their disgusting wealth even more. wake up you blind fools, one more term of this corrupted government and it will be to late to reverse the crazy/greedy ideology.
Conventional neo-classic market economics is making us fractious, angry, divided, alienated and violent.
It is time for a complete change:
– creating profit from activity that actually improves the environment and reduces the consumption of finite resources.
– progressive taxation of wealth rather than income and re-distribution to those denied opportunity.
– wealth transfer to the authentically altruistic.
– prosperity and peace without the meaningless pursuit of growth.
The high priests of meaningless and destructive Capitalism, market economists, are not to be trusted any longer.
We do not live in an ‘economy’. We live in a society. Until we understand that the economy must serve society, not that society must conform to imagined economic ideals, we are dooming our children to misery.
So, Bernard, it was the Coalition that saved us from the GFC. Really? Joe Hockey saved us? I’m worried that you’re working too hard. How long will it be before it was Gladys who saved us? Or maybe Tony Abbott?
Yeah, was wondering about that myself. Their actual budget was austerity for the poor and tax cuts for the wealthy and corporates, most of which didn’t get through the Senate.
I’m pretty sure it was Swannie and Treasury who got us through the GFC, but I’m getting older and perhaps memory fails me.