Talk to The Salvation Army Moneycare Financial Counselling Conference, Collaroy
Asking an economics specialist to talk about the economic landscape and future challenges, as Tony Devlin did, is an open invitation for the specialist to whip out all his slides and bang on about his forecasts for economic growth, unemployment, inflation, interest rates and all the rest. Fortunately, I’m an economic commentator rather than a forecaster, so I don’t have a set of forecasts to dazzle you with - or bore you with - and, in any case, I’m sceptical about the value of forecasts. Economists don’t have a good record on accurately forecasting what will happen.
All I’d say is that, although you’d never know it from all the complaints we hear, it’s now been about 22 years since the last time Australia had a severe recession, and in that time the economy has grown at a reasonably steady rate with the official unemployment falling from about 11 per cent in 1991 to something around 5 per cent - which most economists regard as about as low as it can go without causing inflation problems. You’d have to say this record period without a severe recession obviously can’t go on forever, and when we do have another severe recession, that’s when a lot of businesses fail and unemployment shoots up, causing a lot of us to realise for the first time just how good we’ve had it for so long. It will also be when the demand for your services as financial counsellors grows far beyond your ability to cope.
But I have no particular reason to expect the next severe recession will occur any time soon, so my best guess is that the economy will continue growing much as it has been, with various industries continuing to feel the pain of a high dollar, but with enough growth to limit any great rise in the official unemployment rate. However, I do expect people - particularly business people - to cheer up a lot if, as everyone expects, Tony Abbott wins the election in September. This is partly because all newly elected governments enjoy a honeymoon period in which everyone’s pleased to see the back of the last lot and hopeful the new lot will be much better, but also because I’m convinced a lot of the gloom we’re hearing from business - big and small - has more to do with politics than the actual state of the economy. People forget the day-to-day management of the economy is done by the central bankers, not politicians.
The other thing my crystal ball tells me is that an Abbott government will have a lot of trouble keeping all the promises it has made on the budget, which means budgeting is likely to remain tight and probably get tighter in the coming years. This suggests continuing pressure on grants to outfits like the Army, particularly so when you see the Coalition promising not to make budget savings at the expense of high income-earners.
Before I move on, you may have noticed that all my references were to ‘severe’ recessions. This is because, contrary to the conventional wisdom propagated by both sides of politics, I believe we did have recession in Australia - though a mild one - at the time of the global financial crisis in late 2008 and early 2009. The claim that we escaped recession rests on the slender fact that the contraction in the economy was concentrated in one quarter (0.7pc in Dec q 08) rather than spread over two consecutive quarters, even though the rate of unemployment jumped by 1.6 percentage points in just nine months (trend figures: 4.2% in Aug 08 to 5.8% in May 2009; part rate fell by 0.3pcps; using SA figures, increased by 1.8pcps in 10 months between Aug 08 and June 09 to 5.9%). But while this deterioration was too small and too brief to be noticed by most Australians, my guess is it was noticed by the Army in the form of less generous donations and by an increase in the number of people needing financial counselling - no doubt after a delay. Because downturns always hit the bottom harder than the middle and the top, I suspect the Army’s ‘recession meter’ is a lot more sensitive than other people’s.
I've been thinking a fair bit lately about differences in people’s perspectives and perceptions of the economy. Whereas economists form their views about the state of the economy using economy-wide statistics - meaning they view the economy from a helicopter, so to speak - most business people and ordinary citizens base their views on their own experience and the experience of those around them. What’s happening to me is what’s happening to the economy. If I’m a shopkeeper and my sales are down, it’s obvious the economy’s very weak. If I’m a worker but I haven’t been able to find a job for months, it’s obvious the economy’s stuffed.
The second, more ephemeral factor that influences the views of non-economists is what they see and hear from the media about the state of the economy. But apart from when it’s quoting the official statistics, most of what the media tell us is quite unrepresentative of what's happening to most people. Why? Because the media tell stories about the experiences of individuals, and the stories the media choose to tell are those they believe their audience will find interesting. But the stories we find most interesting are those that are unusual rather than usual, thus making them unrepresentative of the economy rather than representative. This explains the media’s overwhelming preference for bad news rather than good news: people find bad news far more interesting. So, for example, any factory that decides to lay off 350 people will hit the headlines, whereas a factory that took on 350 workers would hardly rate a mention.
Another thing to bear in mind is that, in general, the people to whom the Army provides financial counselling come from the opposite side of the tracks to the relatively well-off and well-educated readers I write for. I often take a fairly unsympathetic line to the complaints of the comfortably off precisely because I'm aware of the genuine, often extreme financial hardship suffered by people struggling to manage on very much lower incomes. But just as I try to remind my readers how comparatively well off they are, so you need to remember that the people you see are also unrepresentative of the wider economy. If one in five adult Australians experience financial stress each year, then four in five don’t experience stress to any great extent.
When the people you counsel complain about the high cost of living, I’m inclined to believe them and be sympathetic. But in recent years it’s become fashionable for people in the comfortable world also to complain about the high cost of living, and there is little objective evidence to support these complaints. Nothing special.
I suspect people complain about the cost of living when they don’t have anything more serious to worry about - such as having to find a job or even the risk they may lose their job. I also suspect the complaints of the comfortably off mostly boil down not to the high cost of living but the difficulty some people encounter achieving the higher standard of living to which they aspire. No matter how high your income, it's always possible feel financially stressed if you over-commit yourself. You can often have difficulty making ends meet if your income is always fully committed and you leave yourself no buffer to cope with unexpected expenses, such as a big increase in utility bills.
As financial counsellors well know, many people have a low level of financial literacy. Many people also have low factual knowledge of the hip-pocket effects of government tax and benefit changes. A recent survey by the progressive think tank Per Capita found that more than half of respondents believed the carbon tax had increased the price of petrol, when it doesn’t apply to petrol. Most respondents estimated the tax had increased their cost of living by $20 a week or more, whereas the Treasury estimate was just under $10 a week. And almost half of respondents claimed to have received no compensation from the government in tax cuts or benefit increases, whereas Treasury’s estimate was that 90 per cent of households would get some compensation and about two-thirds would be fully compensated.
And then, of course, there are the many better-off people who imagine themselves to be middle income-earners when they are, in fact, in the top 10, 5 or even 2 per cent.
Everyone has their own perspective on the economy. There’s the reality and the perception - and the two are often very far apart.
