Scott Morrison wants the Coalition re-elected because of its superior management of the economy. In Josh Frydenberg’s budget speech he referred to our “strong economy” 14 times. Why? He had to keep saying it because it ain’t true.
But get this: it’s not the government’s fault. It’s happening for reasons far beyond the government’s control. Growth is weak in Australia and throughout the developed world for deep reasons economists don’t yet fully understand.
It’s taken a while to realise this because the econocrats – mainly Treasury, but with the acquiescence of the Reserve Bank - either can’t or won’t accept its truth. They’ve gone for eight budgets in a row forecasting an early return to strong growth.
And for seven years in a row they’ve been way off. But so great is their certainty that nothing fundamental has changed, they’ve fronted up with yet another forecast that this year will be different. This year we'll reach lift-off.
It may not be entirely coincidental that, the longer Treasury dwells in the land of hope-springs-eternal, the more it gives its political masters the budget numbers they crave: ones showing the budget deficit soon returning to surplus and staying in surplus as the net debt falls to zero.
In what follows, I’ll ignore Treasury’s cute distinction between “forecasts” and “projections”. Sorry, guys, you’ve played that card too many times.
It’s a key part of the way you’ve misled the public, your political masters, economists and probably even yourselves, that everything’s going fine and will soon be back to normal. It’s part of the reason the net debt’s been allowed to double under this government – we kept being told it wasn’t happening.
When laughing-stock Wayne Swan began his 2012 budget speech promising four budget surpluses in a row, this was based on Treasury’s forecast that real gross domestic product would grow by 3.25 per cent in 2012-13, and then by 3 per cent in each of the three following years.
The 3.25 per cent turned out to be 2.6 per cent, then another 2.6 per cent, 2.3 per cent and 2.8 per cent.
After such an embarrassing stuff-up, you’d think Treasury might have had a rethink. Not a bit of it. Just two budgets later – this government’s first - it had the economy’s growth accelerating over the forward estimates not to 3 per cent, but 3.5 per cent. The first of these turned out to be 2.3 per cent and the next one, 2.8 per cent.
In the 2016 budget, Treasury took a bit of a pull and reverted to forecasting recoveries to no more than 3 per cent growth.
In this month’s budget, Treasury has us growing by only 2.25 per cent in the year just ending. But not to worry. In the coming year it will strengthen to 2.75 per cent, and be back to 3 per cent in the second last year of the forward estimates, where it will stay in 2022-23.
It’s a similar story with what’s become the key problem component of GDP, wages. In Swan’s ill-fated budget, the wage price index was forecast to grow by 3.75 per cent in the budget year and the year following. Turned out to be 2.9 per cent and 2.5 per cent.
The following year’s budget – Swan’s last – put expected wage growth in 2014-15 at 3.5 per cent. Turned out to be 2.3 per cent. Treasury’s first guess for 2017-18 was 3 per cent. Came in at 2.1 per cent.
Treasury’s response to its repeated over-forecasting is just to push the ETA of the return to strong growth out another year. Nothing fundamental in the economy has changed, nothing’s wrong with the forecasting method, it’s just taking a bit longer than we thought. This time we’ll be right.
But, you may object, if the economy’s remained so weak for so long, how come growth in employment has been strong since early 2017 and unemployment has slowly fallen to 5 per cent?
Because of high levels of immigration – high even by our standards, and unmatched by the other rich countries – and because the under-employment rate was worsening until recently.
Much of the jobs growth has come from federal government spending on rolling out the National Disability Insurance Scheme, and state government spending on infrastructure. After all, public sector consumption and investment spending accounted for more than half the surprisingly weak GDP growth of 2.3 per cent over calendar 2018.
Remember this: a strong, healthy economy is one where demand is always threatening to push inflation above the target zone. Our inflation rate's been below the target for three years.
And this amazing fact: the world real long-term interest rate has been falling for years and is now at zero or below. That’s a sign of strong growth?
It’s time Treasury and the Reserve stopped kidding themselves – and us.
