Sitting in his new office, feet on the desk, the afterglow of electoral victory is being tainted for Treasurer Swan by the economic storm clouds gathering on the horizon.
Yesterday, they darkened ever so slightly, with unpleasant trade deficit numbers followed by an unpleasant inflation forecast, which was followed in turn by Adelaide Bank’s announcement that it was raising interest rates independent of any decisions by the Reserve Bank. Cue further unpleasantness.
Crikey asked three leading economists for a three point plan on easing concerns about the economic outlook:
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Richard Gibbs, Chief Economist, Macquarie Bank. The first one is to critically review budget expenditure and the expenditure review committee is already operating. They’ve already identified $10 billion, but they need to find another $10 billion, so around a 2% reduction. They should then look to realign policies away from policy initiatives that stimulate demand, particularly by businesses but also by households, towards initiatives that will boost the productive capacity of the economy. And I think the third one would be to reconsider the composition and incidence of the tax cuts. I’m not saying walk away from the relief for households. What I’m saying is giving that money back in ways that would impact the supply side or saving rather than consumption. I think one way of doing it, one release valve if you like, would be to go back and have a look at paying some of the tax cuts as superannuation, as Paul Keating suggested. Look at increasing the levy by three percentage points and having the levy increase in lieu of the tax cuts. Then there is the question of bottlenecks in our infrastructure. It’s been an ongoing problem for Dalrymple Bay and the Port of Newcastle. Moreso than spending up on infrastructure, I think it’s really an issue of scheduling and coordination in terms of the management of those pieces of infrastructure and I think that’s been a big problem in terms of jurisdictional differences. In other words, which level of government is actually responsible for running that infrastructure? It’s not so much investment in the base infrastructure. It’s actually running that infrastructure efficiently. It’s a COAG issue and it’s one that needs to be addressed, perhaps more rapidly even than the delivery of health services.
Alan Oster, Chief Economist, NAB. Number one would be keep inflation under control. Number two: use fiscal policy in a counter-cyclical manner. In other words, I think you need to tighten up to slow the economy. Sure, you keep surpluses etc, but I think you want to use it to help monetary policy. You can’t just purely use monetary policy. And I suppose the other thing I would want them to do is be flexible. Nobody is sure what’s really happening in the US and that will have to be addressed. And if I could have a fourth one which is a bit longer term, I’d say they need to keep the focus on structural reform. The fact remains, Australia is doing really well. I don’t think it’s a great time to be winning government in the US, for example. It may not be so good in Europe and the UK either, and there are issues about New Zealand. But in Australia the economy is good and in that sort of environment the Labor market remains pretty strong. It’s more a case of making sure it doesn’t get out of control, into a boom-bust scenario.
Michael Knox, Chief Economist and Director of Strategy at ABN AMRO Morgans. I haven’t met Wayne Swan and don’t imagine he would ever take advice from me, even though he’s a fellow Queenslander. But it seems to me he is aware that he needs to have a significant budget surplus. If he doesn’t then the RBA will tighten interest rates further. The problem is how you generate the budget surplus in your first year, and the major way you do that is to say “No” on a regular basis. He has to learn to say “No” to his ministers and “No” to the states. As long as he can practise the word, he can generate a budget surplus. The problem for the federal government on the infrastructure issue is that it’s a state government problem. It may well be that in New South Wales, in selling some infrastructure they own such as power generation, that can finance other infrastructure. You could build more tunnels in Sydney but some people already say Sydney has more tunnels than a wombat. If you raise money in one area and spend it in another it has no net effect on raising spending. The problem has been Queensland and NSW have been borrowing money to spend on infrastructure. There’s been a lot money raised through debt and that’s adding around about a half a percent or thereabouts to the upward pressure on interest rates, and it would be better if they were balancing their budgets. If they can’t balance their budgets at a state level, the federal government has to put its budget surplus by another half a percent to compensate. Overall though, I think the Australian economy is much stronger than the US economy. Our outlook is economic growth of 4.2% next year, and that’s twice as fast the US economy, and that’s because of our very strong terms of trade and our strong investment in expanding our export base. I think the Australian economy will easily weather any downside shock from sub-prime lending. The problem for the Australian economy is that it might grow too fast.