The most revealing statement in this Budget came on page 29 of the Overview, where the Treasury explained, not how the recession it didn’t anticipate came about, but how it imagined the future will be after it.
A downturn that the Budget papers describe ad nauseam as “the most severe since the Great Depression” is expected to be over faster than “the recession we had to have”, to be shallower than it was, and to be followed by a period of above trend growth. The Treasury normally assumes that the economy will grow at 3 percent a year, but it is assuming a 4.5% per annum growth rate in 2011-13.
If this really is “the most severe since the Great Depression”, then the experience of the last 20 years will provide no guide as to how soon it will end, or what conditions will be like after it — whenever “After It” might be. Yet it’s the early 1990s that the Treasury is using as its guide: “The approach is also in line with that taken in budgets in the early 1990s when above-trend rates of growth were assumed as the economy recovered from recession”.
Which is it guys: something you didn’t expect that’s only on a par with the 1930s, or something that recent experience can help us understand?
You don’t have to be a bear to expect that, just as Treasury was wildly off-beam about near term economic conditions in May 2008, it is likely to be wildly wrong in its expectations about future economic conditions today.
Expect as major a rewrite of the Treasury’s forecasts in May 2010 as we got tonight — maybe even as dramatic as this year’s rewrite.
The downturn is likely to be far steeper than the mere 10.5% fall in GDP that the Treasury has forecast for 2009-10, it’s likely to go on far longer.
Growth, when it returns, may well involve a dramatic spurt, but it won’t be here in just another two years’ time.
Steve Keen is Associate Professor at the School of Economics & Finance, University of Western Sydney