So, is 7% unemployment too low?
That was Ken Henry’s response to critics of stimulus spending as he fronted this morning’s hearing of the Senate Economics Committee inquiry into the Government’s stimulus spending.
Henry acknowledged that the Australian economy had performed better than forecast by Treasury, but warned that the withdrawal of stimulus spending would cost 100,000 jobs and 1.5 percentage points in GDP growth in 2010. “Treasury’s view is that unemployment has yet to peak,” he told the committee, and suggested that the IMF’s recent forecast of a peak of 7% might be “reasonable”.
“The question for policymakers is whether 7% unemployment is too low. I think Treasury’s view is that that is not the case.”
Henry emphasised that the peak impact of the stimulus packages had occurred in the June and September quarters, with the impact in the current quarter likely to be “much smaller”. In the first quarter of 2010, the scheduled withdrawal of the stimulus actually had a negative effect on GDP of 1.25%.
Henry’s argument, which complements Wayne Swan’s repeated statement that the stimulus had already peaked and was reducing, confirmed that if anything, fiscal policy had moved ahead of monetary policy in recent weeks until the Reserve Bank caught up on Tuesday with its first rate rise.
But Henry remains at odds with Glenn Stevens’s more optimistic take on the economy. “It is too soon to decide that this is all behind us,” Henry said. “It is still possible that the recovery could be a faltering one. Global growth could be low and volatile, despite the outcomes we’ve seen from the Australian economy to date.”
But Henry had a warning for those who expected a return to growth would produce the same revenue boom as had been witnessed earlier in the decade. “We’ve thought long and hard about this,” he said. “There are a lot of accumulated losses in the tax system that will be offset against profit as growth returns.”
That point might be the most important long-run issue for the Government as it enters the 2010 Budget preparation cycle. Treasury — which admittedly consistently underestimated revenue during the boom years — believes there will be no easy way out of the Government’s deficits, meaning it will only be achieved through spending cuts.
The hearing proved to be anti-climactic after Glenn Stevens wrecked the Opposition’s attack on the stimulus package at his appearance last week, saying he was comfortable with debt levels and they would have no impact on interest rates. Senator Helen Coonan — again left to do the hard yakka on Coalition economic policy — and Senator Barnaby Joyce, on the phone from Queensland, were the only Coalition attendees at the morning session.
The Coalition’s decision to back what was always a stunt by Bob Brown to enable him to attack executive remuneration looks a foolish one, in retrospect, but given its other problems at the moment, it’s a relatively minor debacle.