Oops, well, that wasn’t supposed to happen. The “full capacity” crowd was in full cry, deploring the lamentable failure of Wayne Swan to enact swingeing cuts to government expenditure in light of the small upward revision in Treasury’s growth forecasts MYEFO this week. The economy was roaring ahead, and the Government was failing to further accelerate its reduction in spending.

And then the ABS goes and ruins the story with an increase in unemployment to 5.4%.

True, it’s partly been driven by a rise in the participation rate — in seasonally-adjusted terms, it’s now 65.9%, the highest ever (female participation is equal-highest ever, 59.1%). That’s the best economic data we’ve had in a long time given participation is a key long-term reform issue.

That’s the good news.

But in seasonally-adjusted terms, full-time employment unexpectedly fell. It fell by just under 9,000 in July, but in October fell by 15,000, the biggest fall since July 2009. And for all the talk of the resources boom, the big falls were in Queensland and WA — 12,000 fewer full-time jobs in Queensland, 8,000 in WA — and NSW (9,000). In NSW and Qld, the participation rate jumped significantly (to a new record in Qld), but it actually fell in WA.

The data might yet be revised next month by the ABS, but the fall in full-time employment doesn’t come out of the blue. NAB’s monthly business survey, released on Tuesday, found a “domestic sector continuing to struggle” despite the resources boom. Trade-exposed manufacturing had clearly been hit hard by the high dollar, and retail and construction were under a lot of pressure (MYEFO suggested the housing sector is going to continue to struggle, with growth forecasts revised downwards yet again).

In short, the economic story is more mixed than those clamouring for big budget cuts are letting on.

The situation overseas isn’t improving either, particularly in Europe. The UK Government, to appease the hairshirt brigade, is about to demonstrate what happens when you rip massive amounts of public demand out of a faltering economy. And it’s a matter of if, not when, Ireland needs a bailout, according to authoritative commentators. The implications of Irish insolvency (created by its taxpayer-funded bank guarantee, Stephen Munchenberg might care to note) will vex European policymakers into 2011.

The demand for the Government to slash spending here is a sterile debate anyway. Neither side of politics will take the axe to wasteful public spending in a serious way. Joe Hockey’s boast of $50b in savings is utter nonsense, and have been repeatedly demonstrated to be so — or perhaps Hockey thinks we’ve forgotten about Treasury’s assessment of his election commitments costings already. Neither side will hack into middle-class welfare — in fact both sides went into the election promising to expand it via the education rebate.

Labor, at least, is trying to cut back the ludicrous private health insurance rebate, but a recalcitrant Senate has blocked that. Both sides are committed to pumping more money into the health system to cater to the tabloid-driven expectations of urban Australians about how long they should queue up to access free health care. And both sides — particularly the Coalition — are committed to a swathe of grotesquely inefficient climate change programs that are vastly more expensive per tonne of emissions than a carbon price.

These are the sorts of cuts that effective governments should be making on a regular basis to keep the budget in structural balance, meaning they can respond more effectively to whatever the rest of the world throws at the Australian economy. Engaging in fiscal hairy-chestedness to impress economists whenever a new set of positive data comes along is policy on the run that assumes everything will continue to be fine for the Australian economy.

Peter Fray

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