The government was committed to “more realistic long-term assumptions on the economic and fiscal outlook,” said Treasurer Joe Hockey last December when he released the Mid-year Economic and Fiscal Outlook. Finance Minister Mathias Cormann chimed in: “It is a matter of record that the previous government invariably overestimated revenue and underestimated expenditure. They kept promising surplus budgets and kept delivering more deficits. Our core commitment with this budget update is to draw a line in the sand as the Treasurer said and to provide a believable set of figures.”
As we’ve since seen, the line in the sand has already had to be redrawn at least once, and now we know it will be redrawn yet again in next months’ MYEFO.
Crikey doesn’t rate the much-quoted consultant Stephen Anthony as highly as most other media outlets seem to. If we want a self-promoting economist flogging their own fantasy budgets we’ll stick with Chris “the mining boom is about to end” Richardson. And we were underwhelmed with Anthony’s description of budget critics as “girly men” – a joke you can barely get away with if you sound like Arnie and not at all if you’re a former Treasury official trying to create a reputation for credibility. Nonetheless, the media’s penchant for taking Anthony and his budget forecasts seriously did have the effect of flushing out that the Treasurer expects a significant deterioration in revenue but won’t pursue offsetting savings in MYEFO for fear of further undermining demand.
As we’ve pointed out a number of times, Hockey deserves precisely as much sympathy for this predicament as he gave Wayne Swan – that is, zero, especially after he boasted that the Labor days of overestimating revenue were finished. Shadow Treasurer Chris Bowen in fact is already quoting back to Hockey exactly the lines that Hockey used in opposition when Labor had to reveal revenue writedowns: that the government doesn’t have a revenue problem it has a spending problem.
But Hockey is making the exact same decision Wayne Swan made in 2012, when the latter gave up on a 2012-13 surplus and, having promised a surplus some hundreds of times, had to wear it like a crown of thorns. And it’s the correct call in both cases: growth is just too weak for further significant cuts in government spending. And while Swan had the crippling burden of a plus-parity Aussie dollar, Hockey has another problem: non-existent or even negative income growth.
This morning the Australian Bureau of Statistics released wage price index data for the September quarter, and it showed a continuation of the same tepid wages growth we’ve been seeing for a year. Wages grew 0.6% in both seasonally adjusted and trend terms in the quarter, the same as the June quarter, giving 2.6% annual growth in the year to September in seasonally adjusted terms and 2.5% in trend terms. That means there was finally some real wages growth: CPI in the year to September was 2.3%, so wages are growing, if not exactly exploding, in real terms, primarily because inflation is so low currently. Indeed, using the Reserve Bank’s preferred measure, the trimmed mean, there’s been no real growth at all, with wages and inflation both at 2.5%.
Private sector wage growth have been slowing because, as the RBA points out, there is spare capacity from the rise in unemployment, as it pointed out in last Friday’s fourth Statement of Monetary Policy for the year.
“The weakness in wage growth continues to be broad-based. Private sector wage growth has been weak, slowing to 2.4 per cent over the year. This is consistent with business surveys and liaison, which suggest that wage growth has stabilised at low levels, with firms remaining focused on reducing costs … The extent of the slowing in wage growth appears to have been a little more pronounced than would have been expected given historical relationships between private sector wage growth and measures of the degree of spare capacity in the labour market.
The statement noted that households were being buttressed against the impact of the fall in real wages by rising house prices and higher share prices. Households are also saving a little less than in the years since the financial crisis. But flat real wages growth will drag on the economy and in turn put further downward pressure on tax revenue. With the mining investment boom rapidly receding, whatever growth there is in the economy is coming from investment in new and existing housing. But new home construction and approvals seem to have peaked, and even if they continue at current levels into 2015, their growth boost will start fading. Some of that growth boost can be made up for by consumers running down savings, but as we’ve seen in the past, that’s a one way bet to a nasty bust.
The problem is, the government actually wants real wages to fall. It’s insisting on squeezing public service pay via the cheap 1.5% rise given to serving members of the defence force (while sending them off to war — imagine the media coverage if Kevin Rudd or Julia Gillard had done that). Like businesses that want to cut wages in their own industry but somehow want the overall level of demand in the economy to increase, the government’s fascination with real wage cuts in the long run will help cut its own revenue.
The government should be keeping real wage growth as strong as it can (without triggering a breakout) because the housing construction and price boom won’t continue for much longer, and the much-mooted but slow-to-emerge infrastructure boom won’t be an adequate substitute.