Having been repeatedly accused in his time of talking down the Australian economy, yesterday Treasurer Joe Hockey was doing something very different. His media conference in response to yesterday’s dire June quarter GDP figures was almost Panglossian in its optimism. Despite recording growth of just 0.2% seasonally adjusted and 2% over 2014-15, despite real net national disposable income falling by 0.3%, despite the weakest nominal GDP growth in over a half a century, Hockey claimed the figures were, “encouraging”. Indeed, so good did Hockey believe the figures to be, he said that he “wasn’t complacent”, the sort of thing politicians say when they’ve received some fantastic news.
“The economic plan that we laid down is actually delivering the dividends,” Hockey averred.
Given that, under Hockey, the budget deficit has more than doubled, net debt has soared, unemployment is up 0.7 points to its highest level since Simon Crean was Labor leader, growth has slumped, wages are stagnant and infrastructure spending has collapsed, you might be forgiven for wondering what things would be like if his economic plan weren’t working.
Moreover, you’d be entitled to ask what the government’s economic plan actually is, because at the moment it appears to consist of handing tax cuts to its mates (the miners, the big carbon emitters, the banks) and rushing through “free trade agreements” that the Productivity Commission has demonstrated do little for the economy.
But there’s one way in which Hockey is correct about his economic plan. But it’s the economic plan he rarely mentions.
The only thing that stopped the economy registering zero growth yesterday — a potentially damaging psychological moment for Australian consumers and business — was a surge in government spending in the June quarter. That included, but wasn’t limited to, the accounting fluke of the Commonwealth buying three warships in the quarter.
In opposition, of course, Hockey was the scourge of government spending, declaring that only the Liberals could bring an end to Labor’s profligacy (all the while opposing every savings initiative Wayne Swan put forward). The way back to surplus, Hockey reckoned, was through cuts to spending and an end to the age of entitlement. Hockey would deliver a surplus in his first year and every year after that, he boldly declared in 2013.
When he got into government and the time came to practise what he preached, however, Hockey baulked. Despite the impression of last year’s budget as an austerity budget, Hockey’s planned spending level for 2014-15 was actually above the average of the Labor years as a proportion of GDP, and by this year’s budget, its update for 2014-15 estimated spending to be heading toward the second-highest level after the Rudd government’s 2009 stimulus budget. And while it was a political decision, it was also a sensible economic decision, because growth last year was too weak too sustain big spending cuts (Hockey himself contributed to that weakness through his political ineptitude, but that’s another story).
So while the warships and other government spending might have been an accounting fluke, it’s not inappropriate that it has saved Hockey’s bacon, because he took a deliberate decision to keep pumping government spending into the economy rather than charge headlong for surplus — and it’s strategy Hockey has continued into this financial year, with quiet but noticeable support from the Reserve Bank, as governor Glenn Stevens said in a speech in June:
“Under the current macroeconomic conditions, it would seem inappropriate for governments to seek additional restraint here in the near term.”
Unusually for a politician, Hockey would prefer that his role in keeping growth ticking over, even at a tepid 2%, be kept quiet. In fact, bizarrely, in 2014 Hockey and the government deliberately wore all the political damage of being perceived as reckless cutters. But taking credit for supporting growth with government spending spoils the narrative — to the extent that there is any narrative — of an Abbott government that it is “open for business” and all about freeing up the private sector so those animal spirits can drive growth and jobs. As it turns out, it’s good old Keynesian stimulus that has driven growth and prevented unemployment from getting worse.
If it were Labor in office, you can bet yesterday they’d be hammering the point that government stimulus had kept the economy growing and had been needed to offset the collapse in mining investment and commodity prices. But it came as an afterthought from Hockey — indeed, he made a point of saying the increase in government spending was simply normal volatility — “I can promise you,” he said, “it wasn’t planned to be that way.”
The challenge for Hockey and Treasury is that we face more June quarter-style numbers ahead as the global economy struggles, strong supply and softer demand pushes down prices for Australia’s key commodities and we deal with low prices and, possibly, deflation as well as an extended period of low interest rates here and globally. Overnight, the International Monetary Fund told central banks that “monetary policy must stay accommodative” due to low inflation the absence of any consumption boost from lower oil prices.
A confident treasurer would be following Stevens’ lead and tell Australians that we may be facing a new normal of lower trend growth (and lower nominal GDP growth especially). And a smart government would be using this period of public sector stimulus and low interest rates as a holding tactic while undertaking the kind of reforms that will encourage the animal spirits of business: more, and better allocated, and better priced, infrastructure spending, more competition, encouraging innovation, improving the efficiency of the tax system — and taking voters with them, not fighting and dividing each and every group in the community in an effort to score political points.
But whatever the Abbott government is, it certainly isn’t a smart one.