Good thing that, as Treasurer Scott Morrison insists, we don’t have a revenue problem, only a spending problem, otherwise we might need to really start worrying about the budget deficit.
Because if you were the kind of person to think we really did have a revenue problem, you might think it was getting worse, not better. And that there wasn’t one revenue problem, but three.
Yesterday’s wage index figures from the ABS, which showed the lowest private sector wage rise on record for the September quarter, continued the run of low wage growth numbers we’ve had since before the 2013 election. The lack of wages growth contradicts the narrative of employer groups and rentseekers like the Business Council of Australia that our industrial relations system is broken, but today even The Australian — which along with the Financial Review is a dependable mouthpiece for employers — acknowledged that wages growth is so low that it is becoming a problem for the economy. As David Uren — one of The Australian’s best journalists — noted, low growth will feed through into lower household consumption and lower tax revenue for the government. In other words, a revenue problem.
The annual wage growth rate for the year to September for both public and private sector employees was just 2.3% and the overall quarterly growth rate 0.6%. The budget forecast for wages growth in 2015-16 is 2.5%, and 2.75% in 2016-17.
Then there’s iron ore, which is now back below the Budget forecast of US$48 a tonne and looking like it will head lower, which comes on top of thermal coal falling below its forecast price of US$60; coking coal has been below the forecast $90 a tonne price for some time. Copper prices are now at a six-year low and heading towards $2 a pound, a level not seen for a decade, according to some sources. Oil and gas prices are fallen and are not expected to recover the US$80 a barrel mark for oil until 2020, according to the International Energy Agency. LNG prices have fallen accordingly.
And the third problem is lower economic growth, with wide acceptance, even by Treasury, that the sunny forecasts of 2.75% growth this year and 3+% growth beyond that in the May budget will have to be revised downward.
At the moment, one of the few positives for the budget is on the spending side: the forecasts of 6.5% unemployment this year now look too pessimistic, and if we can ever get some solid figures out of the ABS, they might suggest unemployment is closer to 6%, or maybe even lower if we’re lucky.
But the three-way pressure on revenue suggests not merely that this year’s prediction of a deficit of $35.1 billion will blow out, but that the optimistic path back to near-surplus across the forward estimates sketched out by the budget papers will need to be replaced with a grimmer scenario of continuing deficits and rising debt. That, of course, is what a huge number of commentators said on budget night back in May, but we’ll leave Joe Hockey to ruminate on that while he packs his things for DC.
All of these questions will be resolved in the Mid Year Economic and Fiscal Outlook in coming weeks, but, in retrospect, the decision by the new management not to use MYEFO as a mini-budget looks increasingly poor. True, Morrison needed to get his feet under the desk, and Assistant Treasurer Kelly O’Dwyer is new to the portfolio as well, but Mathias Cormann has been a strong performer in the Finance portfolio and could have been the guiding hand for a new set of savings and revenue measures that demonstrated the government was committed to a fiscal strategy of a medium-term return to surplus while avoiding a short-term fiscal shock.
Next week, there’ll be more September quarter data as we head towards the national accounts on December 1, the day after the last RBA board meeting for the year. Some optimists say third-quarter GDP could have grown by 0.5% to 0.8%, which would be much better than June’s 0.2%, but might engender a false sense of optimism about the budget. Anyone who read the recent fourth Statement on Monetary Policy from the Reserve Bank and recent speeches from governor Glenn Stevens would realise the economy isn’t too bad — sluggish and growing under trend, but not in trouble, as many had feared a year ago and in the early months of 2015 (hence the rate cut in February, then again in June). But nominal GDP only grew at around 1.8% in the year to June, the lowest for decades (since 1961-62 and the great “credit squeeze”) and the weak wage growth and low inflation (the RBA says it will continue into 2017) promise more revenue pressures and weak nominal growth this year and next.
But fixing the budget has been left for a now-delayed tax reform process in which “we don’t have a revenue problem” and backbench unhappiness about GST changes appear to be the guiding principles.