This week saw the first Senate estimates appearance by new Treasury head Steven Kennedy, who replaced long-time Liberal staffer Phil Gaetjens after the latter was promoted to head of Prime Minister and Cabinet. How did Kennedy perform?
The question is more important than at any time in recent years because the once-mighty Treasury is now discredited.
Its Pollyannaish performance on wage growth over the last six years has been profoundly embarrassing, and one of its senior executives recently tried to blame workers themselves for wage stagnation. It missed the collapse in household spending last year that wrecked its 2018-19 budget growth forecast. It has stayed silent about the productivity crisis that has set in under the current government. It has ceded leadership of economic debate to the Reserve Bank and the Productivity Commission, and budgeting credibility to the Parliamentary Budget Office.
Just to make life even more difficult for Kennedy, Treasury is stuck trying to defend the government’s economic credibility while the country visibly stagnates.
At least on wages growth, Kennedy offered a different narrative to the ones we’ve heard from Treasury in recent years, that everything is fine if workers would just wait another quarter or two, or that it’s workers’ fault for not getting off their bums and moving to better paying jobs.
Kennedy, by contrast, actually admitted there was a problem:
A number of other long‑running changes in the labour market may also be affecting the relationship between unemployment and wage growth. An increasing concentration of economic activity in services industries, the effects of demographic and technological change and globalisation may also have played a role … With these uncertainties in mind, the pace of the pick-up in wage growth, and its relationship to the labour market, is likely to continue to be different than in previous economic cycles.
Which is fair enough, except that wages growth in Australia has been highest in recent years in two service professions — health and social care, and education (which are also the sectors with relatively high levels of unionisation).
Kennedy admits that the economy is performing only “modestly” and that productivity growth has slumped. Good for him. But he also bought into the “international headwinds” narrative that the government is pushing, presumably in expectation that the economy is going to continue to stagnate for the rest of the year. When in doubt, blame the foreigners:
…trade tensions are not the only story. There are a number of other factors, including Brexit, financial stability concerns in some economies, the ongoing turmoil in Hong Kong, and geopolitical and economic difficulties in a number of emerging market economies. Combined, these factors are leading to an increased level of uncertainty around the outlook for the global economy.
Except, for Australia that’s not really true. Donald Trump’s trade wars (cheered on by Morrison) have targeted China for the past two years, and seeing it is our biggest trading partner, exports should have been hit (volumes especially). But as a result of the January 25 mine dam wall disaster in Brazil, global iron ore prices have been dramatically higher for much of this year and at $US87 a tonne are still well above the budget forecast of $US65 a tonne.
This didn’t merely help government revenue: GDP rose just 1% in the six months to June but 0.8% of that came from the trade contribution and strong exports. International headwinds? Imagine how weak growth would have been had the dam wall held.
But the Pollyanna act persists otherwise. Kennedy says the RBA’s interest rate cuts and those magical Morrison tax cuts will do the trick (regardless of recent evidence from retailers that the tax cuts have sunk without trace):
The recently legislated personal income tax cuts and declines in interest rates are providing support to disposable household incomes. We expect this to flow through to increased consumption. Although we have some indicators of consumption available for the September quarter, which have not shown a particularly large improvement, these are only partial.
And of course there was no case for fiscal stimulus. “The circumstances or crisis that would warrant temporary fiscal responses are uncommon,” Kennedy insisted. Nor did he mention what the RBA has repeatedly complained about: that the government’s rapidly rising tax take is crimping household incomes and thus economic growth.
It was a start in restoring Treasury’s tattered credibility. Just not exactly a great one.