Clueless Coalition floundering while budget bottom line worsens, The Guardian

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Stephen Koukoulas, Research Fellow


The Guardian Australia, 18 August 2014


The Coalition came to government last year with no substantive plan for the economy.

It seems obvious now but the raft of promises for a “stronger economy” and “fixing the budget mess” were mere platitudes with no policy substance behind them.

The proof of this cluelessness shows up in the fact that after 11 months in office, the budget bottom line has worsened as a result of government policy decisions and the economic growth outlook has deteriorated to a point where the unemployment rate has already exceeded the downbeat forecasts in Treasurer Hockey’s Mid-Year Economic and Fiscal Outlook.

This is extraordinary given the clear improvement in the global growth outlook since this time last year and the fact that the Reserve Bank of Australia has been doing its bit to promote the economy by keeping interest rates at record lows.

After his holiday in Fiji, Hockey is only now belatedly traveling around Australia to meet with the minor parties in the Senate, hoping to convince them that the budget measures he proposed back in May are worth agreeing to and passing. Why he didn’t pre-empt the Senate hostility in September or October last year is anyone’s guess but the curious thing is that the bulk of the measures Hockey now hopes to talk the minor parties into passing through the Senate will actually slow economic growth by taking cash out of the economy.

It is not clear where the strategy for lifting the pace of economic growth is.

This issue has come into sharper focus in recent weeks given some disturbing trends in the labour market data. In July, unemployment spiked to 6.4%, a 12-year high, while wages growth remains at a record low. The Reserve Bank of Australia, in its quarterly statement on monetary policy, slashed its forecasts for real GDP growth and inflation and indicated that growth will not pick up to a trend pace above 3% until 2016. Implicit is an assumption that, as a result, the unemployment rate will get higher before there is any sustainable fall.

These are clear signs that the economy needs to have a policy induced kickstart so that faster growth can be sustained. Financial markets are pricing in the distinct risk that the RBA will be forced to cut interest rates and traders in Australian dollar futures are increasing anticipating a sharp depreciation. This and more might be needed, not only to absorb new workers that will result from population growth, but also to generate jobs for some of the 789,000 people unemployed.

What is concerning is that the policy impasse the government has created is the result of its confusion or even misunderstanding about policy means and ends. The 2013 election campaign mantra of the Coalition, to reduce debt and return the budget to surplus, made no allowance for swings in the business cycle that would inevitably unfold over its time in office.

The Coalition’s misunderstanding of the fact that the budget and government debt are the instruments, the policy levers if you like, that are pushed and pulled by the government to grow or cool the economy, and not ends in themselves, has compounded the current economic policy malaise. Government spending and taxation should be adjusted to bring about structural reform and productivity-enhancing measures, many of which come with a short-term financial cost but a long-run economic benefit. Fiscal policy stimulus in a weak economy is clearly sound, just as fiscal tightness or austerity is in a strong economy.

The worry is how slow, lethargic and cumbersome the government is. It took eight long months from election day until it handed down its first fiscal statement, the budget in May 2014, which shocked the electorate with the mix of policy issues, most of which seem to have been dreamed up in the weeks leading into the budget.

Now, the government is floundering to the point where it is still trash-talking the economy and is doing little if anything to support growth. Three months on from the budget, Hockey is stretching and lurching from meeting to meeting, trying to talk to the crossbench Senators in an effort to get their support for the measures in the budget.

Economic policy is like painting the Sydney harbour bridge. Finish it, and then you have to start all over again. It is never ending.

Hockey would be wise to realise this and to hurry along the reform agenda, bring policies into the public domain and advocate for productivity, growth-enhancing changes. If he doesn’t do this, Australia could confront a further two years of confidence sapping debate over a range of nickel and dime reforms that do precious little to “fix the budget” but can do a lot to harm the longer run growth prospects for the economy.
News Source : Clueless Coalition floundering while budget bottom line worsens, The Guardian
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