Assumptions, not forecasts

The Australian government promises its new budget will boost economic growth. Will it?

Every budget is designed and delivered under constraints. Prime Minister Tony Abbott’s second budget had to deal with two key realities – a weak and deteriorating economy, and its poor electoral standing, due in large part to the ‘failures’ of its first Budget, and the electoral capital and credibility burnt at that time.

On the economic front, the economy is languishing even with historically low interest rates, and nearly a 30 per cent devaluation of our dollar. Even the Governor of the Reserve Bank has recently been encouraging the government to do more.

With our growth rate threatening to slip below 2 per cent, and maybe stick there for a time, the Budget challenge was to decide just how to quickly stimulate economic activity, investment and jobs, while at the same time maintaining some semblance of a strategy to return the Budget to surplus in the medium-term.

The government decided to focus on a substantial injection of cash into small business, and childcare, to be financed by still counting on some expenditure savings announced in last year’s Budget, but so far blocked by the Senate, and a range of peripheral new taxing initiatives.

Will it work? Will it actually boost economic growth? The government has predicted that it will, by suggesting that growth will accelerate quickly to about 3.5 per cent in the last two years of this decade.

However, the detail as to how, and particularly where, the growth and jobs will come from, was not provided. We were just encouraged ‘to have a go’.

It is unlikely that households have much capacity to respond, with their debts to income ratio already over 150 per cent, nearly 15.5 times what it was in the 1991 recession, and again pre-GFC.

Can small business do the job? The budget assumes so, and some of the cash injections would suggest so, except business needs to be confident and profitable, and/or able to borrow, to take advantage of most of the small business measures.

The jury is out on this one, especially as past experience would suggest that these sorts of cash write-off measures are easily abused, or simply move spending forward, to be followed by a lull, with little flow on to sustainable growth and jobs.

Moreover, it’s hard to see how already cash-strapped small businesses can employ more workers without training, which is almost ignored in this budget, following substantial cuts last year.

As to the politics, both Abbott and Treasurer Joe Hockey simply could not afford another budget failure. They needed to be seen to be responding appropriately to our weak economy, still maintaining a firm commitment to ‘fixing’ the budget, while ‘buying off’ key electoral constituencies, and not really offending others.

This budget is cleverly pitched in this respect, although only time will tell. Importantly, they will need to avoid a significant ‘fight’ in the Senate.

In this respect, it is hard to imagine that Minister for Social Services, Scott Morrison, a shrewd and pragmatic political operator, would have allowed a link between childcare and previously advocated cuts in family tax benefits, to be announced without having done his homework with the minor players in the Senate.

Is it an election budget? It could be, despite Abbott’s assurances to the contrary, if it improves the Government’s poll standing, sustainably, and if he can corner Labor on some of the key elements of the budget.

Abbott’s hope is that Opposition Leader Bill Shorten has generally performed so poorly that many in the ALP fear he is Australia’s Ed Miliband.

All up, the economic recovery has been assumed, as distinct from forecast. The risks are significant. I suspect we will be back here next year with a host of rationalistions.

The last Budget predicted $60 billion of deficits over four years from 2014/15. This Budget predicts deficits totalling $116 billion, over the same four years.

Isn’t this a slippery slope?