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Dec 19, 2018

The government has been hit with a surplus. But what if the good times don't last?

Greg Jericho

Here’s a story you might have heard before – it’s about a government who (to quote a former prime minister) got hit in the arse with a rainbow and decided to assume the good times would last forever, and while facing a massive electoral defeat handed out a swag of tax cuts which created a structural deficit in the budget. And then, surprisingly, the good times did not last forever.
Yes, those who cannot remember the past are condemned to repeat it, and we saw this on Monday with the latest mid-year economic and fiscal outlook numbers.
Oh, everything looks good. Surpluses for the next decade, don’t you know! Government net debt is now projected to decline to 1.5% of GDP by 2028-29. Never mind that in the 2014-15 budget net debt was predicted “to decline to 0.7 per cent of GDP in 2024-25”. This time we will be correct!
Budget management is a bizarre thing that is determined mostly by dumb luck.
Costello got hit with a mining boom and masses of revenue. Swan got hit with the GFC, and revenue falling to levels not seen since the early 1970s . Even when investment boomed he was hit with a rising dollar that countered the impact that normally would have seen booming profits.
In the years Costello delivered a surplus the average level of revenue he had to play with was 25.3% of GDP. In all of Swan’s time as treasurer the highest amount of revenue in any one year he had was 23.2% of GDP.
And now we see revenue again projected to rise above 25.2% of GDP, and once again a surplus is projected. It certainly pays to be in power at the time China decides it really needs a lot of our iron ore and coal, and the world’s economy is doing well.
How big is that second rainbow with which the government has been hit?
Compared with the May budget, policy decisions taken have reduced the budget balance by $16.3bn over the four years from 2018-19 to 2021-22, but parameter changes – which are essentially changes to the economic outlook – have improved the budget bottom line by $30.4bn over those four years:
Two years ago the government’s own budget rules stated that “the overall impact of shifts in receipts and payments due to changes in the economy will be banked as an improvement to the budget bottom line.”
But that was then. There’s an election to win now.
Might as well hand out some more tax cuts, then. After all, the good times always last, don’t they?
In the Myefo the government has made it clear they are planning on announcing in the run up to the budget $9.2bn worth of tax cuts over the next three years, as this government decides, much like Howard and Costello did, that a tax cut bribe is the best hope of staying in power.
It continues the usual cycle of Liberal party budgetary management. During lean times they blame the poor for being frivolous and tighten welfare and reduce spending on services, and when the times turn good they indulge in the budgetary equivalent of doing tequila shots into the early hours.
And when they wake in opposition they blame the ALP for the budgetary hangover.
The thing is the ALP gets to play with the same extra $30.4bn. It will be interesting to see if it decides to take a seat at the bar next to the government and go shot for shot.
But what are the chances of a budgetary hangover?
Well headlines this week suggesting that as “trade war bites, China advisers recommend lowering 2019 growth target” are not exactly the stuff to make you start thinking the glass is always going to be half full.
The problem for the world is we have an insecure, paranoid idiot in the White House. And while companies seemed fine with this when he was handing them massive tax cuts, now that they start looking at the state of the US budget, the lack of increased investment from those tax cuts and Trump’s general desire to wreck the trade system, they are feeling rather less joyful.
Trump’s tax cuts have caused a massive increase in the US federal government deficit for little economic benefit. But at least they have shown very clearly that tax cuts do not pay for themselves:
It has reached the point where the yield for the US 10 year treasury bond is nearly as low as that for two year treasury bonds – a sign that investors are losing faith that the future is looking better than the present:
When the 10 year bond yield goes below the two year yield a recession usually follows (often due to a self-fulfilling prophecy). We’re not there yet, but there is more than enough cause for caution.
Locally things also deserve a bit of vigilance.
While the most recent estimate for private investment sees an overall increase in spending in 2018-19 compared to 2017-18, the growth in non-mining investment is slowing somewhat from what occurred last financial year:
The Department of Jobs leading indicator of employment remains in positive, but it is clearly less positive than it was at the start of the year:
It suggests employment growth will moderate somewhat, but should still grow steadily – if not at the levels seen in 2017:
As we have seen the picture for house prices looks to be one of further declines, given the drop in housing finance:
Only Tasmania has seen any really solid growth of owner-occupier home loans in the past year:
The housing picture might change somewhat by the announcement yesterday by the Australian Prudential Regulation Authority (Apra) to remove the restrictions in place since March 2017 of banks limiting interest-only lending to 30% of new home loans.
That measure had helped slow investor lending, but its removal is unlikely to set off a fresh surge of investor buying.
And the current outlook for interest rates is that they will stay exactly where they are. This can change (after all in June the market was predicting a rate rise by October next year), but it would require a big improvement in wages or inflation growth for that to happen:
It is also a sign that while the government’s budget is moving back to surplus, and thus actually slowing growth, the RBA still has its foot to the floor trying to keep growth going.
It suggests an economy that still has concerns – both looking within its borders at household’s level of income and wealth, and outside at the machinations of China and the US. And it is one where it might not be the best time to start assuming that good budgetary times are here to stay.
• Greg Jericho is a Guardian Australia columnist

Source: The Guardian

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