Has the Economy Tanked?
Budget forecasts in the Mid-Year Fiscal and Economic Outlook (MYEFO) released on Monday have been written down by $22 billion over the next four years, in a scenario that points to weaker growth and slower wage increases.
Shadow Treasurer Jim Chalmers said that this was an admission that the Government had got the economy wrong.
He told journalists it was “a humiliating admission that growth was slower, wages were weaker, and that more than half the gross debt that was accumulated was Liberal debt.”
Economic growth for 2019/20 has been revised down from 2.75% to 2.25%. Wage increases will also be lower and unemployment is predicted to be higher than forecast in the budget. Taxation revenue is predicted to be lower by $45 billion, much of it in the form of lower GST.
The more pessimistic forecasts have been attributed to global trade problems, the drought and the bushfires. The government has already spent $1.5 billion extra on aged care and the drought and these outlays are likely to increase over the next four years.
Finance Minister Mathias Cormann rejected Labor’s claims that workers were now earning less than the Government said they would be.
“Wages in Australia continue to grow faster than inflation,” Senator Cormann said. “If you look at the most recent national accounts data, what it shows is that disposable income across Australia has increased to its highest rate in a decade.”
The problem is that people are not spending their increased income. In fact, they are behaving rationally: while interest rates are low, they are paying off debt. This is not only true in Australia but in most developed countries where it has been shown that lower interest rates do not lead to higher consumer spending and higher business investment but rather the reverse.
Some commentators believe that the low business and consumer confidence is because the Reserve Bank has over-emphasised the weakness of the Australian economy, something that has been picked up and amplified by the media. Deloitte Access Economics economist, Chris Richardson, said that weaker economic conditions were a reflection of the Reserve Bank’s warnings of the need for intervention in the economy, which had damaged confidence for businesses and for families.
Mr Richardson believes that he biggest threat to the economy is the lack of confidence with confidence being weaker than the economy itself.
“There is a difference between what the Reserve Bank is saying and what business and families are hearing and what they are hearing from the RBA is ‘run for the hills’. The RBA has failed to make people understand what is really going on. Yes, the economy is weaker but the economy is different. It is good news for jobs and good news for the budget but bad news for inflation,” Mr Richardson said.
So, the truth is that the economy is weaker but still strong and some rain and continued high iron ore prices could see the budget figures in May next year looking a lot better than those in MYEFO.
There will also be a point where consumers think they have paid off enough debt and will start spending again but it probably won’t be over Christmas.