This week the Prime Minister promised to return the Budget to surplus, massively reduce net government debt, and create 1.25 million jobs over the next five years. However, there was no attempt to substantiate these promises, nor to argue that the promises were a logical outcome of his so-called Economic Plan. Indeed, apart from alleging he had a Plan, no further detail was provided. Accordingly, in this article I consider whether we can we believe the Government’s promises for jobs and future budget surpluses.
In a major speech last Tuesday, the PM claimed he had an Economic Plan, and if re-elected he then promised to:
- Create 1.25 million jobs within five years, and
- Return the Budget to surplus and thus reduce net debt (much less than gross debt) by about $300 billion to $40 billion in 2028-29.
But can we believe the PM? He is clearly desperate, and facing defeat, he is unlikely to be held to account for these promises. Furthermore, there was nothing new in this speech that would indicate how and why the Government can lift its performance to this extent.
In these circumstances it is better to rely on other more serious and informed projections.
The Employment Projection
In the Mid-Year Economic and Fiscal Outlook (MYEFO), last month the Treasury forecast employment to increase by 1¾ per cent in 2018-19 and 2019-20, and at an average annual rate of 1½ per cent thereafter. This is equivalent to an average annual rate of employment increase over the next five years of just over 1½ per cent. By comparison the PM’s promise to create 1.25 million jobs over the same period is equivalent to an average annual growth rate of almost 1.9 per cent, or almost half a percentage point more, and more than a quarter of a million more jobs than were projected by the Treasury only a month ago.
So, who do we trust more on economic forecasts? Certainly, the Treasury’s employment projection is much more in line with the experience of the past fifteen years. However, as Abdul Rizvi points out in his article: Is the Government walking both sides of the street on immigration (Pearls & Irritations, 30 January 2019), much of the difference between Morrison and the Treasury is probably explained by the very high migration forecast that Morrison has used. In principle, there is nothing wrong with that, and Morrison’s position as PM gives him the capability to make that higher level of migration happen. But as Rizvi also points out, Morrison is on record as wanting to lower migration, and thus this is further evidence of him wanting to walk both sides of the street.
The Budget Projection
The budget projections in the PM’s plan accord reasonably closely with the latest Treasury figures in the MYEFO. While I have no reason to doubt the budget forecasts for the current financial year, I have previously given my reasons for my doubts about the budget forward estimates and the rest of the next decade in my articles: How Useful and Reliable are the Budget Projections, and The Government’s Mid-Year Economic and Fiscal Outlook Statement, posted respectively in Pearls & Irritations, on 29 May and 18 December 2018.
In brief, the reasons for my scepticism about the ability of this Government to return to a sustained surplus are as follow:
- Wage growth has been overestimated by at least half a percent a year, and low wage growth is the principal factor holding demand back. The Government has failed to take account of how wage growth has been decoupled from economic growth in most advanced economies and it has no plans to alter this situation.
- Over the last decade productivity growth in the OECD has averaged only half its previous rate, and in the last few years it has declined in Australia too, but no such allowance has been made in the Government’s projections.
- The recent reduction in the budget deficit entirely reflects a surge in revenue caused by higher commodity prices, which are still more than 40 per cent above their long-term trend. Thus, this improvement in the budget owes nothing to the Government’s economic management. Indeed, the total cost of the Government’s new policy decisions taken over the 2018 will cost the budget a net $32 billion over the next four years which is more than the amount projected in the MYEFO for the budget surpluses over the same time period.
- In addition, with revenue constrained to increase no faster than GDP after 2021-22, a sustained budget surplus would require outlays to increase more slowly than GDP. Certainly, that would be most unlikely, given the factors underpinning demand for public services – that the Morrison Government is pledged to fund. Instead, that sort of expenditure restraint would require major changes to major expenditure programs of the sort that this Government has eschewed ever since its unpopular 2014 budget.
- The international economic outlook is deteriorating. The OECD and the IMF are revising their projections down, and in Australia the peak in house building and construction has passed.
Clearly the Government’s projections for both employment and future budget surpluses are most unlikely. Furthermore, there is no real economic plan lying behind these projections. Instead, the Government’s economic strategy is limited to:
- Tax cuts that are heavily biased in favour of the rich, when what is holding Australia back is low wages and higher inequality.
- A phoney return to Budget surplus, which if it were true would be appropriate if aggregate demand were rising sufficiently strongly. However, as demand is more likely to be weak, then a slower return to that projected surplus, and some increase in taxation to finance essential services, would be more appropriate.
- An infrastructure program, and as readers of this blog will know, most of the projects have never presented a proper business case and many are most likely a waste of money.
Given the paucity of this Economic Plan we should not be surprised that it is unlikely to achieve its stated objectives.
Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.