Scott Morrison’s old-time AAA play straight out of the Paul Keating book

SCOTT Morrison has done a classic Paul Keating — push down on expectations and then over-deliver, writes Terry McCrann.

Scott Morrison and Mathias Cormann during the MYEFO press conference.

SCOTT Morrison has done a classic Paul Keating — push down on expectations and then over-deliver.

It worked very nicely, and he knew it.

Back in the day, as they say, Treasurer Keating used to game the Canberra press gallery and the financial markets; game them shamelessly, continually and very effectively. It was a beautiful and at the same time rather ugly thing to watch.

Keating would pooh-pooh expectations of a lower budget deficit; and then on Budget day, voila! — he’d unveil a deficit much lower than anyone had predicted and the Aussie dollar would leap in applause.

A year later he’d repeat the whole exercise, with the press gallery — which has a collective memory with a half-life of perhaps a day, if you’re lucky — as gullible as ever, as if the previous con had never occurred.

Well, Morrison has just played the same game. Running into yesterday’s midyear budget update, his tone had been sombre; it was as if he had all-but confirmed the $24 billion budget blowout ‘estimated’ by Deloitte Access Economics. Or indeed, that it would be even worse.

Reading between Morrison’s lines — and after yesterday, we can see they were exactly that: lines in a well-worn script, written by Keating 30 years ago — it was as if he was preparing us all for an instantaneous loss of our triple-A credit rating.

As it turned out we got instead an instantaneous affirmation of the triple-A, and we got it from all three rating agencies. And Morrison and Finance Minister Mathias Cormann knew that would happen when they walked into the press conference.

They were confident and on top of both the budget arithmetic and its politics. They were fully relaxed, one might even say cocky. For those of us who can remember, it was Keating redux.

Sure, the duo didn’t deliver a lower actual deficit over the four years; but they delivered a lower deficit than gallery, experts and market players had been allowed to talk themselves into expecting.

And the relatively small blowout — a total of $10 billion over four years, or barely half-a-per cent of total spending — was not only credible but even conservative. In a sense it even out-Keatinged Keating: Morrison and Cormann could credibly have produced a small bottom-line improvement.

Paul Keating wrote the script 30 years ago.

Let’s make a few broad observations.

First, the numbers. They remain as credible, as incredible, as the original ones last May. The outcomes will almost certainly be very different, as the years unfold. They always are: it is impossible to predict the future, and when even experts do, they get it wrong.

The prospect of ever-getting back to surplus — and certainly by 2020-21 — remains as elusive as it did in May. The best working hypothesis is that we will never see another budget surplus; let’s just hope the deficits don’t stay huge.

The projected surplus in these numbers assumes that Morrison and Cormann can keep an incredibly tight lid on new spending; and do so through another election cycle.

So that as a consequence spending as a share of the economy agonisingly inches down from 25.6 per cent in 2015-16 to 25.2 per cent in 2019-20.

The heavy lifting is done by taxes. They go up sharply from 23.4 per cent of GDP in 2015-16 to 24.8 per cent by 2019-20. That’s an extra near-$30 billion a year in the 2019-20 year — just about exactly equal to the forecast $30 billion fall in the bottom-line deficit.

Most of that is bracket creep, offset marginally by the initial cuts in the company tax rate.

The economic assumptions on which this is based are reasonable, even arguably conservative. But they are also fiscal fantasies.

NO, I’m not suggesting they are deliberately dodgy, simply that if anything the last few years should have taught us is the difficulty of predicting the future.

We just don’t know is our local economy is going to pick up pace to 3 per cent growth and then sustain it at that level. Is employment going to get back to a solid and sustained 1.5 per cent growth rate every year?

Critically, are wages going to go back to increasing at 3 per cent-plus every year? Critically, because you add wages growth to employment growth to get both the rising tax revenues and bracket creep on top.

And behind our local numbers, will China keep growing solidly at 6.5 per cent a year? And just as importantly, even if it does, what sort of growth rate will it be? Will it be growth that sucks in our coal and iron ore? Or will it be redirected to local consumer spending?

Interestingly, the numbers do not factor in a ‘Trump boom’ in the US. Expectations of US growth have been downgraded from 2.25 per cent in 2017 and 2018 to a very ordinary 2 per cent in both those years.

That doesn’t make a big difference to us — it’s China that counts. But if in fact Trump does get the US economy zooming along at 4 per cent; even if perhaps like an out-of-control freight train careering towards a crash; that would transform the global, the China and our local outlooks.

Bottom line of all this is not the fantasy surplus projected for 2020-21, but two critical demands.

One: we need to prepare holistically and big-time for whatever world is going to be made in the Trump House, formerly known as the White House. Even if we don’t know, if we can’t know, quite what that will be.

Two: the absolutely only way we can do that is to over-deliver across the necessary reform agenda — tax, IR, Red tape, climate stupidity
(end it) etc; and deliver yesterday.

SEVEN’S SHARE SIGNAL

THERE are a number of things to be said about the Seven West debacle.

First off, on the surface, it is hard to see any logic in the selling which drove the share price down 8 per cent. I doubt that moralistic viewers are going to abandon their favourite viewing in droves; that outraged advertisers are going to pull ads.

In short, I doubt that the — to quote the perpetrator himself — “regrettable” behaviour of the company’s CEO is going to play directly and negatively on the bottom line.

At the same time, the drop in the share price shows all too clearly why Seven cannot get away with yesterday’s statement of regret from its CEO Tim Worner as the only public response.

The affair is real, it is serious and it is almost certainly going to get worse. Arguably, Worner will have to ultimately at least stand aside, and the longer that’s delayed, the worse it is going to get.

None of this is to make any judgment on the allegations or the morality of any behaviour. It’s simply to state reality. We live in a supercharged highly sensitive environment. And media companies are at the cutting edge.

If something is clearly affecting a company’s share price in a significant way; and even more so when that company’s share price is so vulnerable to being affected negatively; the matter is not simply “price sensitive”, but potentially worse, could prove an extended running sore.

We’ve “been there” in these and very different but parallel circumstances too many times before to believe, to essentially just “hope”, that it will all blow over.

Seven will be best advised to get ahead of the game; to develop and project a full and at least semipublic investigation into the entirely of what’s happened. That’s the only way to actually get to an exit.

This is so even if the company’s not queried on the share price fall. Such a query — and response — could be a charade.

Originally published as Scott Morrison’s old-time AAA play straight out of the Paul Keating book