Terry McCrann: Goldilocks growth to keep rates on hold

THERE were touches of the very different games played by Peter Costello and Paul Keating in Treasurer Scott Morrison’s response to the ‘Goldilocks’ GDP numbers, writes Terry McCrann.

Treasurer Scott Morrison. Picture: Kym Smith

THERE were touches of the very different games that were played — in exactly opposite circumstances — by Peter Costello and Paul Keating in Treasurer Scott Morrison’s response to the ‘Goldilocks’ GDP numbers on Wednesday.

SCOTT MORRISON’S QUESTION TIME FURY OVER BUDGET

Now, that’s my term, Goldilocks, not his — although he probably viewed them much the same way. That they were ‘just right’ — describing a pretty reasonable, even balanced, economic state of affairs — for the country and especially for a treasurer counting down to his second Budget.

Back in the 1980s, neophyte treasurer Keating was trying to win fiscal street cred — both for the post-Whitlam Labor government and for himself personally. So, running down to every Budget, he always painted the task as herculean, indeed all but impossible; and then on Budget night over-delivered, to all-round applause.

So we saw a flash of that in the ‘sombre Morrison’ on Wednesday. Yes, he was pleased by the figures, but he cautioned on their longevity and especially on the buoyant commodity export prices on which they were very largely based.

Come May, he would also like to over-deliver; something we ain’t seen for a decade or more through the Budgets of Wayne Swan, Joe Hockey and Morrison One.

That last part pointed to the ‘Costello play’. For, in the 2000s, Costello — ‘helped’ by some consistent, consistently monumentally incorrect, Treasury forecasting — was always downplaying the (always) good Budget news.

Then when even bigger — ‘unexpected’ — Budget surpluses actually arrived, he could deliver more ‘surprise’ — big and real — tax cuts.

On Budget night, former treasurer Paul Keating always over-delivered.

Costello’s prime motivation in downplaying the surpluses was to keep the sticky fingers of his fellow cabinet ministers and indeed the prime minister himself out of the fiscal cookie jar.

In 2017 we are certainly not talking surpluses, but Morrison would still be desperate to avoid the slightest suggestion that the Budget task was now ‘easier’.

He would be only too aware of how dangerous even the suggestion of just ‘smaller’ deficits could be. With the government at 45-55 in the polls and a PM who is even less popular than that and not just backbenchers in ‘marginal’ seats (anything less than a 15 per cent buffer) in a funk.

Actually getting cuts through the Senate aside, he has got exactly one shot at a tough — OK, maybe toughish — Budget and it is this one. It is the first Budget after the election.

From the day after the Budget, the government will be in long, extended, desperate election mode; any chance of further tough decisions and Budget cuts will be ‘dead, buried and cremated’.

Now, the core of the good GDP numbers was what I would term the ‘fourth stage’ of the (great) China resources boom impact on our economy.

The first was the soaring prices on limited supply. That played through as increased income and fed (Costello’s) tax revenues.

The second was the glorious combination of high prices on increased production. That delivered both economic output growth and higher national income.

The third was in the construction phase — those three huge LNG projects in Queensland, similar conventional LNG offshore WA and the NT, coal mines and Pilbara iron ore.

Come May, Treasurer Scott Morrison would also like to over-deliver.

As these projects are all completed and investment falls away, we’ve been looking desperately for new ‘after-the-boom’ economic drivers. But in these latest figures we went back to the boom.

Our terms of trade (essentially commodity prices) leapt nearly 10 per cent. We got those higher prices across much higher export volumes. Those higher export volumes contributed around half the 1.1 per cent growth in the economy in the December quarter.

The higher prices underwrote the stunning 2.9 per cent (for the quarter, making 6.8 per cent for the year) in net national disposable income.

And the combination delivered the thumping 3 per cent growth (for just a single quarter, and making 6 per cent for the year) surge in nominal GDP. As opposed to just the 1.1/2.4 per cent rises in real GDP.

It is nominal GDP which is key to Budget revenue. You don’t pay taxes on ‘real’ incomes (CGT excepted) but on nominal (actual) money incomes; and this would have made Morrison’s fiscal heart flutter.

NOW, the other main driver of growth was increased consumption spending, but this increase was a little more complicated — and, problematical for Morrison.

The near 1 per cent rise occurred despite very sluggish wages growth. It was only possible because of a big drop in the recorded savings ratio.

So, people cut back on their savings growth because they ‘had to’, because their wages weren’t growing?’ Or because they felt more confident — not so much ‘saving for a rainy day’? Or because of low interest rates, saving ain’t that attractive?

Whatever, consumption spending won’t be roaring, unless we get more jobs or wage and salary growth picks up or both.

Further, while nominal national income growth is important for overall Budget revenues, it is wages growth that is especially critical for the single biggest revenue source — personal income tax. Thanks also, to bracket creep. So, a question mark.

One thing the numbers do is absolutely rule out any prospect of an official rate cut from the Reserve Bank any time, including next week.

And if indeed, the US economy starts to rock and Trump-roll — and Janet Yellen lifts US official interest rates (the US jobs report on Friday night will tell me, and then you, if she is going to hike later this month) — the speculation will shift towards the other direction.

Originally published as Terry McCrann: Goldilocks growth to keep rates on hold