CBA’s chief economist Michael Blythe makes case for tax cuts

CBA’s chief economist has hosed down talk about a “per capita recession” but says it’s time to bring forward tax cuts.

CBA chief economist Michael Blythe. Picture: Hollie Adams.

Commonwealth Bank’s chief economist Michael Blythe says that if Australia is in a “per capita” recession, then it’s the strangest one he’s ever seen.

And while there might be pressure on the RBA to cut interest rates to help address the slump in GDP growth, there were other options available, thanks to a rapidly improving budget position that makes bringing forward tax cuts possible.

According to Australian Bureau of Statistics data, GDP growth plunged from an annualised rate of 3.8 per cent in the first half last year to 0.9 per cent in the second half.

“At one level Australia’s record‑breaking expansion continues through its 28th year,” Mr Blythe said. “But those looking for the negative spin will note that GDP growth fell behind population growth in the second half. Headlines about a GDP per capita recession abound.”

So if the current conditions marked any kind of recession, then it was an extraordinary one, he said. “If this is a recession then it is one of the strangest I’ve seen in my 36 years of following the Australia economy.

“No recession I have seen comes with positive jobs growth, an unemployment rate at the full‑employment level of 5 per cent, a (near) budget surplus, upgraded business capex plans, above‑average consumer sentiment and a rising terms‑of‑trade.”

Mr Blythe said that while GDP — the “catch-all for living standards” — plunged last year, real net national disposable income per capita grew by 2.1 per cent during 2018.

“What matters for living standards is not production per se, but the income generated by that production,” he said. “It is real net national disposable income per capita that matters for those that want to keep a running tab on living standards.”

But he indicated that the more sophisticated measure of real net national disposable income didn’t offer the simple narratives that hold sway on social media like Twitter. “Try fitting that into a tweet in 160 characters or less,” he said.

GDP growth for both the third and fourth quarter last year was disappointing and saw the market further move price in an interest rate this year while some economists predicted two cuts by August.

Mr Blythe noted that RBA governor Philip Lowe last week contrasted the decline in GDP growth with the growing demand for labour.

“A simple rationalisation would be to say that the labour market lags the overall cycle. But an equally valid argument is that GDP is a backward‑looking indicator,” he said.

“The policy debate inevitably focuses on the RBA. Monetary policy is able to respond quickly and decisively when required. “

But the RBA was right to resist a knee-jerk reaction to lower GDP growth, because there were other options available to kickstart growth besides monetary policy.

The federal budget was probably in better shape than even the government’s mid-year economic and fiscal outlook (MYEFO) update in December indicated, and return to surplus was not far away, Mr Blythe said.

“The MYEFO on our figuring already contained an allowance of $9.2bn for additional income tax cuts. The money is there in the Treasury portfolio under the coy heading of ‘decisions taken but not yet announced’,” he said.

“There is now scope (and need) to top up these tax cuts in the Budget on 2 April.”