Budget’s in the black, but nation needs a fresh track

On April 2, Josh Frydenberg declared “the budget is back in black and Australia is back on track”. He laid on the table a strong hand of four surpluses across the forward years, totalling $45bn. On Monday, as he flipped over cards in the Mid-Year Economic and Fiscal Outlook, the Treasurer’s underlying cash balances were slashed to $23.5bn. Behind that slide is an even greater writedown in revenues, with weaker expectations for GDP growth, wages and export prices. This was always a risk, as we warned on budget night, citing the strategy’s reliance on fiscal drag and mining profits. “Today’s revenue projections will go up in smoke” if local and global conditions weaken, we concluded in our editorial. “Australia needs a safer fiscal track.”

On the plus side, Mr Frydenberg and Finance Minister Mathias Cormann are keeping outlays in check. Over the forward estimates, average annual real spending growth is 1.3 per cent. Net debt will peak this year at 19.5 per cent of GDP and is projected to fall below 2 per cent by decade’s end; it was forecast to be zero by then in the budget. As well, the prices plugged in for iron ore are on the safe side, meaning company tax receipts could be much higher, flowing straight into a fatter fiscal buffer. The other surprise dividend could come from a stronger global economy. Right now, world growth is running at its weakest since the global financial crisis. But the strong result for Boris Johnson, untangling of the Brexit knot and good news on the US-China trade spat could all point to a global recovery.

At home, Mr Frydenberg’s budget update is in line with what we know about an economy stuck in low gear. Growth is being sustained by the export sector and government social spending, while the drought, slumps in home building and business investment, and the consumer spending strike are a drag on the economy. Treasury has pared back its GDP forecast to 2.25 per cent this financial year, rising to 2.75 per cent in 2020-21; that’s better than other rich nations but sub-par based on our long-run trends. Wages growth is expected to flatline at 2.5 per cent this year and next financial year, despite pre-election forecasts it would reach as high as 3.25 per cent. In a low-inflation world, the Reserve Bank says we have to get used to this, as the nexus between the jobs market and wage growth is rewritten.

So where will growth come from? The Morrison government argues it has been doing enough — namely, personal income tax cuts and new road, rail and water projects — to hurry up demand. Since MYEFO in 2017, the Coalition has pumped an extra $42bn in spending into Canberra’s pipeline. Plus the RBA has cut official interest rates three times since June to 0.75 per cent. For now, no extra stimulus is required. This does not mean the government is putting up a “white flag” on the economy, as Labor contends. It is better to watch and wait on the stimulus front, and stand ready to act if output slumps over summer. In any case, rather than bringing forward tax cuts, as Labor argues, it is prudent to accelerate spending on infrastructure if the need arises. At heart, MYEFO tells us there is a tightening fiscal operating environment, no room for error.

As we have long argued, the best, and only, route for sustainable rises in incomes is through productivity improvements. Praising the transport, tax cut and skills measures in April, we lamented “there is little to see on the economic reform front in this budget”. The Treasurer speaks about cutting tax for small business, investing in trades training and working with the states to harmonise regulations and to accelerate bulldozer-ready projects. He has listened to the business lobby and it appears the May budget will have a tax break for investment; hopefully, this will generate new spending rather than paying an allowance for capital that would have been added anyway.

Business investment is a missing part of the productivity puzzle, a clamp on the economy’s supply side. Workers need better machines, tools, software and ideas if they are to raise output per hour. Many companies are finding it difficult to get the sign-off for loans for expansion in the wake of tighter prudential rules, changed attitudes to risk and the finance industry’s shaming during the banking royal commission. The banks need to play their role as the “handmaiden of industry”, as a former central bank chief once said. The rusty credit tap must be loosened to unleash a more dynamic business sector.

A rosy view of MYEFO is there’s no need to panic; the fundamentals are solid, let the economy right itself. A more realistic take is the runway for economic reform — before the next election or a global crisis — is getting shorter. Scott Morrison’s careful, albeit narrow, agenda of under-promising to voters in May has its limits. Policy in increments is fine for tyro officials, but this government is in its third term. In truth, the fiscal buffer is wafer-thin, a “rounding error” in accounting terms. The Coalition must turn the screws on a heaving social welfare bureaucracy as it revamps the machinery of government.

We believe the Prime Minister and Treasurer need to get on the front foot and change the conversation on the economy with voters. They are positive marketers at a time of wage stagnation and slow growth. At the margin, their messaging will help to raise business confidence. Less global uncertainty will also help. But they should take quiet Australians into their confidence about how the world has changed and that we need to be productive, innovative and flexible to earn our way. As he prepares his second budget, Mr Frydenberg must continue the fiscal consolidation he has started. But the more pressing task is to find a track to faster economic growth, built on broadbased private investment.