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Editorial

Labor raises alarm, but no need for economic panic

The International Monetary Fund’s downgrade for global growth and its sobering forecast for our economy is merely catching up with what those of us who live, work and invest here have been experiencing for the past year. The IMF expects GDP to grow by 1.7 per cent this year, down from its previous reading of 2.1 per cent and the official forecasts of Treasury and the Reserve Bank of about 2.25 per cent. Despite lower interest rates and higher personal income tax refunds, spending in the economy is insipid. Households are carrying high levels of debt and any extra cash is being channelled into home mortgages or consumer debts; spending on essentials such as power, food and shelter is holding up, while outlays on discretionary goods, services and luxuries have been pared back.

The RBA is almost out of firepower, with the official cash rate at a record-low 0.75 per cent and many economists questioning whether there’s any point in cutting further. The IMF, factoring in the worst global growth rate in a decade of 3 per cent, said fiscal policy could “play a more active role” in some nations, as long as budget policy was not already too expansionary. It doesn’t take much to get Labor’s tax-and-spend juices flowing, just as the budget shifts to balance for the first time since the global financial crisis. Anthony Albanese wants a booster shot of stimulus, akin to the emergency cash splurge Kevin Rudd unleashed. As we detailed at the time, the initial handouts kept the economy ticking over but the subsequent doses were the wrong medicine for a recovering patient — too much, too late — before becoming permanent parts of an obese budget.

After six years in office, the third-term Coalition government has largely succeeded in keeping a lid on its own spending. The nation is on the cusp of a surplus, a badge of credit-rating honour. Josh Frydenberg is not about to sacrifice policy credibility in the face of panic merchants and spendthrifts. Yet much of the turnaround in the budget’s bottom line, however, has been through fiscal drag (as inflation pushes more taxpayers into higher brackets). The Morrison government’s tax-relief plan, in three stages, will see a flattening in the tax structure, with almost all workers paying no more than 30 per cent from 2024. A new study by the Centre for Independent Studies shows fast-tracking of the tax cuts would not kill off the surplus; it would also boost economic growth and deliver structural reforms, such as improved work incentives.

Labor Treasury spokesman Jim Chalmers finally is spruiking tax relief for workers and business. He called for “a tax break for business investment to deal with the extraordinarily weak business investment in the economy”. This is progress, of sorts. After the May election, Labor resisted the Coalition’s tax cuts, then waved them through. The point of such obstruction eludes us. Labor also blocked company tax cuts when Malcolm Turnbull was prime minister; big businesses are still saddled with a 30 per cent impost, while the rate will fall to 25 per cent for others. Labor knows lower taxes are the best way to encourage capital expansion but supports relief only at the margin via ad hoc allowances. As Peter Costello argues, boosting the supply side — cutting red tape, reducing workplace regulation, skilling workers — is preferable to big spending by Canberra and more rate cuts via Martin Place.

The fundamentals of the economy are sound. That’s a consensus view, not just government PR. Any suggestions of GFC-style measures are cynical, political and panicky, or a mix of all three. Although GDP is at its weakest annual growth rate in a decade, it is still positive. The jobless rate is stubborn at just above 5 per cent yet employment growth is solid. Wages are rising, albeit slowly, and inflation is ultra-low. But community confidence is shot, amid global uncertainty and endless financial market volatility. These are strange and perplexing times as wages stagnate, new technologies disrupt industries and economic power recalibrates the globe.

The Treasurer is not without a plan. The strategy is modest and politically risk-averse yet adaptable. In the mid-year fiscal update he has options should consumer spending fall into a deeper hole or the shocks from the US-China trade dispute hit our export industries. As a rule, more dynamism and fewer obstacles for business lead to higher profits and wages. While Mr Frydenberg has spoken about the need to improve productivity growth, there is little follow-up in educating voters, firing up business or pushing officials to shift the dial on supply-side reforms. Alas, the economy does not rate highly on the Morrison government’s talking points sheet. The IMF’s wake-up call must change priorities and invigorate the Coalition’s reform agenda.

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Original URL: https://www.theaustralian.com.au/commentary/editorials/labor-raises-alarm-but-no-need-for-economic-panic/news-story/91df50e65b9bbf9ed26607d5091915c7