Here we go.
There’s an election coming on July 2 and it’s possible the official proceedings will kick off as early as Sunday if Malcolm Turnbull goes to Yarralumla and asks for the parliament to be dissolved.
“The economy, stupid” was a campaigning philosophy coined by James Carville when he was working on Bill Clinton’s successful bid for the US presidency in 1992. It has since become reductio ad absurdum in Anglosphere democracies; if you win on your economic argument, you can win elections.
The backdrop to this campaign is that the future trajectory of Australia’s economy is more difficult than ever to predict. The RBA today slashed its inflation forecast for this year for a band between 1% and 2%, a powerful warning that the disinflationary forces that have been building in the economy risk becoming entrenched.
Central banks around the world have been fighting to stoke inflation for years in the post-GFC world. But as ANZ’s former chief economist Warren Hogan pointed out last week on Business Insider, monetary policy is losing its potency, and the specter of inflation is a concern that needs to be managed for reasons that are not complicated: in a global world, private enterprise has become extremely efficient at offering lower prices for all sorts of goods and services.
As has become clear over the past decade, the inflation process is becoming globalised. Supply chains are global while multinationals are increasingly prominent in the retail space. Australia is no different with a raft of global players entering the domestic market in the past half-decade.
Global players have deep pockets and are prepared to compete on price. They don’t require the same return on equity that many of the domestic players are trying to achieve because they are funded in a world of super low interest rates. This brings intense competitive forces into consumer markets and keeps prices low or falling.
The globalisation of the retail sector is actually just fast-tracking a more powerful force from the global economy into Australia: deflation. Global inflation pressures are almost non-existent in a world of ultra-transparency and overcapacity in manufacturing.
Defending profitability in this environment relies on managing costs, with “efficiency programs” being all the rage in corporate Australia, which is code for laying off workers and suppressing wage increases.
Australians will welcome the hip-pocket relief from the RBA’s rate cut but there should be no Joe Hockey-style ebullience about the state of the economy. The nation is living through an unprecedented unwinding of income flow and investment from the China-driven mining boom, forcing both Treasury and the RBA to revise downwards, repeatedly, their forecasts for GDP growth and inflation.
Both are predicting a return to something resembling normal levels of inflation and economic growth within three years, but as it stands, we are still awaiting evidence that this will happen. In the absence of signs that inflationary pressures are returning or that demand is picking up significantly, prudence insists on contemplating a cycle of further downgrades to come.
For Australians now experiencing record-low levels of wages growth and having taken on record levels of household debt, there are plenty of reasons to examine carefully any promises that politicians can rebuild the nation’s economic resilience.
The leaders of both political parties say they intend to treat voters with respect, but there has been a disappointing lack of evidence that this will be the case in the past 24 hours. We have seen both the Coalition and Labor lapse into lazy pot shots on budgetary positions over 10 years.
Australian voters understand that the economy can turn in a matter of months. If anything, the past 18 months of global financial volatility have shown that predicting budget outcomes even six months in advance is difficult. In the mid-year budget update last December the Treasury updated its forecast for the iron ore price to $US39 a tonne, and some thought even that was optimistic. Yet here we are six months on with iron ore at around $US60. The GDP data for the December quarter surprised everybody with its strength; and still the 2015-16 budget bottom line has gone backwards by $2.5 billion since then.
Or, if iron ore isn’t your thing, take the interest rate outlook. Four weeks ago very few economists and market watchers believed the RBA would cut the official cash rate in its May meeting. One bad data point and the market priced it at 50:50. There was a cut on Tuesday, and following today’s update to the RBA’s inflation forecasts, increasing numbers of economists are calling for another rate cut in June. The interest rate outlook has changed dramatically in just days.
The adage that a week is a long time in politics now applies to economics, too.
This should bring some context to the debate over the cost of the government’s company tax cuts being pegged at some $48 billion over a decade. It is simply impossible to accurately predict such an outcome in the modern age. It could cost less if economic activity slows; equally, should the economy see a strong recovery, the revenues foregone could be significantly more.
Labor’s claim that it can save more than $70 billion over ten years should be treated with equal caution. For either of those outcomes to be realised, vast assumptions need to be made about future economic activity. The first of those assumptions is that there will not be any sort of downturn, deep or shallow, to interrupt Australia’s record-breaking streak of continuous economic growth spanning a quarter of a century.
While it is useful to have guidelines for likely policy costings, the time-worn, gotcha-style rigidity attached to budget outcomes now belongs to a bygone – and, yes, simpler – age.
A deeper focus on the mix of activity in the economy, and increasing its diversity, is now required. To his credit, this the conversation that the prime minister is trying to lead, though his policy approach is, in the eyes of many, timid so far. Opposition leader Bill Shorten wants to fight on the future of Medicare and some much-needed reforms to the education sector, but he is determined to oppose tax relief to businesses on the basis that they are “camouflage for a massive tax cut to big multinationals“.
The prime minister and his treasurer have been caught in an embarrassing tangle over the cost of the company tax cut, with Turnbull claiming, seemingly in error, that government officials had not put a dollar figure on the cost. This is not the first time there have appeared to be mix-ups between Turnbull and Morrison and repeating this in future will not send a healthy signal from a team that is trying to convince voters that they have a credible plan.
Ultimately, however, even the best-laid plans will be subject to disruption by outside shocks. While Morrison’s budget has provided plenty of discussion points for the week, the RBA’s reasoning for deciding to cut the official cash rate was another reminder of how important it is for Australia’s economy to be resilient to them.
Because as sure as politicians will kiss babies, visit shopping centres, and stand with their families in this particular point in the political cycle, the shocks will come.
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