Budgets are always pretty boring. Any controversial issues have been leaked (and spun) beforehand. Last night's was no exception. But it does provide an opportunity for a stock-take on longer-term debates about how the economy is travelling.
In a world which has been 'too slow for too long', the Australian performance has been pretty good, especially considering the collapse of commodity prices since 2011 (the graph below shows just how big this terms-of-trade shock has been). On the usual aggregate GDP measure, Australia has grown 22% over the eight years since 2007, just before the crisis. This compares with 10% for the USA, 7% for the UK and 12% for Canada, a rather similar economy. This looks even better against the dismal performance of Europe, where France is up just 3%, Germany up 7% and Italy down (yes, down!) 8%. Among the mature economies, New Zealand is closest, with 16% expansion. (all data from IMF WEO April 2016 database).
If we look at per capita GDP, Australia is less of a stand-out, with an increase of 7% over these eight years. On this measure the out-performance narrows: even Japan is up a couple of percent. But Australia still has twice the growth of the US.
It's too early for a definitive assessment of how the transition from the resources boom is going, but so far the cautious optimists like John Edwards are ahead. There is now a wider acceptance that the impact of the resources boom was exaggerated. Half the increase in resource investment was spent on imports rather than in the domestic economy; the calculation of the terms-of-trade impact on income left a lot of room for different interpretation; and so much of the resources sector is foreign-owned that the big swings (both up and down) are felt more by foreign investors than by locals. Coal miner Peabody is now in Chapter 11 insolvency and Xstrata-owner Glencore is restructuring its balance sheet, but these are wholly foreign-owned.
None of the predicted disasters has come to pass. The banks were said to be vulnerable because of their dependence on foreign funding but this was given a real-life ultimate stress-test in 2008 and they came through untroubled. Anyone predicting a repeat of the freezing of the New York money markets hasn't noticed what prudential supervisors have been doing since then. Another popular alarmist prediction was a house-price bust (with the knock-on effect this might have on the banks' mortgage-heavy balance sheets). Again, so far so good: asset-prices seem to be levelling out and even if they drop back, the biggest exposures are with well-placed borrowers. Unless there is a big rise in unemployment, all this seem a case of scare-mongering — or commentators without enough real issues to talk about.
Moody's has put the government on notice that it must do more to get the budget into surplus. It's a puzzle why anyone would take any notice of the credit-rating agencies after their pre-crisis performance in handing out AAA securitization ratings on demand. Certainly the markets didn't take any notice of past down-grading of Japan and the US. But Australian politicians have made a rod for their own backs here, by using the threat of downgrading as an impetus for budget stringency.
In the global context, this pressure for a quick return to budget surplus has been the driver of austerity in the crisis-affected countries. This macro-economic mistake is perhaps the main explanation for 'too slow for too long'. The crisis expanded deficits, more because of the economic downturn rather than the need to support failing banks. Winding these deficits back greatly weakened the recovery: even with a conservative estimate of the fiscal multiplier, each percent reduction in the deficit-to-GDP ratio takes a percent off the growth rate. Look at this graph to see the contraction applied by austerity in 2011-13 and weep.
Source: IMF WEO April 2015 Figure 1.7
Australia had the same debate, with successive governments vying with their opposition in promising faster return to surplus. This was, in fact, unnecessary here. With no recession or bank failures to cause a huge deficit blow-out, moderate government debt levels and time-bound fiscal stimulus, there was no pressing need to return quickly to surplus. Fortunately, the austerity needed to achieve a surplus was never applied. The promised surplus has progressively receded into the future. We were saved by prevarication.
Long-planned resources projects (including LNG) have kept the level of investment from dropping precipitately, and housing investment has helped fill the gap. Total investment has fallen from 28% of GDP in 2007 to 26% in 2015, still strong by international comparison. Unemployment is fairly low, thanks to wages restraint. The slowing has been softened by exchange rates and interest rates. The real (inflation-adjusted) exchange rate is more than 20% lower than its peak in 2012 (the largest fall among mature economies). Interest rates are low in historic terms, but the RBA has not had to resort to the desperation-driven near-zero (and even negative) rates prevailing overseas. Ross Garnaut's advocacy for still-lower rates to get the exchange rate down further seems misplaced in an inflation-targeting regime which has served Australia well.
Of course further structural transition is still needed. While productivity is notoriously hard (maybe impossible) to measure, there is not much doubt that Australia is mimicking the global weakness. At some stage, the budget has to be brought back to surplus.
The valid criticism of past policies is not that they have been seriously wrong, but that the political process has not only failed to take desirable options: it has also blocked them off in the future. The government ignored the main lesson of the successful reforms of the 1980s: when your political opposition advocates good policy, you should seize it as your own. In the current context, trimming back the excesses of negative gearing is an example. Labor's total hash of a resources super-tax in 2010 has put that option off the agenda for as long as memory lasts. Combined with a sovereign wealth fund, this would have been a powerful automatic counter-cyclical instrument for Australian's chronic problem of commodity cycles. The current government botched sensible climate-change policies just as decisively. A carbon-tax was labeled as a 'big new tax' and scuttled forever, ignoring the opportunity it provided to lower other taxes which distort, rather than offset a distortion, as a carbon tax would have done.
Economic reform requires patient gathering of support through rational argument and sensible compromise, not the now-standard point-scoring negative politics. Parties pander to their constituencies. The modest cut in company tax this budget responds to vested interests, ignoring the fact that Australia's imputation policy fully offsets company tax for domestic shareholders. Foreign multinationals are the target of a potentially budget-fixing 'Google' tax, with the actual collection being a problem conveniently in the future. South Australia's political blackmail on ship-building succeeds brilliantly, as industry policy disappears down a dead-end.
Economists, for their part, should be ready to offer compromise second-best solutions, rather than incomprehensible optimality (as was Treasury's proposed resources super-tax).
The key issues for the economy's future are not to be found in last night's door-stop of budget documents. Far-sighted initiatives (such as an infrastructure fund, financed outside the budget) were left for another day. Tinkering has prevailed over structural reform. The strategy which will in due course return the budget to surplus remains uncertain.
On the resources debate, John Edwards' measured assessment of the not-too-disastrous impact of the resources boom is proving correct, but Ross Garnaut's somber message of lost opportunities resounds. With all the advantages of resource endowment and proximity to the globe's fastest-growing region, we should do better than just muddling through. The overall assessment is: 'Lazy: could try harder'.
Photo by Stefan Postles/Getty Images