From the AFR this morning:
The federal government’s razor gang is looking for savings to cover $6 billion or more in forecast revenue estimated to have been lost since the May budget, to fulfil its promise of a surplus by 2016-17.
With company tax, capital gains tax and income tax receipts well below what was expected two months ago, and the Papua New Guinea asylum-seeker solution needing to be funded, cabinet’s Expenditure Review Committee met on Monday and is scheduled to meet again this week, on Wednesday or Thursday.
The committee’s aim is to cut hard enough to meet the return-to-surplus timetable outlined by the government in the May budget.
The updated outlook will be detailed in the economic statement the government plans to finalise before the election campaign.
There are two very different propositions here. The first is that revenues have slid by another $6 billion. The second is that spending has increased on the PNG solution. No evidence is offered to clarify what contributes what to the budget bottom line.
The distinction is important in macroeconomic terms because we need to know whether government spending is actually being cut or it’s being reallocated. If it is being cut then it is another blow to growth. $6 billion over four years may not seem like a lot but it’s another 0.1% of GDP per annum and, as we go over the mining investment cliff, every little bit counts.
It sounds from the article like it’s some combination of both cuts and reallocated spending. Given the boost to spending is in PNG, that’s a negative reallocation of money going offshore so the blow to growth will be larger still in the short term, if not so much over the long as PNG costs come down if the program works.
It may be that the FBT and refugee arrival policy changes are sensible policy shifts in terms of what is expected by middle Australia of its government. But as the economy slows, so long as we continue to respond to exigencies and falling government revenue growth by making deeper budget cuts we’ll push growth down even further.
Given the obvious parallels with the struggles of other Western nations post-GFC, it is interesting to ask where other economy’s have been before us on this path. No doubt readers will recognise European dynamics, if not as severe, of falling growth in private sector activity resulting in deeper budget deficits resulting in deeper government cuts resulting in falling growth in private sector activity. European countries have no floating currency so these dynamics have forced an internal devaluation via lower wages.
That has begun here too with the dollar remaining stupidly high and wage growth sliding significantly. But the degree of this dynamic is important and we are nothing like the European periphery.
Other parallels can be drawn with the Anglosphere model. In the US, public spending has detracted from growth every year since 2009. In the first few years, much of it was driven by state and local government austerity as Federal stimulus rose. In the past two years that’s reversed as regional government budgets have stabilised and austerity has overtaken Federal spending.
Meanwhile, the heavy lifting of recovery has been done by loose monetary policy, devaluing the currency and slowly lifting private sector borrowing (or, at least, enabling a smoother deleveraging of private balance sheets).
The sympatico with Australia is again imperfect. We did not have the same deep recession to kick us off and have enjoyed a spectacular mining investment boom to support incomes and asset prices. But the differences are in degree not kind. As that boom passes, government revenues keep bleeding away, monetary policy is headed inevitably to its lower bound enabling accelerated disleverging and the currency will ultimately fall much further as well. The constraint upon public spending is less tight than in the North Atlantic – with scope for sensible deficits for a few years – but it is very real nonetheless. To make good on its guarantee of private liabilities the government has no choice but to aim for surplus across the cycle.
Both the US and European experiences are, of course, examples of “balance sheet recessions” or as Paul Krugman calls it “depression economics”. Japan’s post 80s bubble burst led the world in its contemporary understanding for how long these periods of economic consolidation can proceed. It is often referred to as a “zombie economy”.
Australia has a head start on the same adjustment thanks to the mining boom that is now waning. But make no mistake, we’ve a long way to go. So long as current surplus policies persist, Australian growth won’t come in at 3%. Not in 2013/14. Not in 2014/15. Not in 2015/16.
Zombie Australia is upon us.
