What kind of economy will the next government inherit?
The economy feels sluggish because it is still transitioning from mining investment-led growth.
The prime minister, Malcolm Turnbull, and the opposition leader, Bill Shorten, have offered voters competing visions on how to speed up the process but neither has much urgency.
The centrepiece of Turnbull’s budget – his $48bn 10-year tax cut plan – will be fully implemented by 2026-27, so its total effect won’t be felt until 2046.
Shorten says he would rather fuel growth by spending heavily on health and education. But the benefits of his plan, measured by economic growth, will take as long as Turnbull’s. The economy won’t be getting much from government policy in the next few years, whoever wins.
How will things improve?
On Thursday Australia completed its 25th year of uninterrupted economic growth.
For 25 years the economy grew at an average annual rate of about 3.25%. Over the past 12 months, it has grown by 3.1%, so economic activity is running close to the long-term average.
Sound believable? It is. In fact it is higher than Treasury’s estimate of Australia’s potential growth rate, which is about 2.75%.
That has helped the trend unemployment rate to fall from 6.2% to 5.7% since March last year. One reason is that non-mining sector jobs are more labour-intensive, and non-mining jobs are picking up.
The economist Saul Eslake says: “It makes sense that the rotation in growth away from mining, which is the least labour-intensive form of activity known to mankind, to growth led by dwelling construction and by household and business services, which are fairly labour-intensive, will create more jobs for a given amount of GDP. .
“That all makes sense. And we’re now having record levels of dwelling construction, with over 200,000 new dwellings last year, and that’s labour-intensive. Likewise, we know there’s a strong upswing in tourism, which is also labour-intensive.”
The chief economist of the Commonwealth Bank, Michael Blythe, says the economy is further through the transition than people realise. He says the big miners are about 80% of the way through their downturn in capital expenditure, and about 60% of the way through the associated job losses – and those resources are definitely being diverted to non-mining parts of the economy.
So why do things feel so sluggish? Because wages have not kept pace with economic growth. We are being paid less for the work we’re doing.
“We’ve had three or four years now of falling commodity prices,” Blythe says. “It explains why income growth in Australia is running at recession-type levels.
“So despite those fantastic outcomes in the real economy, our income looks more like what you’d expect to see during a recession. And that brings with it a number of risks for the Australian economy in the year ahead.”
What about the budget?
One of the risks in such an environment, where incomes and government revenue are so weak, is that the government will have to cut spending if it wants to wind back the deficit quickly.
“That comes with a negative impact on growth,” says Blythe.
And companies facing weak profits that want to boost their bottom line may want to focus on costs. That means putting off capital spending and deferring labour hiring. That will have a negative impact too.
Economists say the commonwealth budget is in a much less secure position than it was in 2007.
Both Labor and the Coalition say their policies will return the budget to surplus by 2020-21.
But they are relying on a Treasury assumption that nominal income growth will revert to 5% within two years, boosting revenue and dragging the budget into the black. It’s an artificial assumption.
“It’s not based on anything other than convention,” says a former Reserve Bank board member, Warwick McKibbin.
The next government will not have much fiscal space to work with.
