Scott Morrison walks an extremely difficult path in handing down the 2016 federal budget.
On one hand he is setting out what is essentially an election manifesto, with all the temptation to make a big pitch to middle Australia to help put the Turnbull government on the right footing heading into an election on July 2.
On the other, all the information shows that Australia’s economic momentum and budget position remain flat at best, if not deteriorating. Morrison needs to make some meaningful policy announcements that will protect the budgetary position and give some assurance to people – who have seen wage growth slowing and the jobs market look OK but far from robust – that the government has a plan to steady the economy.
The lessons of Australia’s recent economic history are that there are an increasing number of forces far beyond the policy levers of Canberra that will affect the Australian community. Think about how rapidly the China slowdown has been felt in Australia’s resources sector, or how signals from the US Federal Reserve’s signals on interest rates can affect the medium-term value of the Australian dollar, increasing the price of the tourism and education services that are so crucial in the transition now that mining investment has fallen off a cliff.
Through the booming years when Peter Costello was treasurer, the Howard government was able to bask in the huge increase in national income that came from selling commodities to China. It was also able to lavish Australians with income tax cuts and new social programs like the baby bonus. In the Rudd, Gillard, and Abbott years, there persisted a notion that Costello-style blockbuster budget were a political requisite.
The truth is that much of the increases in the budget bottom line were due to cyclical factors, and not changes in government policy. Former Morgan Stanley star analyst Gerard Minack captured this perfectly in the following chart, which tells a powerful story about policy versus economics in Australia’s budget outcomes.
It shows it was cylical changes – not strokes of policy genius – which had outsized positive impact on the budget bottom line. Minack referred to this as “the fiscal magic pudding”, where the money simply appeared impossible to run down no matter how much the government spent.
To give him credit, Morrison has made a strong effort to reset expectations of the limits of government power when it comes to budget outcomes, and explain the the point so powerfully captured in that Minack chart: that increased global volatility has consequences for Australian politics and policy-making.
Morrison set this backdrop out at length in his speech to the press club back in February. He talked about equity market volatility, crashing oil prices, China’s rebalancing, global interest rates at zero, and the need to lift productivity in the Australian economy.
“The message in that is this is a long road,” Morrison said. “Our fiscal challenge that we inherited – there is no quick fix to us, there is no one statement, there is no one budget. There are budgets and budgets and budgets and budgets that are required to fix that problem.”
He added: “From a growth point of view, at 2.5% that’s below the long-term trend (and) you’ve got to start asking what the long-term trends are, I think, in this new global economic environment.”
These have been concerns that economists and investors have been raising for some time. The growth levels that the world has become used to simply aren’t there any more. It was a statement from Morrison that Australia’s economic realities have changed.
But that speech was widely criticised for not outlining any policy responses to all of this chaos, including by me, because of a reasonable expectation that as the chief economic policy maker he would have some answers for all of the questions he was raising.
Anyway, the answers will come tonight. What will be fascinating will be how Morrison manages the message on the health of the economy. The most reasonable assessment of the economy right now is that it’s doing just OK.
Voters are daily participants in the real economy, where the nature of work and career is changing rapidly and where a downturn in China leads to layoffs in Kalgoorlie. My guess is that people have a much greater sense of Australia’s place in the global economy – and its exposure to its ups and downs – than many in the political class care to acknowledge. It’s easier to keep ploughing the old furrows about restoring the surplus and targeting socio-economic groups or organisations for cuts or spending increases.
This isn’t a very fashionable opinion, but in my view Morrison has been doing a big part of what is required from an Australian treasurer in 2016, and he should be credited for his continuous efforts to explain it.
While this is a good start, being Treasurer is not all about economic commentary. Tonight he needs to start convincing people about his ability to make decisions, and set out a clear path in a volatile environment.