Ahead of next week’s mid-year economic and fiscal outlook, respected economist Chris Richardson released the Deloitte Access Economics budget monitor. Among its 120-plus pages of detailed budget predictions, there were three telling observations.
First, it calls for the “decade of deficits” to end, saying that a surplus “is a means to an end, not an end in itself”. So true.
When we came to government we inherited $240bn of accumulated deficits and debt was rising at more than 30 per cent per annum. Labor’s last deficit, five years on from the global financial crisis, was 3 per cent of GDP and Australia’s second highest on record.
It has taken six years to turn the ship around.
The budget position has improved year-by-year, with our past three final budget outcomes $37bn better off than forecast. It is not luck that the budget is in balance for the first time in 11 years and we are delivering a surplus.
Growth in government spending is around its lowest level in 50 years, welfare dependency its lowest in 30 years.
Australia’s tax-to-GDP ratio was 23 per cent last year, below our self-imposed cap of 23.9 per cent. And while export volumes are strong, our commodity price assumptions have been prudent, with iron ore prices today less than half their peak under Labor.
A positive story is the labour market, with the participation rate for women and seniors at record levels helping to drive 2 per cent growth in employment – almost three times the rate we inherited. Unemployment is down from the 5.7 per cent under Labor to 5.3 per cent.
So now is the time to pay down Labor’s debt. The country can’t keep kicking the can down the road.
Our interest bill last year was $19bn, almost as much as we spend on schools. This is money that goes to the pockets of bond holders here and overseas, instead of being invested in worthwhile projects at home. At some point, interest rates will rise and so too the nation’s interest bill, forcing future governments to increase taxes or cut services.
The failure to get debt under control could also endanger our AAA credit rating while reducing the government’s flexibility to respond to economic shocks.
Second, Deloitte’s rejects the notion that fiscal and monetary policy are pushing in opposing directions, saying that claim is “not true” as “our main economic levers, monetary and budget policy, are both supporting economic growth”.
The Morrison government is providing an additional $9.5bn to the Australian economy this year and next. This is a result of infrastructure projects brought forward, tax cuts legislated after the election and funding commitments in response to the drought.
We have also announced an aged-care funding package worth more that $500m in response to the royal commission’s interim report.
When one adds the additional $6bn on education and health this year and next together with the full rollout of the NDIS, it is clear there is significant additional federal support flowing into the economy.
This was illustrated in last week’s national accounts public final demand figure that covers government spending on capital and consumption and was up 4.9 per cent through the year.
When it comes to fiscal policy, our priorities are clear: lower taxes, more funding for infrastructure and record support for essential services. We will not be panicked into wasteful spending.
But to keep the economy growing, the government is not relying only on tax cuts and infrastructure spending but rather is engaged in significant reforms to the supply side of the economy.
This is why we are pushing ahead with our deregulation agenda to speed up environmental approval times for major projects, making it easier for food exporters to get their accreditation and helping micro-businesses employ their first worker.
Our industrial relations reforms are tackling lawlessness in the workplace, including in the construction sector where costs have been driven up by as much as 30 per cent.
Our skills agenda, our support for small business with lower taxes and increased access to finance and our focus on the digital economy, including the passage of the consumer data right, all add to the productive capacity of the economy.
Thirdly, the report says that despite the “deep” drought and a riskier global environment, the “momentum” in the Australian economy “has been lifting”.
The housing market has stabilised, with higher auction clearance rates and increased prices, and Bureau of Statistics survey data is indicating capital expenditure in the mining sector will be up 7 per cent.
Despite the drought contributing to the 5.9 per cent fall in farm GDP and the unresolved trade tensions weighing on global business and consumer sentiment, our economy has been resilient.
While Britain, Germany, South Korea and Singapore all experienced negative quarters of growth this year, Australia defied the trend.
While we would like higher household consumption, the national account numbers show household disposable income has increased by 2.5 per cent in the quarter, its fastest rate of growth in a decade.
While the tax cuts are putting money into the pockets of workers, it’s ultimately up to the individual whether they spend or save it. With more than 70 per cent of mortgage holders at least a month ahead on their repayments, many families are choosing to reduce their debts. Paying down debt today will bring forward their consumption tomorrow.
In our 29th consecutive year of economic growth, the Australian economy is now $2 trillion strong.
We face some significant headwinds but Australians can be confident about their economic future.
With the budget back in balance, the country is again living within its means and with significant tax cuts, infrastructure spending and supply-side reforms under way, the economy continues to grow.
It is more important than ever to maintain a disciplined and considered approach to economic management.
Josh Frydenberg is the federal Treasurer.