Australia’s new Prime Minister Malcolm Turnbull and his Treasurer Scott Morrison are now in charge of economic policy.
Having come from portfolio responsibilities with little or nothing to do with macroeconomic policy, both Turnbull and Morrison will be on a very steep learning curve which will kick o ff with the brie fing each will receive from Treasury Secretary John Fraser and Reserve Bank of Australia Governor Glenn Stevens. That brie fing will be brutal. In terms of the analysis of current economic conditions, Turnbull-Morrison will be told that economic growth is mired below trend. As a result of two straight years of this subdued growth, the unemployment rate has been hovering near a 13-year high around 6.25 percent and neither Treasury nor the RBA are forecasting it to fall below six percent for at least the next two years. Accepting this outlook, as former Prime Minister Abbott and Treasurer Hockey were willing to do, was a signi ficant failure of their policy agenda. Turnbull and Morrison would be well advised to do something about this unemployment problem, or run the risk of going to an election this time next year with the unemployment rate near seven percent. An early challenge will be to not only outline, but to implement, a policy framework that will work to lower the unemployment rate. Another vital issue will be the position of the budget, including the outlook for government debt. Most sensible and impartial economists have never been all that worried about the level of government debt in Australia, nor with the fact that the budget is in de ficit when the economy was growing below trend. Indeed, deficits when the economy is weak are appropriate. This approach was not always the case under Abbott where government debt and de ficit were escalated to the point where they were described as an “emergency” and “disaster”. Despite promises to “return to surplus” and “pay o ff” government debt, under Abbott and Hockey’s management, gross government debt rose by $118 billion to a record $391 billion. The budget de ficit in 2014-15 was $38 billion, some $14 billion higher than was left to Abbott at the time of the September 2013 election. Turnbull has said little on the budget position to indicate whether the priority of his government will be to reduce debt and de ficit or whether he will follow the policy pragmatism of Labor Treasurer Swan and allow the budget de ficit to remain in place if it becomes apparent that the economy is soft and the unemployment rate unacceptably high. Importantly, Australia’s actual economic performance, as opposed to the forecasts, will fundamentally determine which path Turnbull will take on the budget. At the moment, the medium-term outlook from both Treasury and the RBA is reasonably upbeat. The central forecast is for GDP growth to reach and then exceed three percent within 18 months, which, if accurate, would see the need for easier fiscal policy recede and the budget’s automatic stabilisers will help the budget on its path steadily towards surplus through higher revenue growth and more restrained spending. If the economy under-performs this scenario, which seems to be the growing consensus from market economists, then the budget de ficit will remain wider for longer, which will bring the fiscal policy strategy of the Turnbull administration under the microscope. Areas of tax reform, labour market and industrial relations, infrastructure development, the environment, a ffordable housing, skills, training and education are vital areas of economic policy that need constant work and reform. The Abbott Government not only failed to keep up with the changes required for a modern economy, but also in many areas went backwards. Turnbull, in his first week as Prime Minister, is making some good noises not only about fixing the broken economic policy platform generated by Abbott and Hockey, but throwing forward to the demands in the years ahead. The next few months will be vitally important not only for Turnbull’s re-election prospects, but for the prospects of the economy and the close to 800,000 people unemployed. There is no doubt at all that he will do a vastly superior job to Abbott but the bigger question is whether it will transform the Australian economy so that it can grow at a faster pace with a fairer and more sustainable fiscal policy framework. Stephen Koukoulas is the Managing Director of Market Economics thekouk.com.au @ TheKouk