Australia – what’s the plan?

What’s the plan?

At a recent Australian British Chamber of Commerce event in Melbourne I was asked my thoughts on Australia’s federal budget. I replied that, in a political context, with the nature of the parliament, the document was a success.   

From a more dispassionate perspective, what was missing is something which should frame every budget: a plan.

I don’t think the forecasts - a surplus projection of $A11 billion (0.5 per cent of GDP) is in place for 2020-21 and $A16.6 billion (0.8 per cent of GDP) for 2022-12 - lack credibility. But I do think everyone agrees they're on the optimistic end of the spectrum.

That outlook reflects the kind of bias in the systematic forecasting process to always return to the mean. The problem is in many areas of the economy that mean has – very clearly – changed for good.

In the 1980s and 1990s growth in GDP per capita and Australia was about 3 per cent a year. It was volatile - particularly in the 80s - but it was about 3 per cent. In the past five years we've struggled to get to 1 per cent. We're not going back to 3 per cent.

Even if we can get GDP growth of three-point-something, it’s important to consider 0.5 per cent will be liquid natural gas exports and 1.5 per cent will be population growth. Then effective per-capita growth is just 1 per cent.

I think that’s a really important backdrop. I think we're constantly looking for growth to go back to where we were or we think it ought to be and it's not going there. This is the situation we face.

The global economy in 2018 will grow at about 3.9 per cent. In 2016 it was 3.2 per cent. I think 3.9 per cent is as good as it gets. Not that I see enormous downside - I just think what we've seen the last couple of months, data-wise, suggests this is about the global speed limit.

In the 10 years before the global financial crisis the annual average was 4.3 per cent. We're peaking out below the average of the pre-crisis period. Okay. What's the plan? 

If anything

As I said at the ABCC event, I don't think the Australian budget means anything for interest rates in the short term.

There’s still a tussle between whether we'd like to have interest rates a bit higher because household credit growth has been too strong for the past few decades, or lower to stimulate demand. That story can't really go on.

We don't know what the endgame is but with debt to income as high as it is you've got to think we're in the fifth set at Wimbledon right now. That's going to be an important brake on the economy as we find growth drivers outside consumer spending.

In addition to that, like everywhere in the world, we're struggling with this low-wage low-inflation story. I think we're coming to realise running a pure inflation target for the central bank is not the full answer; the financial side of the economy is also a really important part of the transmission mechanism.

Alternatively, running interest rates too low and building up debt is also not a sustainable way to reach your inflation target. On that basis I think the RBA probably does nothing for a bit longer and hopefully raise rates next year when the economy is a little bit stronger.

Population

Population growth has been a big driver of economic growth for the last few decades, as has the rise in household debt and household credit.

As an illustration, if we want to stabilise the debt to income ratio for the household sector at 200 per cent - this is not bring it down by the way, just stop it going up - the rate of credit growth in Australia needs to be half the rate of income growth.

Now if income growth is 5 per cent - roughly what we've got at the moment, about 2 per cent wage growth and 3 per cent employment growth - you need credit growth of 2.5 per cent.

I don't know if I was born when Australia last had credit growth for the household sector sustained at 2.5 per cent. We don't really know what the economy will look like with credit growth that low for an extended period.  

The economic reality is population is probably the single-largest driver of economic growth in Australia at the moment. For that to be sustainable it needs to be run with an investment program.

If you look at public investment in Australia over the last three decades, in 10 of the last 12 years we have been spending less per person than the long-term average.

We've been relying on the population button without delivering the investment spend. And that just builds up a wedge which needs to be addressed. So again, I ask – what’s the plan?

Richard Yetsenga is Chief Economist at ANZ