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We're teetering on the brink of recession but the government is ignoring reality

John Hewson

Economists have been the brunt of many a joke. A particularly unflattering one tells of a chemist, a physicist, and an economist surviving a shipwreck to a small island, only able to save a can of beans.

A heated contest soon emerges between the chemist and the physicist as to how best to open the can – the former wanting to accelerate the rusting off of the lid, with a potion of salt water and various local vegetation; the latter, fearing such a process alarmingly slow, suggested propelling the can to strike a rock at such an angle as to pop the lid off; which, in turn, was seen as alarmingly risky by the chemist.

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MYEFO: budget deficit to deteriorate

The Mid-year budget update is not expected to contain good news for the government. Peter Martin explains why.

So, in defeat and desperation, they turn to the economist who, unflinchingly, suggests, "Assume we have a can opener!"

Substitute "MYEFO" for "beans", and "budget surplus" for the "can opener". That is exactly what the government did this week! Projecting a rapid return to 3 per cent real growth (stronger than our "long-run potential growth"), together with a rapid pick up in wages and inflation – aided by also "assuming" the passage of expenditure cuts they haven't been able to pass through the Parliament in the last couple of years and, hey presto – they could foreshadow a budget surplus by the end of this decade.

As if this wasn't alarming enough, the "benchmark" of assessment of MYEFO was almost universally that they "didn't lose the AAA credit rating" – budget repair task "done", for now at least.

This superficiality is genuinely alarming, ignoring the realities of the riskiness and unpredictability of the global economy, and of the structural challenges in our current and prospective domestic economy, perhaps now actually teetering on the brink of a recession.

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Just how is our economy to not only recover from the 0.5 per cent fall in growth in the September quarter, but actually produce a "growth spurt" as assumed through to the end of the decade – which industries, which jobs? None of this can simply be "assumed".

It is most sobering to realise that the accumulated budget deficits (relative to GDP) since the GFC already dwarf those that followed each of the previous two recessions, and we haven't had a recession, rather we are now in our 26th year of continuous growth.

Moreover, even on the optimistic forecasts/predictions of MYEFO, we will have at least four more budget deficits, totalling some $95 billion through the budget period. Using more realistic forecasts – and recognising the some $14 billion of measures still stuck in the Parliament (that still exceed the net savings achieved since the last budget) – the budget repair task is a very significant challenge that will require both more expenditure restraint and tax increases overall. It is most telling that the government won't "commit" to the small projected surplus in 2020/21.

While we may have dodged the ratings downgrade bullet for now, the possibility of a downgrade is still very real. We certainly can't be complacent, especially as our economy is now probably more vulnerable than it has been since the GFC, certainly recognising the limited policy capacity and flexibility to handle another "shock".

Let's hypothesise that we do run into recession – indeed, apart from a bunching of one-off government spending in the June quarter, we would have been there already with the negative September quarter. It could happen, and it would be a "game changer" in terms of the economic debate in this country.

Monetary policy has already reached the limit of its capacity to stimulate – except by jawboning our dollar down – and rising borrowing costs, and associated bond market corrections globally, could further work to restrain growth. Similarly, the magnitude of the budget repair task, and the threat of a ratings downgrade, leaves us with very little budgetary capacity to stimulate as well.

Our vulnerability is the result of at least 10-12 years of poor economic management, under governments of both persuasions. The benefits of the resources boom were squandered – failing to put some away for a rainy day – and then we failed to move early, and more decisively, in budget repair, even allowing for the GFC.

We now face the toughest and most unpredictable global economic environment in memory, where our fate is most heavily dependent on China, where their growth is slowing much faster than they will admit. Add to this the need to achieve "compromise" with a very short-term focused, opportunistic, Senate.

The need for an effective national, mostly bipartisan, economic strategy has rarely been greater, but the probability of achieving it rarely less.

John Hewson is a professor at the Crawford School of Public Policy, ANU, and a former Liberal opposition leader.

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