Analysis
Updated
It's the long-promised Christmas gift hardly anyone now seems to want.
But after a decade of disappointments, missteps and broken promises, Josh Frydenberg is determined to deliver a budget surplus this financial year whether you like it or not. Admittedly, it's a much skinnier surplus than the one promised at election time: about $21 billion shaved from those estimates over the next four years.
Still, that puts the Treasurer at odds with vast swathes of the economics fraternity, the business community and, more importantly, the Reserve Bank of Australia.
All are pressuring the Government to jettison the surplus and to start spending, particularly on big-ticket infrastructure items to boost employment, help lift wages and improve long-term productivity.
RBA under pressure to kickstart growth
The damaging chasm between the RBA and the Federal Government over the economic outlook is best illustrated by stark differences over what is required to fire up wage growth.The Reserve Bank argues that unemployment needs to drop to about 4 per cent before labour shortfalls feed through to higher wages.
Given our jobless rate currently sits at 5.2 per cent, a major stimulus would be required to get anywhere near that mark.
In the Mid-Year Economic and Fiscal Outlook, however, Treasury maintained the decades-long belief that the unemployment sweet spot is 5 per cent — meaning we're only a whisker away from a wages growth break-out.
So, no need to open the cash spigots, as far as the Federal Government is concerned.
And that puts the onus back on the RBA to kickstart domestic growth.
A February rate cut to a record low of 0.5 per cent now is on the cards, after three cuts this year.
Housing prices tied to our spending funk
The mid-year outlook document paints a picture of a decelerating economy under severe domestic pressure that has been propped up by government spending and higher-than-anticipated commodity prices — a boom that is not expected to last.Forecasts have been slashed for growth and inflation, although for many, they still are well above realistic targets.
GDP growth has been cut dramatically, to 2.25 per cent. The most recent reading, however, was an annual rate of 1.7 per cent for the September quarter.
Inflation forecasts have been trimmed to 2 per cent. But we haven't seen inflation above 2 per cent for the best part of four years as the RBA has tried in vain to reach that target.
There is, however, one bit of common ground between the Government and the RBA.
Both are hoping that a recovery in housing prices will help lift consumers out of their spending funk.
The theory goes that, as real estate prices rise, consumers feel richer and spend more. It's worked plenty of times in the past.
The dampener is that with Australian household debt at record levels, it would appear most Australians are using the recent tax and interest rate cuts to pay off their home loans, and with property markets roaring back to record levels in the two biggest markets, there is limited scope for a "wealth effect" redux.
Lowe delivers some Christmas cheer
To a certain extent, the scaling back in surplus estimates — to $5 billion this year from the previous $7 billion estimate — politically could work in the Government's favour.It would be a difficult to justify banking cash from strong iron ore prices as the domestic economy was tanking.
A skinny surplus, or even a balanced budget, during tough times seems more responsible and easier to sell the political message that it wants to pay down debt — to strengthen our finances in case the global economy deteriorates.
On that front, the Treasurer has been delivered some Christmas cheer from RBA governor Philip Lowe.
Those three rate cuts will dramatically lower the bill on our national debt over the next decade.
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