Myefo is a portrait of a failing economy, yet the Coalition's surplus obsession remains

Extract from The Guardian

Grogonomics

Australian economy

Greg Jericho

Households are doing it tough, but the only thing not downgraded in this Myefo is the government’s slavish devotion to the ‘S’ word

@GrogsGamut

Mon 16 Dec 2019 13.59 AEDT Last modified on Mon 16 Dec 2019 19.37 AEDT

Josh Frydenberg and Mathias Cormann deliver the 2019 Myefo, a tale of many downgrades. Photograph: Mike Bowers/The Guardian

The mid-year fiscal and economic outlook (Myefo) released on Monday reveals in bold just how pointless is a surplus and how weak the Australian economy has become over the past year.
The Myefo is a tale of downgrades – GDP growth for 2019-20 has been downgraded from 2.75% in the budget to 2.25%. A year ago, in the 2018 Myefo, the government was predicting it would be 3.0%.

The forecasts for household consumption growth have been absolutely slashed – from an already below average 2.75% in the budget to an abysmal 1.75%. And it is not just households who are showing the pain; predictions for business investment growth have gone off a cliff – from 5% to a pitiable 1.5%.
It would be nice if we could blame it all on the end of the mining boom, but the Myefo estimates non-mining investment growth this year will be just 2% – less than half the 5.5% growth predicted in the budget.
That is a collapse.

All the figures show an economy as weak as we have seen since the 1990s recession. But whereas in previous lean periods such as the Dot Com crash in 2001 or the GFC the government used the budget to help stabilise growth (by allowing a deficit in 2001-02 or stimulating the economy during the GFC), here we see a government addicted to its surplus.
And yet even here we see the furphy of the figures.
The budget surplus predictions have been massively downgraded – down $2bn this year, $4.9bn in 2020-21, and more than halved in 2021-22 and 2022-23.
The government is still gamely trying to tell us a budget surplus will be in place by 2022-23 – a $4bn surplus, which given we have revenue of $554bn is little more than a rounding error. (And let’s be honest, there have been a lot of errors in predicting revenue.)
The massive downgrade in household consumption, which comes off the back of pathetic wages growth and overall flat real household incomes, has smashed the estimates for GST.
Predictions for revenue this financial year are down $3bn, and $1.8bn of that is the GST.
Revenue is also revised down $5.7bn in the following year and $11.8bn and $12bn in 2021-22 and 2022-23 respectively.
But the overall level of revenue remains predicted to stay above 24.6% of GDP – well above the highest amount ever collected during the ALP’s time in government: 23.2% of GDP in 2008-09. It highlights again that since the 1990s recession no government has delivered a budget surplus with revenue of less than 24.5%:

For workers, however, we see just how pointless the surplus is. Far from suggesting good times and a booming economy flowing through to households, the Myefo yet again downgraded wages growth forecasts.

This has been the standard operating procedure for every economic statement under the Coalition government. They promise a return to average wages growth, and then have to revise the timeline out another year or two.

A return to 3% wage growth is now not predicted until June 2023, by which time it will have been a decade since we have had what was once average wages growth.

The level of company tax revenue has been downgraded – but mostly in later years, and it remains well above what was anticipated two years ago:

So if everything is so bad, how come we are still seeing historically strong tax revenue and predictions of a surplus? And why is that surplus not concurrent with a strong economy?

The answer lies in the changed nature of our economy, and also the changed nature of the mining boom.
Generally the greater the level of profit an industry captures, the greater the number of workers it employs.
If we look at the manufacturing industry we can see that back in the 1990s, when it accounted for around 35% of all business profits in Australia, it employed 12% of all workers. Now that its profits only account for 9% the share of workers it employs has also decreased:

Now that seems pretty obvious – if an industry makes a bigger share of profits it will be growing and thus employing more people.

But with mining the relationship is much weaker.
Over this century mining has gone from accounting for just over 20% of total profits to now 37%, and yet in that time the level of workers in the economy it employs has risen from 0.9% to just 1.8%:

In manufacturing a 5% increase in the share of total profits led to a 1% increase in the share of workers it employed; with mining a 5% increase in the share of profit led to just a 0.4% point increase in the share of workers.
But the relationship is even more damaging now for our economy.
During the 2000s mining boom, not only did we see an increased level of employment in the sector, but the wages it paid surged – and as a result the amount of total wages that went to workers in the mining sector also grew.
But now we are in a mining export boom. And that is not a boom that needs workers. It is a greatly automated process that does not need masses of construction workers.
As a result, we can see that while the share of total profits going to mining has soared over the past three years, the industry’s share of total wages has not.

And thus we have an economy where the government continues to get solid levels of revenue, even with the downgrades, but there is no flow-through to workers, either directly to the mining sector, or in flow-on impacts into other sectors which have workers whose skills are attractive to the mining sector and thus require strong wages to keep them from leaving.
And so yes, we have a surplus, but we also have the worst GDP growth since the GFC, we have households shutting their wallets, we have wages growth remaining weak and continuing to be so for the foreseeable future.
And we have the Reserve Bank needing to cut rates to record lows, and a prediction for even lower rates next year, because we also have a government determined to deliver a surplus even if it means economic growth continues to stagnate.

• Greg Jericho writes on economics for Guardian Australia