Wednesday, December 16, 2015

The economy's doing a lot better than the budget

There is nothing in the mid-year budget update to be alarmed about, but nor does it suggest Malcolm Turnbull will do any better than his predecessors at getting the budget back to surplus.

The news on the budget deficit is bad, but no worse than we expected. It's bad not through mismanagement but because of factors beyond the government's control.

In total, deficits over the next four years are now expected to be about $26 billion bigger than thought at budget time in May.

Fortunately, however, the budget is not the economy, not even in microcosm. It's just an estimate of the federal government's incomings and outgoings which, while capable of affecting the economy of far greater private sector production and consumption, is mainly just a reflection of the state of that economy.

So care about the state of the economy first, then about the state of the budget if you have care to spare.

The outlook for the deficit has deteriorated mainly because it's now likely the economy won't be growing as strongly as expected at budget time, because some key export prices have fallen by more than expected and because wages have increased more slowly than expected.

Scott Morrison announced some housekeeping measures which, he says, will be sufficient to fully cover the cost of the government's new spending measures since the budget, including last week's innovation package.

Though the weaker outlook for the economy is hardly good news, we didn't need the budget update to tell us about it, so don't count it twice.

One of the main tests of an economy is whether it's generating enough jobs to accommodate the growing number of people wanting to work.

And here is the news good - indeed, better than expected at budget time. Using more conservative figures than those Morrison used, total employment has grown by a surprisingly strong 2.5 per cent - almost 300,000 extra jobs - over the year to November. More than half those jobs are full time.

As a result, the rate of unemployment has fallen from 6.2 per cent to 6 per cent over the year, and the proportion of the working-age population with jobs has risen from 60.6 per cent to 61.3 per cent.

Doesn't sound like things are going too badly, whatever the gloom and doom.

Why so? Because, as Morrison explained, growth in the economy is shifting from mining to industries that are more "job intensive".

Like his predecessors - Labor as well as Liberal - Morrison is right to say it would be counterproductive to respond to the lower-than-expected growth in tax collections by raising taxes or slashing government spending to try to make up the gap.

The time for tax increases and spending cuts will come when the private sector is growing strongly enough to cope with a public sector pullback.

Even so, measures will need to be taken at some - let's hope not too far off - point to get the budget back into surplus and the government's debt falling rather than rising.

The budget update offers not a hint that such a plan is being prepared.

What's that? It's all a far cry from the scaremongering about debt and deficit that Tony Abbott and Joe Hockey used to get themselves elected?

Don't know what you're on about. Malcolm and Scott don't remember anything like that.