Why the economy is growing faster

So, the shock, horror economic news of the week was something good. The national accounts showed the economy grew a lot more strongly during the last part of last year than anyone was expecting.

Whereas economists – both on the official and the market side – were expecting growth in real gross domestic product of 0.4 per cent or less during the December quarter, leading to growth of 2.5 per cent for the year, the Australian Bureau of Statistics came up with figures of 0.6 per cent and (thanks to upward revision of growth in the September quarter) 3.0 per cent for the year.

Why? Because the statisticians found stronger growth in consumer spending – particularly spending on services – than people were expecting, as well as stronger exports of services.

In other words, our domestic economy – indeed, not just our internal economy but the household sector of our economy – is a bigger part of our destiny than many imagine.

It should be a lesson to those who assume that problems in other economies immediately translate to problems in our economy.

Or that problems in financial markets – particularly the sharemarket – immediately translate to problems in the "real" economy inhabited by you and me. That once the bad news starts, all the news is bad.

The lesson holds even though this week's news relates mainly to a period that began five months ago and ended two months ago, whereas the bad news about China and the sharemarket and all the rest came in the new year.

The first conclusion to draw from this week's accounts is that, if we enjoy a long period of exceptionally low interest rates and a significant fall in the value of our dollar, these forms of stimulus will eventually get the economy growing faster.

The second conclusion is that, thanks to the help of low interest rates and a low dollar, the economy's transition from mining-led growth to growth in the rest of the economy is proceeding satisfactorily.

The national accounts showed business investment spending falling by 3.3 per cent in the December quarter and by 10.1 per cent over the year, with most of that explained by the sharp drop-off in mining and natural gas construction.

On the other side of the transition, the first effect of low interest rates was to encourage a surge in the buying and selling of existing houses, leading to a rise in the prices of those houses and the building of a lot of additional houses.

Spending on building new homes and altering existing ones grew by 2.2 per cent in the quarter and by 9.8 per cent over the year.

Consumer spending grew by 0.8 per cent in the quarter (following upwardly revised growth of 0.9 per cent in the September quarter) to show healthy growth of 2.9 per cent over the year.

Explaining this isn't easy. Let's turn to the "household income account" - which means we switch from quoting real (inflation-adjusted) changes to quoting nominal changes.

We know that household income wouldn't have been growing too strongly because, although a lot more people got jobs in the December quarter, wage growth has been very low. Household income grew by just 0.4 per cent in the quarter.

And household disposable income grew by less than 0.1 per cent, mainly because payments of income tax grew by 1.2 per cent in the quarter.

And yet consumer spending grew by a remarkably strong 1.2 per cent during the quarter (that figure's nominal, remember).

How was this possible? It happened not because households "dipped into their savings" as was mistakenly reported, but because they chose to reduce the amount of what they saved from the quarter's disposable income.

According to the accounts, the nation's households reduced their saving during the quarter by $2.9 billion, dropping it to $19.5 billion. This means the net household saving ratio fell from 8.7 per cent of household disposable income to 7.6 per cent.

Remember that the estimate of household saving is calculated as a residual (income minus consumption), so it can be distorted by any errors in the other items in the sum.

It's not hard to believe the rate of saving has fallen, because for the past four years it's been edging down from its post-financial crisis peak of 11.1 per cent at the end of 2011.

Even so, last quarter's drop of more than 1 percentage point seems very big, about double the size of the biggest previous quarterly falls. It may be revised to a smaller drop.

The best explanation for households' falling rate of saving is that people are less worried about their debts and about keeping their jobs, with rapidly rising house prices in most cities leading them to feel wealthier than they were.

The decline in the rate of saving as house prices rise is pretty convincing evidence of a "wealth effect" helping to bolster consumer spending at a time when household income isn't growing strongly.

And the wealth effect coming via house prices helps tie the strength of consumer spending back to the period of low interest rates and its ability to stimulate spending in different ways.

The news of faster growth in production also fits with the already-known strong growth in jobs – particularly in the later part of last year – and modest fall in the rate of unemployment.

It makes the good news we've been getting on the labour market easier to believe because it's now more consistent with the story we've been getting from the national accounts.

Annual real GDP growth of 3 per cent is a fraction higher than the economy's newly re-estimated trend or "potential" growth rate of 2.75 per cent. And this above-trend growth is what's usually required to have the unemployment rate falling – as it has been.

Of course, whether growth stays at or a little above trend this year isn't guaranteed.

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Doctors share blame for a sick budget

Some of my best friends are doctors. These days, I even have in-laws who are doctors. I've just become a grandad and my tiny grandson stands a fair chance of ending up as a doctor, too.

But I'm still a journo, and have to do my job. So let me let me adapt something Kerry Packer said about a youthful Malcolm Turnbull: never get between a doctor and bag of money.

If you wonder why it will be so long before we get the federal budget back into surplus, doctors are part of the reason.

If, as Scott Morrison keeps telling us, the trouble with the budget is a spending problem, not a revenue problem, the government's decision last week to greatly increase our spending on defence has just made the problem a lot worse.

That's the problem with saying government spending is the problem. Politicians – of all stripes – are much keener on increasing spending than on reducing it.

A lot of the growth in spending – especially if you include the state governments – is coming from spending on healthcare. Part of it's the ageing of the population, but most of it's the higher cost of new pharmaceuticals, prosthetics and medical procedures.

There's actually nothing terrible about that. If we're getting a little more prosperous each year, what's more natural than that we choose to spend a fair bit of that increase on improving our health?

If so, the problem isn't our spending, it's our reluctance to pay for it. Which means the real problem with the budget is the aversion of pollies on both sides to confronting voters with that simple truth: if you want more spending on better healthcare you're welcome to it but, as with everything else in life, you'll have to pay more for it.

The problem with the debate about spending and taxing is that government budgets are so huge – about $430 billion a year, and a lot more if you add in the states – with so many taxes spent on such a multitude of things – that it's easy for each of us to lose our sense of cause and effect, in a way we'd never do with our own, household budget.

But to say that spending on healthcare should and will continue growing strongly – so the pollies had better learn to live with that fact – is not to say that every dollar spent on health is a dollar well spent.

Every doctor I know tells me there's plenty of waste in the health system. Governments should be trying to find and eliminate that waste, thereby giving taxpayers better value for money, as well as slowing the rate of healthcare spending's inexorable rise.

Here I have to tell you that, under the greatly improved leadership of federal Health Minister Sussan Ley, and after the public's summary rejection of the harebrained idea of imposing a $7-a-pop patient co-payment on GP visits, the Health Department is making a much better effort to identify and remove waste.

Trouble is, just because a payment is judged unnecessary doesn't mean there isn't someone for whom that payment is part of their income. Threaten to take it away and all hell breaks loose as they fight to protect that income. Especially if they're a doctor.

Late last year the Turnbull government proposed saving $650 million over four years by removing bulk-billing incentives for pathology services and reducing them for diagnostic imaging.

The boss of the nation's most powerful union, aka the Australian Medical Association, was out of the blocks within moments, prophesying death and destruction.

Doctors would have no choice but to impose their own charges on patients, many of whom would struggle to afford them, leaving some poor people declining to get the tests they needed.

Yeah, sure.

Some years ago the Labor government tried to save money by cutting the rebate for eye operations. The ophthalmologists created an enormous stink, telling every little old lady they could find they'd have to start charging thousands for a cataract removal and urging them to write to their local member.

It worked. The Labor government beat a hasty retreat. Some years later, a doctor mate told me everyone in medicine knew the opthos were raking it in. The fees in the medical benefits schedule had been set long before the procedure had become highly automated, allowing surgeons to do far more operations in a day.

Everyone in medicine knew this, but while the opthos were bludgeoning the government, they kept their mouths shut – a practice known as "professionalism".

It's a similar story with pathology rebates. Advances in automation have made the rebates far higher than they need to be – which is why the special bulk-billing incentives aren't needed.

And because automation also offers big economies of scale, we now have about three-quarters of the nation's pathology tests being done by just two big companies, both listed on the stock exchange – a small fact the AMA boss didn't feel he needed to mention.

For once, this isn't about greedy specialists. This is a fight to protect the excessive profits of two big listed companies. But please still write to your local member.

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