Things are about to get a whole heap tougher
Bushfires, impeachments and escalation in the Middle East. 2020 is off to a roaring start. Let’s take a step back to a simpler time. To December.
The Treasury issued their economic forecast. I enjoy Treasury Economic forecasts about as much as most people enjoy a Scott Morrison handshake.
In 2018 they guessed the Crown’s fiscal surplus in 2020 would be $1.3 billion and our economy would grow by 3.1 per cent this year.
Last month they revised this to a deficit of $300m and 2.2 per cent growth.
Our population grows by around 2 per cent, which means Treasury is projecting per-capita growth of one tenth of 1 per cent. About $56 per head. All going well.
Things are not going well. Treasury’s forecast is now optimistic, given the Middle East is heating up and the self-immolation of a major trading partner to the West.
Consequently most of us are going to be poorer this time next year. Possibly a lot poorer if the Iranians close the Strait of Hormuz.
The impending decline in living standards is compounded by the failure to index taxation. The top rate of marginal tax was set at 33 per cent for incomes over $70,000 in 2011. The nominal value of a dollar has declined by nearly 10 per cent since.
Most people are still ahead because the value of the economy and their wage rates have more than kept up. This will not be true going forward. We are entering a period of declining real living standards.
The implication of this change means that for me to get ahead economically you must go backwards; we are entering an economy of the zero-sum-game. With positive growth we can both progress, or at least if one person does well it need not be at his neighbour’s expense.
The reason for the decline in our fortunes cannot be laid entirely at this Government’s doorstep. We are not a set of economic islands. But a series of decisions are compounding the problem and almost all of what this Government touts as a success is having a small but collectively damaging economic impact.
Even if you believe increasing welfare payments and raising the minimum wage are morally justifiable you should acknowledge this will reduce the incentive to work and deny business access to affordable labour.
Likewise regulating the rental market, equal pay legislation, carbon taxes, restrictions on gas exploration, pressure on dairy farmers over water quality and ending the 90-day law for large and medium sized firms have each had a small negative effect. Cumulatively, it begins to matter. In the macro economy the failure to control government spending is also beginning to bite. In response to the declining economic projections Finance Minister Grant Robertson has outlined an aggressive $12b in infrastructure spending.
We can add this to the $3b Shane Jones is using to bolster his leadership ambitions, the $400m spent on upgrading schools, the billion on Winston’s vanity rail project, $2.3b on Poseidon aircraft, $1.9b for mental health and the $2.5b in increased welfare payments projected by the December Treasury forecast.
Net government debt, according to that Treasury forecast, is going to rise by $20b over the next five years. This will prove to be an underestimate.
One of the enduring myths of Keynesian economics is that government spending boosts the economy. It doesn’t. It simply removes capital from the more productive private sector and crowds out real economic activity.
Most people, I accept, do not believe this. Government has become synonymous with good in the minds of the public and the imaginary benefits of spending on infrastructure is uncontroversial.
Yet even if you believe that spending taxpayer money on roads and moving a port from our largest city to a regional backwater somehow builds economic capacity, you first must assume that most of this investment will not be squandered.
We currently have a Government that cannot plant trees and spends half a million on a slide. It requires a leap of faith to believe that all of this spending will achieve anything more than regret and fiscal drag.
Although innovation in technology will continue to produce economic benefits, most people will begin to feel a real decline in their living standards in the near future. There will be more stories about financial hardship, requiring more government programmes, higher taxes and further reduction in output by the productive sector. Economic stagnation and political disruption usually coincide. It is going to be an interesting year.