If you’re wondering what might be in next year’s budget, you need look no further than yesterday’s mid-year fiscal and economic update. It is designed to give the Morrison government the option of cancelling parliament and going to an election earlier than the May 2019 date built into the parliamentary sitting calendar released three weeks ago. But is this de facto budget, like the economy, built on a house of cards?
Fourteen months ago I warned that the Australian economy had become a house of cards, our economic growth being held together by the feel-good effect of rising house prices on consumer spending. Households had borrowed to the hilt, many using interest-only loans to get into the housing market, while banks and other financial institutions were falling over themselves to lend without properly questioning borrowers’ capacity to repay. Pull the house-price card out and the whole economic structure could come tumbling down.
Much of this prediction has already come to pass, confirmed in the latest national accounts by a weakening in consumer spending in the face of tumbling house prices – despite households running down their savings to the lowest rate in a decade.
Yet the Morrison government’s budget update would have us believe that consumer spending, which accounts for around 56 per cent of the nation’s GDP, will hold up strongly, revising its growth forecast down by a tiny 0.25 percentage points this financial year while maintaining the budget-time forecast for next year. Consumers simply cannot keep depleting their savings to sustain their spending habits. Something has to give in the house of cards.
Unless the authorities act quickly, there is every chance of a massive credit crunch in 2019. Following the banking royal commission, banks have become extremely conservative in their lending practices. The responsible lending obligations set out in the National Consumer Credit Protection Act, which many financial institutions failed to follow during the frenzied housing boom, require lenders to protect borrowers from themselves by conducting rigorous credit assessments. The banks are now doing this, determined not to appear before a resuscitated royal commission or to be charged by chastened regulators for reckless lending behaviour.
If credit dries up next year, consumer spending will require a healthy pick-up in wages growth. For years, the government has been claiming wage rises are just around the corner. But which corner? Wages growth is assumed to pick up from just over 2 per cent last financial year to 3½ per cent by 2020-21. Yet in discussing risks to the forecasts, the budget update concedes that subdued household income growth, tighter-than-expected credit conditions and housing price falls could cause consumer spending to be weaker than forecast.
In these circumstances, it would be economically prudent to achieve bigger budget surpluses and pay down debt faster. Instead, the government has decided to create a $9 billion war chest for pre-election policy announcements. If the government is re-elected and the economic forecasts turn out to be overly optimistic, it will claim circumstances have changed and a return to surplus will have to wait.
What should Labor do? Labor has publicly stated and reaffirmed that it will go faster on budget repair than the Coalition. Since most of the $9 billion is for a further round of tax cuts, Labor would probably be obliged to wave them through – as long as they weren’t patently unfair. But Labor should press ahead with closing down various tax shelters – on negative gearing, dividend imputation credit refunds and family trusts – that the Coalition is demanding must stay open.
The extra revenue generated would put Labor in the position of paying down debt faster while incentivising new private investment through its Investment Guarantee offering accelerated depreciation of capital expenditure.
But back to election timing. The parliamentary calendar for 2019 includes two sitting weeks beginning 12 February. A few weeks ago, the Morrison government, lacking a majority in the House of Representatives, barely survived the final two sitting days of 2018.
Labor and the cross benchers have aspirations to legislate an agenda against the government’s wishes, including a national integrity commission with teeth, an end to the live sheep export trade, and more humane treatment of asylum seekers in need of medical attention. Government ministers have readily conceded that when parliament is messy it is the government that pays the electoral price.
The prospect of two weeks of parliamentary chaos, in which the Coalition has manifestly lost control of the House of Representatives, is hardly enticing for a beleaguered government. The mid-year budget update has been designed to give the government the option to cancel parliament and go early to the people, armed with a war chest of further tax cuts.