Back in September at a lunch at Perth’s Hyatt Regency, Reserve Bank of Australia Governor Philip Lowe took the stage in front of a particularly receptive crowd.
The city had been at the heart of the mining investment boom, a period of record iron ore prices that Dr Lowe compared to the gold rush of the 1850s as Australia’s terms of trade soared to 150-year highs. Economic growth, jobs, wealth and confidence had flourished in a commodities cycle noone had ever experienced before. As previous RBA research showed, the boom “substantially increased Australian living standards” to the point where by 2013 real per capita household disposable income was up 13 per cent, real wages 6 per cent and the unemployment rate about 1.25 percentage points lower.
But as the investment boom petered out in recent years, Perth and other mining-exposed regions that arguably reaped the most riches have struggled the hardest.
“That boom, and its unwinding, has been central to the story of the Australian and Western Australian economies for more than a decade now,” Dr Lowe told diners in his speech “The Next Chapter”. “The new chapter will, almost certainly, have a different central theme.”
As businesses grapple with similar questions around future drivers of growth, RBA Assistant Governor Luci Ellis last month furthered Dr Lowe’s sentiments in an address where she challenged ongoing talk that the economy required a “growth handover” from mining to housing construction, and now to infrastructure investment, and then to something else.
As 2017 comes to a close, the focus on future growth at a time of massive technological and demographic upheaval is intense across the nation, from business to politics to local communities. But with the mining boom in the rear view mirror, it’s occurring with a vastly different backdrop. According to Westpac’s economics research, the cumulative budget deficit from 2008-09 to 2016-17 came in at $350 billion, compared to a total surplus of $103bn in the eleven years to 2007-08 when the boom was firing up company tax revenues.
In a mid-year update this week, Treasurer Scott Morrison had some better news to end the year, projecting that the 2017-18 budget deficit would narrow to $23.6bn – some $5.8bn lower than the May Budget forecast – and pencilling in a larger return to surplus in 2021 on higher company tax revenue. The peak in government net debt of $363bn in 2018-19, equal to 19.2 per cent of GDP, was also lower than previously flagged, albeit about three times the average ratio recorded between 1971 and 2015, which included a few years of zero net debt in dollar terms just prior to the global financial crisis.
“We spent our windfall on the here and now,” think tank Per Capita argued in a 2012 paper into where the proceeds from the mining boom went.
From 2001-02 to 2007-08, Per Capita found that the boom generated a “windfall” to public coffers of at least $180bn over and above long-term GDP growth. They claimed that the Howard and Rudd governments used around $105bn paying off debt and funding long-term “savings vehicles”, such as The Future Fund. Around $25bn was used on tax cuts and concessions, such as fuel excise and voluntary superannuation contributions, while $50bn went towards various policy programs.
“It’s worth noting that even these numbers understate the size of the windfall - $180bn is a minimum estimate. Our analysis does not capture the scale of the tax concessions offered by changes made to superannuation tax arrangements in 2006,” the paper added.
The researchers took aim at the spending of the $75bn on tax cuts and policy programs, arguing it locked in reduced tax levels and increased spending that could not be sustained when economic circumstances inevitably changed. They cited how government spending to GDP grew from 22.1 per cent in 2002 to 25.4 per cent after the GFC hit and stimulus flowed.
In this week’s mid-year update, the government revealed this ratio would likely fall to 24.9 per cent of GDP by 2021, which it claimed was only slightly above the 30 year historical average.
In a note, UBS economist George Tharenou said the Mid-Year Economic & Fiscal Update “finally showed a turning point after a decade of fiscal slippage” that provided “some fiscal room for household tax cuts in the May-18 Budget”, a move recently flagged by the government.
Westpac economists, however, expressed caution around the government’s growth forecasts for the economy. They noted that while Westpac was a little more optimistic for this financial year, the economy would likely slowdown in 2018-19 to 2.5 per cent, below the government and the RBA’s forecasts, mainly due to their softer view on household consumption growth and residential construction.
Mr Morrison was upbeat and argued that growth was becoming “broader-based” as the global economy had further strengthened. Commodity prices were uncertain, he added, recognising how they can both positively and negatively affect the budget and debt position in a nation as rich in natural resources as Australia.
Looking further out in her November lecture, the RBA’s Ms Ellis also struck an upbeat tone and urged moving on from always searching for the “engines of growth” and “identifiable external triggers”. She pointed out that construction-related booms could only ever run for so long, that the mining investment boom had now triggered an exports boom and that other sectors, such as tourism and manufacturing, that had been “squeezed” out in prior years could help pick up the slack. Longer term, she said “underlying growth” would also be shaped by population, participation and productivity, or the “three P’s” economists have long claimed determined the ups and downs of economies.
“Next time somebody asks you ‘where’s the growth going to come from?', you can answer: ‘from all of us, trying new things, and gradually getting a bit better at what we do.’ We don't need to wait for something external to make it happen,” she implored.
For the next few years at least, Westpac chief economist Bill Evans this week reiterated his view that the RBA would hold the cash rate at a record low 1.5 per cent in 2018 and 2019. Or as Deutsche Bank economist Adam Boyton wrote this week ahead of a potential federal election next year: “The more interesting policy moves in 2018 may … end up being political and fiscal, as opposed to monetary.”
By Michael Bennet
Editor, Westpac Wire