Wednesday, 1 May 2013

Australia is facing a future of lower growth...

Macro Business has a post looking at the budget debate: The delusional budget debate.
Australia is in the early stages of an historic adjustment downwards in its income growth as the terms of trade fall.

The problem Pascoe is identifying is that by definition in a current account deficit country when the public sector runs a surplus (or smaller deficit) then the private sector must run a larger deficit to offset it or growth will fall. That is, the private sector will have to borrow more (or sell more assets).

That might be OK, a return to the Howard/Costello growth model as it were, but our situation is actually worse than Pascoe is arguing. Credit growth is not at such low levels entirely by choice. It is kept low because APRA insists that all new loans are funded by deposits. This limits credit distribution (not price) by driving up credit standards. This in turn is the result of Australian banks no longer being able to borrow money endlessly offshore or they will have their credit ratings stripped. We are, in fact, in a slowly tightening current account squeeze.

This is the vice that I have described for the Australian economy for the past five years. Private credit cannot grow too fast lest it threaten the banks’ credit ratings. Public credit cannot rise too fast because it will threaten the national credit rating which still guarantees the bank ratings. Yet you can’t cut back too fast on either lest growth plunges. We’ve been supported through it so far by massive growth in the external sector (the mining boom) but that is ending.

This election should be about this: which party offers the best path forward out of the trap. The right solution will look something like this:
  •     a huge productivity drive
  •     modest public deficits aimed very much at productivity boosting soft and hard infrastructure
  •     private sector disleveraging and probable deleveraging
  •     above all, measures to lower the dollar and boost tradables growth without firing up greater credit growth

The budget deficit and reported decline in revenue explained

In Labor in a budget quagmire of its own making Greg Jericho looks at the changes in revenue and spending over the last few budgets and compares them to the situation in the nineties. As usual there are plenty of graphs to back up his reasoning.
This week the budget situation is being spoken of in grave terms. News articles are full of dire prognostications, the Prime Minister is being sombre, and the opposition is free to run every scare campaign it wishes.

But back in the 2009-10 Budget - the first after the GFC had smacked the bejeezus out of the revenue - Wayne Swan predicted by 2012-13 that the budget would be in deficit of 2 per cent of GDP. Back then we weren't expected to return to surplus until 2015-16.
In reality its predictions of the budget situation were pretty much on the money - perhaps even too conservative. But a year later the Government in a misconstrued desire to win the race of economic management through achieving speedy returns to a surplus, shifted the goal from 2015-16 to 2012-13.