We face 'extraordinary' times, 'very sensitive' times, international headwinds and fragility. But the overarching message we are meant to take away from this year's Budget with is a positive one.
In his 2016-17 Budget speech, delivered tonight, Australian Treasurer Scott Morrison stated that the Turnbull Government understands the economic challenges Australia faces. And indeed there is a comprehensive range of measures and policy announcements intended to assure us that the government is responding to our challenges and successfully navigating the transition away from the mining boom.
Unfortunately, the Treasurer's words have been undermined somewhat by his extremely light treatment of the global challenges and risks that are materially important to the Budget figures.
The avoidance of international context is particularly worrying on the back of the Treasurer's decisions not to attend the IMF, World Bank and G20 meetings in Lima last October and in Washington last month, as well as other recent international gatherings.
The scant international content in the Treasurer's remarks is particularly striking in light of the 0.25% interest rate cut announced this morning by Reserve Bank of Australia Governor Glenn Stevens. In justifying the interest rate decision, the key factors cited by the Reserve Bank Board were primarily global in nature. Weighing on the Board was a confluence of downgrades in global economic forecasts, uncertainty about the economic outlook, difficult conditions in emerging-market economies, and the divergence in monetary policy settings.
The Treasurer cited precisely none of these factors in his speech.
He had much to work with. Digging into the details of the Budget papers suggests a prudent, middle-of-the-road set of estimates about the global economy, awareness of the risks, and broad alignment with the international economic discourse and the Reserve Bank Board decision.
The US, Japan and Euro area are expected to grow at modest rates or remain subdued out to 2018 the forecast years. As for our emerging-market trading partners, the ongoing Chinese transition means moderating growth and ongoing risk to the global economy, India's title as fastest growing major country in the world will continue to present opportunities, and other East Asian countries are expected to grow slowly relative to history.
The overall picture is one of moderating global growth, reflecting unresolved crisis legacies, low productivity growth and unfavourable demographics. [fold]
Table 1: International GDP growth forecasts
Given the Budget papers’ claim that risks to growth are broadening and are evident in both advanced and emerging economies, it is also worth paying attention to the uncertainty around the estimates. For interested wonks, Budget Paper 1, Statement 7 details forecasting performance and scenario analysis and is worth a read. It is technical but rich in detail about the uncertainty of numbers.
I’ve produced, with a couple of tweaks, an Aussie version of the ‘most depressing chart in the world’, an honour bequeathed to a chart from the 2016 Economic Report of the US President which explains the succession of World Real GDP growth forecast downgrades by the IMF.
Australian Major Trading Partner GDP forecast, 2010-2018
Source: Various Australian Budgets and Mid-Year Economic and Fiscal Outlooks (MYEFOs)
The graph explains how well, or rather how poorly, Australia has forecast the performance of our major trading partners – those of particular importance to domestic economic activity – in recent Budgets. We have gotten into a routine of projecting a rosy recovery, which has failed to materialize by the time forecasts become actual, known figures.
It is an observation entirely consistent with the experience of other forecasters, such as the IMF, and is unsurprising given the tendency for Australian forecasts of the international economy to benchmark our international projection, for very understandable reasons, against credible global and national forecasts. But it means we inherit their mistakes, and this has meant downgrades so far this decade.
What continued downgrades in the international economy means is a very real thing for the Budget. It is a material contributor to the ‘parameter and other variations’ (changes in Australian economic conditions not associated with policy) that are collectively responsible for around $13.5 billion in net tax receipts downgrades since MYEFO out to 2018-19, a smaller downgrade than in recent budgetary documents. In comparison, though, the net impact of policy decisions on the budget bottom line across the same four years (which admittedly covers a range of actions that impact on the budget bottom line) is just $1.2 billion.
In all, this is very much the Budget of a salesperson, one that allows Morrison to distance himself firmly from his predecessor and the highly optimistic tone on the global economy that was a hallmark of last year’s Budget.
A side effect, though, is that when it comes to the big picture, the impression is that Australia’s Treasurer is completely focused on a fraction of the change that drives our nation’s bottom line. The action by the Reserve Bank, and what it implies about the trajectory of the Australian economy, is therefore likely to steal some of the headlines away from this unusually early Budget.