Yes, the economy has rebounded – but only to its pre-pandemic levels of unreformed mediocrity.
While markets will applaud the improved bottom line in Thursday’s budget update, all political eyes will be on two sets of numbers – inflation and wages.
Both sides of politics agree that the cost of living will be a decisive issue at the coming election. If the government forecasts wages to barely keep pace with inflation over the next four years, it will officially admit it expects living standards to remain stagnant under its stewardship.
The Mid-Year Economic and Fiscal Outlook (MYEFO) may be the Morrison government’s last fiscal statement before the election. If the prime minister decides to avoid a rerun of the spectacle of government members squabbling in parliament and crossing the floor, he will call an election for early March.
But if his pollsters advise him that he can’t win a March election he will delay and allow his treasurer to bring down a budget as scheduled and head to a May election.
Either way, 10 days into the election campaign Treasury and the Department of Finance will release their own Pre-election Economic and Fiscal Outlook (PEFO). Under the Charter of Budget Honesty, PEFO will reflect the best professional judgment of the officers of those two agencies, free of any government influence.
PEFO, too, will include forecasts for inflation and wages. The government can’t afford a big divergence between its forecasts this Thursday and those in PEFO. Otherwise, it would open itself up to the charge of manipulating the MYEFO forecasts for political advantage.
The benchmark for MYEFO’s forecasts for real wages is provided in the May 2021 Budget, and they are for real wages to flatline through to the middle of this decade.
Much is being made of acute labour shortages as the economy rebounds from the heavy lockdowns that began in June. Those shortages should ordinarily force real wages up.
But the Morrison government already has a plan to suppress wages through a resumption of temporary work visas for low-skilled workers in the agricultural, tourism and hospitality industries https://www.foreignminister.gov.au/minister/marise-payne/media-release/joint-media-release-australian-agriculture-visa and https://minister.homeaffairs.gov.au/AlexHawke/Pages/working-holiday-Maker-Visa-maker-visa-changes-helping-COVID-19-recovery.aspx
Just to be sure, the Morrison government earlier this year withdrew its own bill to criminalise wage theft https://www.afr.com/politics/federal/morrison-s-workplace-bill-faces-collapse-20210318-p57brl
Among economists there is widespread agreement that the best way to increase real wages sustainably is to increase productivity growth. In fact, productivity growth has contributed 95 per cent of the improvement in Australians’ material living standards since Federation https://www.pc.gov.au/research/ongoing/productivity-insights/recent-developments-2021/productivity-insights-2021-recent-developments.pdf
After reaching 2 per cent per annum during the 1990s on the back of the Hawke-Keating economic reforms, productivity growth has been sliding ever since. In the past five years, it averaged just 0.5 per cent per annum and shuddered to a halt the year before COVID-19 struck.
The 2021 Budget simply assumes that productivity will lift itself off the floor, grow gradually over 10 years to its average rate over the last three decades of 1.5 per cent per annum, and remain at that rate thereafter.
Since that 30-year average includes the productivity boom years of the 1990s, this is a wondrously optimistic assumption.
When Treasurer Frydenberg re-announces on Thursday that the economy is rebounding to its pre-pandemic level, he will be right. But that’s all he will be announcing.
The economy is re-opening, investment is being pulled forward by time-limited accelerated depreciation provisions and, despite an alarming pre-pandemic dive in the fertility rate https://www.afr.com/politics/federal/cheaper-childcare-could-reverse-record-low-fertility-rate-economists-20211208-p59fx7 overall population growth will resume as Australia reopens its borders to migrants.
When the country’s population grows, GDP grows with it, but GDP per person doesn’t necessarily follow.
After the rebound, the economy will likely ease back to its pre-pandemic annual growth rate of around 2.5 per cent – the same as in the 2021 Budget forecasts. Since around two-thirds of that pre-pandemic GDP growth was attributable to population growth, the domestic economy had been travelling poorly for about eight years.
Whichever party wins the coming election, a new economic reform program aimed at reviving productivity growth and ensuring the benefits of that growth are shared fairly will be essential.
Last Thursday, I attended a small gathering of family and friends to commemorate what would have been Bob Hawke’s 92nd birthday. Hawke promised reconciliation between workers and employers and, with Paul Keating and their colleagues, achieved it through various iterations of the Prices and Incomes Accord.
A new National Reform Summit should be convened after the election and a fresh consensus built among governments, trade unions, employer groups and representatives of civil society and Indigenous Australians about the problems facing the country and possible solutions to them.
Meanwhile, in lieu of a reform program, get ready for the political message that if you think the economy is not great under the Morrison government, beware that spending and taxes will always be higher under Labor https://www.afr.com/politics/federal/business-investment-surge-to-drive-economy-frydenberg-20211210-p59gjv
But it’s not true.
As a percentage of GDP, the present government had outspent the Rudd and Gillard governments even before its pandemic-era spending began. Now it’s much greater. And the two highest-taxing governments in Australia’s history are the Howard and Morrison Coalition governments.
Still, it’s a good tale. Ah, you can tell an election is in the air.
Craig Emerson is managing director of Emerson Economics, a distinguished fellow at the ANU, director of the APEC Study Centre at RMIT, adjunct professor at Victoria University’s College of Business and chair of the McKell Institute.