economic policy in a year of - financial standard...3 financial year ended forecast commonwealth...

Economic policy in a year of

uncertainty

Financial Standard Chief Economists Forum

Danielle Wood, Grattan Institute

5 &7 February 2020

2

Economic policy outlook for 2020 and

beyond

Fiscal policy: back in fashion

• Surplus out, stimulus in?

• Government loosed the spending straightjacket

• Investment allowance, age care spending, and perhaps more….

Monetary policy: a year of leaning

• Another cut then ‘wait and watch’?

• Adopting a flexible approach to inflation target with an eye to house prices

and debt

Lower wage growth the new normal?

• Both Treasury and RBA revised down their forecasts

• Don’t forget the supply side - excess capacity despite strong jobs growth

Longer-term outlook will be in the spotlight

• Intergenerational Report will restart conversation about long term pressures

• Climate change is the gaping hole – will government build in climate risk?

3

Financial year ended

Forecast

Commonwealth receipts and payments

per cent of GDP

Long-promised surplus on its way?

Source: 2019-20 MYEFO.

15

17

19

21

23

25

27

2003 2008 2013 2018 2023

Payments

Receipts

4

What a difference 6 months makes….

“Tonight, I announce that the Budget is back

in the black and Australia is back on track”Josh Frydenberg, April 2019 Budget speech

“The surplus is of no focus for me" … "What

matters to me is the human cost and

meeting whatever cost we need to meet.Scott Morrison, January 2020

The budget surplus is “non-negotiable” Josh Frydenberg, August 2019

5

Collector’s items?

6

What happens beyond that? A close

reading of budget papers signals a change

Others targets have been

‘disappeared’…

• New spending initiatives

will be more than offset by

reductions in spending

elsewhere in the budget

• Improvements in the

budget position due to

favourable economic

circumstances will be

banked to the bottom line

• Spending will be reduced

as a share of GDP

7

Predictions for 2020-21 budget….

• Close to balance, government will do what it can to land on the

surplus side of the ledger

• Fires will show up as higher spending (but mainly in the short-term)

and lower growth. Coronavirus also a hit to growth. How big?

• Bets are off for 2020-21 and beyond ….expect to see new

spending and tax changes:

– Investment allowance – will $2 billion be enough to get

investment moving?

– More age-care spending – responding to Royal Commission will

be expensive

– Other spending inc injections to tourism sector?

8


beyond








and debt







9

Predictions for 2020 monetary policy

• Expect to see another cut before

the May budget, then ‘wait and

watch’

• RBA will happily embrace the

breathing room if federal

government shifts to more

stimulatory settings

• RBA clearly taking ‘flexible’

approach to inflation target with an

eye to financial stability

• Macroprudential loosening plus low

interest rates potent combination

house prices….

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1991 1995 1999 2003 2007 2012 2016

Annual change in the consumer price index

Source: ABS 6401.0

10

Macroprudential loosening combined

interest rate cuts a powerful combination ….

Corelogic daily house price index (12 August 2019 = 100)

11


beyond








and debt







12

Actual and forecast growth in wages, per cent

Treasury and esp RBA forecasting lower

wages growth for foreseeable future

Note: Total hourly rates of pay excluding bonuses, private and public wages.

Source: Grattan analysis of Commonwealth Budget Papers 2010-11 to 2019-20 and MYEFO 2019-20.

Financial year ending

1.5

2.0

2.5

3.0

3.5

4.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

RBA

Forecast made in…

2013

20142015

2016

201720122018 2019

Budget

Actual

2019

MYEFO

13

Unemployment rate (%)

RIP the Phillips curve…..

0

5

10

15

20

3 4 5 6 7 8 9 10 11 12

Pre-

1990s

1990-

2009

Post-

GFC

Gro

wth

in

em

plo

ye

e c

om

pe

nsatio

n (

%)

Notes: Employee compensation is total remuneration of employees including wages, ad hoc bonuses, termination payments and in-kind benefits

Source: Based on NAB and Grattan analysis of ABS Labour Force data

14

Participation been much higher than expected

– particularly for older women

0%

20%

40%

60%

80%

100%

1966 1976 1986 1996 2006 2016

Hu

nd

red

s

Women’s LF participation rate by age, 1966 to 2018

2007 2011 2015 2019

66%

65%

64%

Participation rate

RBA May 2017

forecast

15

Temporary migration has substantially

boosted supply of unskilled workers

0

200,000

400,000

600,000

800,000

1,000,000

Stock of temporary migrants (ex NZ)

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

Family

Skilled permSkilled temp

HumanitarianNZ cit

Aust cit

Other perm

Students

Working holiday

Visitor and other

Other

temp

Working

holiday

Temporary

skilled

Students

Net overseas migration, FY ended

Sources: Treasury / Department of Home Affairs, “Shaping Our Nation”, Figure 16. https://cdn.tspace.gov.au/uploads/sites/107/2018/04/Shaping-a-Nation-1.pdf ; ABS 3412

https://cdn.tspace.gov.au/uploads/sites/107/2018/04/Shaping-a-Nation-1.pdf

16

0%

5%

10%

15%

20%

25%

1978 1983 1988 1993 1998 2003 2008 2013 2018

Hu

nd

red

s Age

group

65+

55-6435-44

25-34

15-24

45-54

And underemployment is on the rise for

young people

17


beyond






• RBA likely to cut once more then ‘watch and wait’

• Maintaining a flexible approach to inflation target with an eye to house

prices and debt







18

2020 means release of another

Intergenerational Report

Commonwealth Charter Budget Honesty requires the government

release an IGR every five years

19

1975

2015

2055

Australians aged 15-64 for every Australian 65+

Highlight future pressures on government

budgets from population ageing

20

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

1988-89 2015-16Higher workforce

participation 55-64;

this group now net

contributors

15-24 25-34 35-44 45-54 55-64 65-74 75+

Governments have supercharged these

pressuresAverage annual net benefits per household, 2015-16 $, by age of head of HH

Notes: Net benefits are social assistance benefits in cash plus support in kind minus income and sales taxes. Equivalisation accounts for

households of different sizes. Age group is the age of the household reference person. Source: ABS (2018b).

21

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

2015 2020 2025 2030 2035 2040 2045 2050 2055

That’s why business as usual could look ugly

0

10

20

30

40

50

60

70

2015 2020 2025 2030 2035 2040 2045 2050 2055

Projected Commonwealth cash balance under

2015 legislated policy (per cent of GDP)

Projected Commonwealth net debt under 2015

legislated policy (per cent of GDP)

Source: Commonwealth Government, Intergenerational Report (2015)

22

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%Economic impact of Australia's bushfires set to exceed $4.4bn cost of Black SaturdayThe Guardian – estimates by Moody’s

Economic cost of bushfires estimated at $2 billion and risingThe Age – estimates by SGS

With costs approaching $100 billion, the bushfires are Australia’s costliest natural disasterThe Conversation – estimates by Read and Denniss

with adaption and mitigation

with mitigation but no adaption

with adaption but no mitigation

without adaption or mitigation

Australia

International

Source: CSIRO National Outlook 2019, Technical Appendix

But demographic change not only long-

term pressure Economic effects of climate change could be large

2030 2050 2060 2100

Mercer

Mercer (4C)

Stern

OECD

OECD (4C)

OECD

(ANZ)

OECD

(4C, ANZ)

Diaz & Moore

(4C)

Diaz & Moore

OECD

Kompas

(4C)

Kompas

(2C)

Kompas

(2C, Aus)

Kompas

(4C, Aus)

23

Australia risks being significantly out of

step

Probability

Impact

2007 2009 2011 2013 2015 2017 2019

Economic Social Geopolitics Technology Environment

Top 5 global risks, World Economic Forum

Asset

crash

Asset

crash

Asset

crash

Asset

crash

Fiscal

crash

Finance

crash

Finance

crash

Fiscal

crash

Water

short

Climate

change

WMD WMD WMD Climate

change

Depop-

ulation

Depop-

ulation

Depop-

ulation

Depop-

ulation

Climate

change

Water

short

Water

short

Climate

change

Pan-

demic

WMD Extreme

weather

Extreme

weather

Climate

change

WMD

I-nat

conflict

China

crash

Oil price

shock

Oil price

shock

I-nat

conflict

Food

short

Fiscal

crash

Water

short

WMD Water

short

Water

short

Natural

disaster

Extreme

weather

Bio-

diversity

Pan-

demic

Oil price

shock

Chronic

disease

Chronic

disease

Asset

crash

Fiscal

crash

WMD Unemp-

loyment

I-nat

conflict

Forced

migrat’n

Natural

disaster

Climate

change

Water

short

Extreme

weather

Oil price

shock

Pan-

demic

Fiscal

crash

Fiscal

crash

Energy

prices

Energy

prices

Climate

change

I/str

break

Climate

change

Energy

prices

Climate

change

Water

short

Natural

disaster

Water

short

I/str

break

Asset

crash

Asset

crash

Asset

crash

Extreme

weather

In-

equality

In-

equality

In-

equality

I-nat

conflict

Forced

migrat’n

Extreme

weather

Extreme

weather

Extreme

weather

Extreme

weather

Chronic

disease

ME war China

crash

China

crash

Extreme

weather

Fiscal

crash

Fiscal

crash

Extreme

weather

Extreme

weather

Extreme

weather

Forced

migrat’n

Natural

disaster

Climate

change

Climate

change

Oil price

shock

Failed

states

Chronic

disease

Chronic

disease

Corrup-

tion

Climate

change

Climate

change

Unemp-

loyment

Nat’l

gov’ce

Climate

change

Natural

disaster

Cyber Natural

disaster

Natural

disaster

China

crash

Oil price

shock

Global

gov’ce

Fiscal

crash

Bio-

diversity

Cyber Water

short

Climate

change

State

collapse

I-nat

conflict

Terror-

ism

Data

fraud

Data

fraud

Bio-

diversity

Asset

crash

Chronic

disease

Deglob-

alisation

Global

gov’ce

Climate

change

Water

short

Ageing Cyber Unemp-

loyment

Natural

disaster

Data

fraud

Climate

change

Cyber Enviro-

disaster

Source: World Economic Forum, Global Risk Report. Note some risks recoded for consistency

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