Skip to content

The Economy: Little cheer in seasons greetings

by Colin Chapman

xmastreeAs we enter the last full working week before Christmas and the kids tumble out of school for the long, hot summer holidays, breaking news will further test investors’ patience, and could jolt rising public confidence in the Turnbull government. Retail sales may well tail off in much the same way as the property market has cooled in recent weeks.

The news will come on Tuesday December 15 when federal treasurer Scott Morrison releases the Mid-Year Economic and Fiscal Outlook, better known as MYEFO. It will show Australia’s public finances and economic outlook have deteriorated further in the past six months. Despite a fall in unemployment to 5.8 per cent, and rising farm exports, further falls in the prices of oil and coal have been damaging.

The weekend meeting of state premiers and the prime minister, along with finance ministers, has failed to reach agreement on economic reform, and a decision has been put off until March. Rancorous arguments are certain to continue.

We know Tuesday’s numbers are going to be bad. Morrison has already indicated there will have to be further cuts in government spending beyond those already announced. Some leaks – or guesses – suggest the rise will be no more than 4pc, to a budget deficit of $39 billion, for the current financial year. But a number of thinktanks are forecasting much higher amounts, with Deloitte Access Economics forecasting $43 billion.

Whatever the number, it is immaterial.  What matters is what can be done to jump start the economy and reduce the deficit. It is the policy settings that matter. The government’s preferred option is to make budget cuts and to increase and extend Goods and Services tax (GST) from 10pc to 15pc, using a large slice of the extra revenue raised to lower income taxes.

In the absence of an agreement with state premiers, Morrison is modelling a wide variety of other options. These include a 2.5% increase in GST, extending it to a greater universe of goods and services and reducing the extent of income tax cuts.

South Australian premier Jay Wetherill

The Opposition is opposed to raising the GST but has failed to offer any practical solutions of its own; but some Labor premiers have been won over. One is South Australia’s Jay Wetherill. At present the entire proceeds of the GST goes to the states, but he has suggested that the extra proceeds generated from raising GST to 15pc would go to the Federal government, to be used to cut company and personal taxes, as well as compensating lower and middle income families for the increase. The states would no longer get general purpose payments from the national Treasury, but instead receive 17.5% of national income tax to spend as they choose. NSW premier Mike Baird and ACT chief minister Andrew Barr believe this idea is worth pursuing.

If agreement on reform cannot be agreed in March the Turnbull government will act independently in the May Budget and take controversial issues to an election shortly thereafter.

Malcolm Turnbull has other issues on his mind in the coming week. The most important is a visit to Tokyo for talks with prime minister Shinzo Abe. The Japanese remain the favourites to build the next class of Australian submarines, almost certainly in Wetherill’s South Australia. It will be the first time advanced Japanese defence technology will have been transferred offshore. The French and the Germans remain in the running for the contract.

An irritant for the PM, but of less concern, will be his predecessor’s constant niggling of the Muslim community. In a speech on security last week, former PM Tony Abbott said that Muslim leaders in Australia should be doing more to stop the spread of extremism, comments the head of the Arab Council of Australia, Randan Kattan, described as completely unhelpful. Turnbull hit back, saying that casting aspersions against Muslims, “risks playing into the hands of our enemies”.

The sad truth is that Abbott, with the support of some columnists on The Australian newspaper, still believes he can get his old job back, reminding friends that Kevin Rudd was able to avenge his overthrow by Julia Gillard.  Abbott has already reneged on his post-removal promise not to snipe from the sidelines, but for Turnbull he remains a minor irritant, to be swotted away from time to time. Abbott has failed to position himself as the ‘prime minister in exile’.  The Cabinet and public opinion is still solidly behind Turnbull, much to Labor’s chagrin; Labor who would love nothing better than having the Mad Monk back at the dispatch box.