Saturday, February 07, 2015

The economic case for changing leaders

Government MPs wondering whether to ditch Prime Minister Tony Abbott now or give him a few more months to get his act together ought to have a close read of the Reserve Bank's latest economic statement.

It's upped its forecast for unemployment and cut its forecast for economic growth. So bleak were the original forecasts presented to the board on Tuesday that they had to be massaged in the document made public on Friday in order not to harm confidence.

The budget update presented by Abbott and Treasurer Joe Hockey in December forecast low economic growth of 2.5 per cent this financial year followed by 3 per cent in 2015-16, each figure well below Australia's potential growth rate, which is why unemployment was going to climb to 6.5 per cent.

The figure presented to the board would have been for growth of around 2.75 per cent in 2015-16, embarrassingly low for a country with Australia's potential and painfully low for a government about to face re-election.

This information isn't the result of a leak from the board. It's the result of a calculation that works backwards from the forecasts published on Friday. Those forecasts are for economic growth of 3 per cent in 2015-16. But they were made after taking into account the most recent interest rate cut (which hadn't happened when the board was presented with the forecasts on Tuesday) and at least one more subsequent cut...

The Bank's rule of thumb is that two interest rates cut cuts taken together boost economic growth by around 0.25 percent after a year to eighteen months. It means that the forecasts presented to the board on Tuesday were for unsettlingly low economic growth of 2.75 per cent right through to mid 2016. They would have made Abbott's promise of half a million new jobs in five years impossible to achieve and would have seen the unemployment rate steadily rise.

The message government MPs will get if they delve into the economic statement is that things are far weaker than had been thought, so weak that action is needed now rather than later.

If Abbott survives and he and Hockey cobble together another budget like the last one only to be brought down later, the opportunity for a timely reset will be lost.
The message is that now is the time to look at everything afresh, followed by a period of stability later.

As well-intentioned as Abbott and Hockey might be, they are gaffe-prone and shown themselves to be unable to build a budget that inspires confidence and unable to get things through the Senate.

Business and consumer confidence took a hit after the May budget and didn't recover.

The mere installation of a new team is itself likely to lift confidence.

If it is installed next week before too much work is done on the next May budget there's a chance it can be used to turn things around.

The Australian economy is worth $1.6 trillion. Delaying restoring economic growth for another year would cost Australia $40 billion.

Waiting is costly.

In The Age and Sydney Morning Herald

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