The budget challenge

Australian households and consumers are struggling, so is it time to make some tough decisions?

John Hewson

Economics and finance, Government and governance | Australia

26 February 2016

The upcoming budget is shaping up to be a test of Malcolm Turnbull’s leadership, John Hewson writes.

As much as our political leaders would hate to admit it, especially in the run-up to a difficult Budget, households/consumers are really struggling.

This week we saw data released for the December quarter of 2015 that recorded the lowest increase in wages since records began. Although it is consistent with somewhat stronger employment growth, job insecurity is also rising, with big shifts from full-time to part-time employment, and significant underemployment, where people can’t work as much as they would like.

In recent days, these uncertainties have been significantly compounded by fears of changes to negative gearing and capital gains taxes, and just how these might impact on the value of the family home, and by the poor and volatile performance of the stock market, along with possible changes to the taxation of superannuation, creating fears that the value of their superannuation might also be reduced.

Yet, while fears mount that both household income and wealth will remain constrained, or even decline, households have to grapple with the seemingly endless increases in, and complexity of, power and water bills, phone bills, local rates, school and childcare fees, and so on. Lower interest rates and petrol prices don’t seem to have helped much.

The results of a recent survey by MLC/nab suggested that half of working Australians are living from payday to payday, while having unrealistic expectations about their living needs in retirement.

A staggering 85 per cent thought that we were living beyond our means – consistent with the large increases in household debt – yet they expected to be able to sustain their living standards and lifestyle into retirement.

Unfortunately, the reality is that, overall, the standard of living of households is in decline. This can be expected to continue, and to have significant further consequences for retail sales, and in turn, our national economic growth.

More on this: Unreal interest rates will not create real demand | Warwick McKibbin
Recognition of these realities will be a significant constraint on the Government in framing the May Budget, with some additional key pressure points.

As the Government has admitted, even with modest income growth, the average income earner is about to drift into the second top tax bracket – what is called bracket creep – that will increase their tax burden significantly.

Yet, the Government is constrained in just how much Budget capacity it has to respond, given very large, long-term, expenditure commitments in defence, school reform and education overall, health, disability care, the National Broadband Network, and a host of infrastructure requirements, while also having closed the door on significant overall tax reform.

This is against the background of a Budget deficit and outlook that is worse than when they won office at the last election, in a world where global growth is weakening, as governments and policy authorities struggle to respond effectively to economic and a host of geo-political challenges and uncertainties.

Our Reserve Bank has been suggesting that it still has capacity to lower interest rates further, if our economic circumstances deteriorate further. Yet, low interest rates haven’t had the stimulatory effects they had hoped, and there is mounting global evidence that perhaps the effectiveness of monetary policy may have run its course, even with zero or negative rates – indeed, they may be counterproductive.

Consumer and business confidence is fundamental to our economic and social wellbeing, yet it is becoming increasingly fragile.

The Turnbull Prime Ministership arrived with a burst of expectations. He is popular with the electorate that is willing him to govern. There is a hope for sound leadership, and I believe a tolerance for tough decisions in the national interest.

The drift and mismanagement of issues, and further ministerial changes, in recent weeks have begun to unnerve the electorate. The polls have narrowed.

While Turnbull should easily win the next election, the Budget is looming as the fundamental test of his bona fides for leadership, as the economic well-being of average Australian is in decline.

This piece was also published by the Southern Highland News.

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Citation

Hewson, J. (2016). The budget challenge - Policy Forum. [online] Policy Forum. Available at: http://www.policyforum.net/the-budget-challenge/ 

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