Turnbull’s economic challenge

The economy and some tough decisions ahead suggest Malcolm Turnbull might go to an election ahead of the next budget, writes John Hewson.

Malcolm Turnbull is obviously enjoying being popular, and especially being so far ahead in the polls against Bill Shorten as preferred prime minister, the latter having now become Mr 15 Per Cent.

However, popularity is quite ephemeral. As soon as Turnbull attempts a significant reform, he will create winners and losers, pluses and minuses. His popularity will be a casualty, even though, I concede, the electorate is hungry for good government.

Turnbull is popular as he looks and sounds like a leader. But, so far, he has talked a lot, but done very little. He has certainly changed the mood, and indeed the perception of ‘a leader’, when compared to both Gillard and Abbott.

But he is raising expectations in the community already well beyond his capacity to deliver. Given that we have had very poor government over the last decade or so, where most issues/policy areas have essentially been left to drift, the magnitude of the reform task in any area is now very significant.

By any measure, any reform today, in almost any policy area, will need to be big and bold. There is little opportunity for marginal changes, for a minimalist approach.

In terms of economic policy, for example, to have any credibility, Turnbull/Morrison will need to begin with a completely honest and realistic assessment of where we are, of the state of our economic circumstances, challenges, and opportunities.

This week Treasury began this process by admitting that we should no longer aspire to trend growth of 3.25 to 3.5 per cent, as government had been doing, but rather work with say 2.75 per cent. To understand this, it should be recognised that 1 per cent less growth means a GDP some A$150 billion less, probably with rising unemployment.

It should also be recognised that our current growth rate is still less than this, and that there is now a strong view internationally that the developed world may need to accept the reality of a growth recession for years to come, where growth is, at best, 2 per cent. So, our projected trend growth may still be unattainable against such a prospect.

In terms of the Budget task, it should be recalled that last year’s Budget assumed, rather than predicted, that growth would rocket back to some 3.5 per cent in two years’ time which, along with the assumption that the government could keep the revenue from bracket creep, allowed them to claim a return to Budget surplus by the end of this decade.

Clearly, this is now off the cards. At least, off the cards without very significant further cuts to government spending and/or a significant increase in the overall tax burden.

While Treasury have lowered the trend growth rate, Treasurer Scott Morrison is, naively, promising to fix the Budget by cutting expenditure, without any increase in the tax burden.

It was undeliverable when he first said it on becoming Treasurer. It is even more undeliverable now that Treasury has lowered their growth expectations.

The reality is that government revenues are running at about 23 per cent of GDP, while expenditure is running at over 26 per cent of GDP. The difference, in a A$1.5 trillion economy, is some A$45-50 billion.

Closing this difference would almost wipe out the Budget deficit. So too, if the Howard Government, completed by the Rudd Government, hadn’t delivered those last tax cuts, which cost, in today’s dollars, the bulk of the difference.

The Government is to soon release the Mid-Year Economic and Financial Outlook (MYEFO). This will be Turnbull’s only chance to really come clean on the actual state of our economy, and the real magnitude of the Budget challenge, and thereby to set the key parameters for overall economic policy moving forward.

It is an absolute imperative that he does so, given the waffle of the Abbott Government about the debt and deficits crisis/emergency, and its failure to actually to make any headway in the task at all, having most of its expenditure initiatives blocked by the Opposition and the Senate, and rejected as grossly unfair by the electorate.

When you consider the detail of all this, and despite Turnbull’s total rejection of the possibility of an early election, realistically, how can he avoid the temptation of going to an early election, say March/April next year, prior to the next Budget?

He would surely, easily, win such an election against a hapless Shorten, to achieve a broad mandate, in his own right, to govern, to take the hard decisions that are mounting by the day.

This piece was also published by the Southern Highland News.