Growing calls for Federal Government to bring tax cuts forward

Growing calls for Federal Government to bring tax cuts forward

Posted

March 01, 2020 11:27:56


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Economists have called for the Government to bring forward already-legislated tax cuts. (ABC News: Jessica Hinchliffe)

When Prime Minister Scott Morrison warned Australians of the likelihood the coronavirus could become a pandemic last week, he suggested it was a good thing the federal budget was close to generating a surplus.

“I can tell you this,” he said.

“Australia would not have been as well prepared for dealing with these series of crises that we have been dealing with now for months were it not for the calm, sober and methodical financial discipline that we have put in place over the last six years.

“I remember last year, people last year in October, in August, in September, telling us to splash money around on goodness knows what.

“We kept our heads at that point and we’ve kept our heads as we’re continuing to move through these crises now.”


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Bill Evans says the case to bring tax cuts forward is getting stronger. (Supplied: Westpac)

But two days later, Westpac’s chief economist Bill Evans said the Commonwealth budget should not be anywhere near surplus in these conditions — and not because of the cost of the bushfires or coronavirus.

“The bottom line is that a country that is running unemployment well above its NAIRU [non-accelerating inflation rate of unemployment], and is well below its inflation targets, should not have the luxury of a fiscal surplus,” Mr Evans said.

“It’s clearly saying that the policy settings are inappropriate. I believe that we will start to see the Government reviewing that issue over the next few months.

“And, as you know, we’ve been strongly of the view that they should be bringing forward the tax cuts — and what we’ve seen of the last month only makes that a stronger argument, not a weaker argument.”

Economist’s criticisms weren’t heard

Comments of such a political nature from Mr Evans would normally make headlines, but they passed silently amid the maelstrom of news about stock markets plummeting, Australia’s dollar dropping to 11-year lows, and fears of the coronavirus outbreak reaching pandemic levels.

However, if we understand what Mr Evans is talking about then we’ll better appreciate this week’s economic data.

The Reserve Bank is meeting to discuss interest rates on Tuesday, GDP data will come out on Wednesday, and retail sales figures will come out on Friday.

What’s happening in the economy?

Australia’s inflation rate is running at about 1.8 per cent (very low), the unemployment rate is 5.3 per cent (too high), and the economy is growing slowly at 1.7 per cent.

The Reserve Bank aims to have inflation sitting at about 2.5 per cent on average over the medium term, and it thinks the unemployment rate needs to drop to 4.5 per cent (at least) for inflation to start picking up.

Economists call that “sweet spot” for the unemployment rate the non-accelerating inflation rate of unemployment, or NAIRU.

When Mr Evans talks about the NAIRU being too high, that’s what he’s talking about.

He thinks Australia’s unemployment rate needs to drop significantly for inflation to move in the direction the RBA wants.

What’s required for the unemployment rate to drop significantly? Economic growth.

But where will that economic growth come from when the Reserve Bank has already cut the official interest rate to a record-low 0.75 per cent, leaving it with little firepower to kickstart growth without inflating asset prices?

It’s a conundrum

And curiously, the RBA still estimates Australia’s economy will grow by 2.75 per cent over 2020 (up from 1.7 per cent), and by 3 per cent over 2021.

Many economists think the RBA’s estimates are too optimistic. On Friday, NAB group chief economist Alan Oster said he expected growth would more likely be 1.3 per cent for 2020 and 2.7 per cent for 2021.

According to Mr Evans, in such jittery conditions, there’s no way the RBA can achieve its economic growth target without assistance from Federal Government spending.

That’s why he says the Morrison Government should be bringing forward its planned tax cuts — to flush the economy with cash quickly to get people spending again.

He’s not the only one.

Commonwealth Bank senior economist Gareth Aird warned in November the Government’s budget settings were hurting the economy and he said it ought to bring its tax cuts forward.

“At present, the stance of fiscal policy adopted in the federal budget is contractionary,” Mr Aird said a few months ago.

“Growth in taxation is greater than growth in expenditure, which is why the deficit has shrunk and the budget is now essentially balanced. [But] shrinking the Commonwealth budget in this manner in pursuit of a surplus effectively sucks money out of the economy.”

GDP data this week

On Wednesday, when the Bureau of Statistics releases GDP figures, we’ll get data confirming if the economy weakened in the last three months of last year.

Economists suspect the data will show the economy’s growth rate hasn’t changed much from 1.7 per cent.

However, they think Australia’s GDP will record a noticeable slide in the March quarter, because that’s when the impact of the summer’s catastrophic bushfires and the fallout from the coronavirus will show up in the data.

Mr Oster says if 2019 ends with a growth rate of about 1.8 per cent it will signal there’s growing spare capacity in the economy.

“While the current focus of policymakers has turned to the impact of the coronavirus outbreak, a soft end to 2019 will confirm the underlying weakness in the economy, such that higher unemployment lies ahead,” Mr Oster said.

“Indeed, we think unemployment will increase to around 5.5 per cent in 2020, with the RBA cutting rates as soon as April, with the fallout from the virus adding to the case for easier policy.”

Monthly update on the Commonwealth’s financial position

Late on Friday afternoon, Minister for Finance Mathias Cormann released the Morrison Government’s monthly update on its budget position.

It showed when the Government published its mid-year budget update in December it was expecting the underlying cash balance for the 2019-20 financial year through to January 31, 2020 would show a deficit of $22.8 billion.

However, the deficit is currently $26.6 billion — $3.7 billion larger than expected two months ago.

Mr Cormann said we shouldn’t make too much of the figures because timing differences between when receipts are received and when payments are made can make the balance appear worse than it is, and December and January are consistently two of the most volatile months.

However, at this point in the budgetary cycle in February 2019 the budget’s deficit was $2.9 billion smaller than expected, and in February 2018 it was $6.4 billion smaller.

Topics:

business-economics-and-finance,

markets,

industry,

retail,

consumer-finance,

australia

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