Balancing the national budget is important, but spending isn't always bad

Updated

It is never easy being Treasurer.

Portrayed as a killjoy in good times, the second in command is readily denounced as incompetent when things turn sour, or for taking appropriate action to avert a disaster that has been caused by forces well beyond his or her control.

Scott Morrison may have just made his task even more difficult.

Last week, the Treasurer let rip during a speech that he did not think the Reserve Bank (RBA) should cut rates further, primarily because monetary policy was no longer working.

He is not alone in that line of thought. Former Reserve Bank governor Glenn Stevens spent more than a year banging on with the same argument and his successor Philip Lowe was even more blunt in his first outing three weeks ago.

Key points: Central bankers in Europe, Japan urge spurring economy into action through fiscal stimulus

IMF says global debt levels have reached $199 trillion, notes Australian households

UBS says housing supply is unlikely to peak until 2018

Given the distortions ultra-loose monetary policy is causing — forcing asset prices into record territory while debt is ballooning — the Treasurer's concerns are well founded.

Central bankers in Europe and Japan are rapidly coming to the same conclusion.

What they are urging, though, is for governments to fill the void; to spur the economy into action through fiscal stimulus. Things like infrastructure spending.

And that is where things could get sticky for the Federal Government.

Loosening the purse strings does not come naturally to the Treasurer, or the Coalition, which for decades has consistently preached the evils of spending and the sanctity of small government.

So far, Mr Turnbull and Mr Morrison have confined their fiscal stimulus plans to strict Coalition philosophy; tax cuts for middle and high-income earners and for business.

That creates another problem. Reducing revenue automatically makes it tougher to bring the budget back to surplus, unless spending is reined in even harder than originally planned.

And that runs counter to the increasingly desperate calls from central bankers.

Not only that, there is no guarantee tax cuts will have the desired effect even over the medium to long term.

Businesses globally have been loath to invest, even with interest rates at their lowest in human history.

Handing out a cut in the corporate tax rate is unlikely to achieve much at all other than to benefit foreign corporations who will repatriate the extra profits offshore.

Australian households among world's most indebted

When it comes to personal taxes, the best way to boost the economy is to deliver cuts to the least well off.

That is because the lower your income, the more likely you are to spend everything you earn.

The higher your income, the greater your propensity to save, simply because the uber-rich already buy everything they need and want.

Let's not forget that Australian households are among the world's most indebted.

Just a fortnight ago, the International Monetary Fund sounded the alarm over rising global debt levels, which now have reached $199 trillion. And it gave Australian households a special mention.

"The accumulated gap is large and has even grown further in a number of cases [notably Australia and Canada]," it said in its report Debt, Use it Wisely.

So there is little chance Australian households could be relied upon to pick up the slack and boost economic growth, for many years at least.

Growth achieved through high immigration

By why do we even need to lift our growth? Are we not powering ahead?

The latest figures show growth of 3.3 per cent, the fastest in four years and the envy of the developed world.

It all depends how you measure growth. Equally important, it depends how you achieve growth.

Gross Domestic Product (GDP) is the normally accepted measure of growth.

Like all statistics, however, it has its flaws, which might explain why, at a personal level, most of us feel as though we have not been travelling too well at all.

Commonwealth Bank senior economist Gareth Aird last week argued we should be looking at other measures.

That aggregate number ignores the impact on individuals, primarily because a large part of our growth over the past few decades has been achieved through high immigration.

Overall growth has been terrific. But when you divide it by the number of people — which takes into account population growth — it has not been very good at all.

"If you've got more people, you've got more spending," he told the ABC's Michael Janda.

Firing up housing market to boost employment

Mr Aird suggests we measure economic growth by how much disposable income Australians have.

On that measure, we have been in recession for much of the past five years.

GDP, you see, is a measure of volume. And while we have been exporting hugely more since we ramped up mining production, the crash in commodity prices has seen us earning less.

On the population front, federal governments for decades have been happy to reap the dividends in the form of higher economic growth.

But they have been missing in action when it comes to investing in infrastructure to cope with all those extra people.

Australia's population grew by 327,600 to reach 24 million last March — a 1.4 per cent rise across the nation.

Victoria was the fastest-growing state with 1.9 per cent growth, closely followed by NSW.

That growth is driven largely by new arrivals, most of whom end up in Melbourne and Sydney.

Housing them should not be a problem. The Reserve Bank spent the past few years deliberately firing up the housing market in an effort to boost eastern states' construction and employment as the mining investment boom unwound.

Major cities becoming choked

A report by investment bank UBS last week indicated that, based on continuing levels of housing approvals, the boom is much bigger than the RBA thinks, with housing supply unlikely to peak until 2018.

Much of that new housing, however, has manifest itself in high-rise apartments, largely in established areas that previously boasted single-story dwellings or factories.

Our transport systems simply are inadequate to cope with these rapidly expanding populations and our major cities are becoming choked while ancillary services like health and education are constantly targeted for cutbacks.

Perhaps that is where the Federal Government could step in.

Improved infrastructure spending would deliver a shot to the economy. More importantly, if wisely spent, it could help lift productivity — an essential ingredient for economic growth.

That is going to require a major rethinking of priorities for the Turnbull Government.

Balancing the budget on recurrent spending is important. Investing for the future at a time of record-low interest rates and low national income is vital.

Spending is not always bad.

Topics: government-and-politics, federal-government, budget, transport, housing-industry, business-economics-and-finance, australia

First posted