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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

the start of the downturn « Previous | |Next »
November 6, 2008

Treasury's mid-year outlook takes the wind out of the sails of the panglossian spinners who have underestimated the financial and economic crisis until the last possible moment.

Treasury estimates that growth in output will slow to 2% this year and 2.25% next year; predicts that jobs will keep growing, slowly, while unemployment is kept to 5.75%; that business investment will rise even higher, then level off, and exports will increase in the depressed global market due to the lower Australian dollar.

debt.jpg Spooner

The mid-year outlook marks official recognition of the protracted economic downturn the financial market meltdown has caused. Some commentators say that Treasury believes the worst global financial crisis since the Great Depression will cause no more of a ripple across the Australian economy than we saw with the introduction of the GST in 2000-01. A ripple with 5.75% unemployment and $46 billion wiped off the budget surplus over the next four years? That sounds pretty grim to me.

The mid-year outlook admits that Treasury simply doesn't know what lies ahead. "Significant uncertainty remains over the extent and duration of the economic downturn stemming from the crisis, and the effect on Australia" it says. So things could be worse than forecast. The growth projections could be on the sunny side. If they are lower then unemployment will go higher.

The known unknown is that the economic downturn is not going to be quickly reversed. As Malcolm Maiden says:

The national balance sheet will be hit successively over several years by lower capital gains receipts that flow directly from the market losses, and then by lower corporate tax revenue as the crisis undermines consumer demand, pricing power, margins and profits.

We have a share market slump, falling house prices, scared households paying off their debts, businesses shelving their expansion plans and the collapse in commodity export prices.

| Posted by Gary Sauer-Thompson at 6:47 AM | | Comments (5)


Well Treasury may turn out to be right and then again they might just be scared that accurate predictions will add to the panic. But to believe we will get out of this with less damage than happened in the relatively mild late 1980s recession is the triumph of hope over experience.

Moreover for both parties to be rabbiting on about keeping a surplus is not only pissing in the wind, it's contrary to all sensible economic management. Any government that doesn't run big deficits over the next few years will be completely irresponsible.

Any government that doesn't run big deficits over the next few years will be completely irresponsible.

Of course, and they know that. But they're managing expectations.

They'll wait until all the markets and the opinion writers are begging them to before they graciously assent to run a deficit. Then they'll be in a position to spend up big.

I'm sure Treasury's forecasting is solidly grounded in n both macro-economic analysis and a careful assessment of of the balance of risks Australia faces. It also sets a benchmark for policy and political discussion.

However, I agree with your interpretation of their forecasts. They look optimistic in terms of the extent to which the economy will slow (near zero growth looks more likely) and unemployment rises.

you are probably dead right. At least the political debate about inflation caused by bad economic management of the Howard/Costello Government during the boom years has dropped away.

Now it is about the strengths and weaknesses of Keynesian style deficit spending to soften the impact of an economic downturn through productivity boosting spending.

"They'll wait until all the markets and the opinion writers are begging them to before they graciously assent to run a deficit."

It may take a little longer to convince the public.