Do we need to be worried about Australia's economic outlook?
The Reserve Bank of Australia reckons that the next move in official interest rates is more likely to be up than down. RBA Governor has said so in recent weeks as he talks up the prospects for the economy over the next year or two.
This is disconcerting news for everyone out there with a mortgage or a small business loan, especially in a climate where the business sector is doing it tough and when wages growth is floundering near record lows. The good news is that the RBA is likely to be wrong and the next move in interest rates could be down, such is the run of recent news on the economy. Failing an interest rate cut, the hard economic facts suggest that any interest rate rises are a long way into the future and if they do come, there will not be all that many.
At this point, it is important to bring together the issues that would need to unfold to see the RBA pull the lever to hike interest rates. At the simplest level, the start of an interest rate hiking cycle would need to see annual GDP growth above 3.25 per cent, the unemployment rate falling to 5 per cent and less, wages growth lifting towards 3 per cent and more and underlying inflation increasing to 2.5 per cent.
This is where the RBA expectation for higher interest rates is on very thin ice.
As some of the dust settles from Treasurer Scott Morrison’s budget, the clean air reveals the biggest issues boil down to significant cuts in income tax; an earlier return to surplus; and a path to lower government debt.
The government announced this seemingly incongruous policy mix – lower taxes and yet lower government debt – because revenue has been flowing into the Treasury coffers at a pace significantly above the level assumed in the mid year Economic and Fiscal Outlook update in December last year.
Lower tax and lower government debt are, at face value, good news. Most individuals would prefer paying less tax, while economic prudence and sound policy should see government debt levels reduced when the economy is growing at a decent pace.
But the good news on tax and debt is based on a number of premises that are open to debate.
The surplus forecast needs the economy to remain strong
Important to the analysis of the budget are the following assumptions from Treasury:
• The economy picks up steam and grows consistently by 3 per cent • The unemployment edges down to 5 per cent • Annual wages growth accelerates from 3.25 to 3.5 per cent
These favourable economic conditions are essential for the revenue inflow to remain strong enough to fund the tax cuts, see the budget return to surplus in 2019-20 and debt levels decline.