‘I have always believed in miracles’ proclaimed a clearly overjoyed Scott Morrison, as he is poised to continue his Prime Ministership after his party won the apparently ‘unwinnable’ election about a week ago. The Prime Minister is entitled to his beliefs, but one wonders whether he can ignore the harsh reality of a substantial growth slowdown of the Australian economy and its sombre ramifications.
In March of this year, media reports were full of references to the fact that the Australian economy was experiencing ‘per capita recession’ – see here, for example. While the economy was not in a recession in a conventional sense (two consecutive quarters of negative overall GDP growth), growth in recent quarters was so slow that it fell below the population growth. Thus, per capita growth on a quarterly basis became negative. Here is how one leading Australian economist puts it:
“National accounts figures show that the Australian economy grew by just 0.2% in the last quarter of 2018…The shocking revelation was that Gross Domestic Product per person (a more relevant measure of living standards) actually slipped in the December quarter by 0.2%, on the back of a fall of 0.1% in the September quarter.
These are the first back-to-back quarters of negative GDP per capita growth in 13 years – since 2006…”
Per capita recession, if it persists, can be insidious, as it puts downward pressure on real wage growth which, in turn, can stymie household consumption growth. Given that household consumption represents 60% of Australian GDP, sluggish spending by households, in turn, puts downward pressure on per capita GDP growth. This is happening against a background of falling property prices in major metropolitan areas which effectively attenuates the role of a positive ‘wealth effect’ on consumer spending. It is also possible that Australia, like other OECD economies, has entered an era of ‘secular stagnation’ typified by persistent sub-par growth.
Despite these warning signs, the notion of per capita recession and its ramifications hardly featured during the election campaign. Yet, post-election, the Reserve Bank Governor has declared his hand. The RBA Governor stands ready to cut interest rates to support faltering growth and has expressed concern that this may not be enough unless there is adequate fiscal support.
The Prime Minister and his team are keen to project an era of continued prosperity built on the back of imminent tax cuts while brandishing the notion of a budget surplus. One wonders whether Scott Morrison and his colleagues in government are on a fool’s errand. Even if tax cuts are expeditiously done (which appears to be a big if), a well-known empirical regularity is that ‘tax multipliers’ are usually lower than ‘spending multipliers’ (that is, tax cuts have a moderate impact on aggregate demand relative to government expenditure, especially on infrastructure) and may not be enough to offset the impact of sluggish consumer spending on aggregate demand. Moreover, given that the Morrison government has pinned its credibility on attaining a budget surplus next year (and perhaps over the term of the new government), it has placed self-inflicted limits on pro-active fiscal policy. Instead of a growth strategy articulated in terms of significant investments in health, education, infrastructure and renewable energy which could stave off the risks of secular stagnation, the government appears committed to attaining a budget surplus regardless of changing economic circumstances.