MYEFO is better than YourEFO

Today the Government released the Mid-Year Economic and Fiscal Outlook (MYEFO), which provides an update of the Budget figures projected in May. The document is 298 pages long, but here’s a quick summary: lower unemployment than anticipated in May, lower debt, lower deficits, and higher growth.

Instead of topping out at 8.5%, unemployment is now forecast to only reach 6.75% (and most economists would say that is being overly pessimistic).

It was a pretty easy sell for Wayne Swan today, especially as last week’s inflation figures showed the stimulus had had next to bugger all impact on prices.

Unfortunately for Joe Hockey, he had to come out and defend the Opposition’s position. Now Joe has had a couple weeks off parental leave due to the birth of his second son, so you can forgive him for being a tad rusty, but coming out and saying that the MYEFO proved Australia had avoided a recession is just silly – is he trying to spruik for the Government now? (OK he said this in the context of saying Rudd and Swan had panicked, but Rudd and Swan will not mind him starting every sentence by first pointing out Australia has avoided a recession).

He followed this up by saying:

“We said at budget time the government was spending too much money. We said that their ... projections were incredibly ambitious in order to pay off government debt. We've been proven right all along."

Sorry Joe, here’s what you actually said back at Budget time in your Budget response at the National Press Club:

This Budget has left the government with no margin for error. If the world economy does not recover later this year, Mr Rudd will have shot all the ammunition in the locker and he will have few options remaining.

Interesting... I guess it is a good thing the world economy seems to have recovered… He went on:

Even the government’s own figures, which Wayne Swan was amazingly describing as conservative in the last few days, assume that we will have at least six consecutive years of uninterrupted real growth of 4% or higher immediately following the predicted end of the recession next year.

Yep, he is having a go at Wayne Swan for being too optimistic – that is, Hockey was saying the economy would be worse than what the Budget predicated.

As Bernard Keane in Crikey has noted, Hockey can at least feel like he was right about the 4% growth in the future years. Keane notes:

MYEFO revises down the forecast for the recovery in 2011-12 and 2012-13  — from 4.5% to 4%. Unfortunately, that’s only because the recovery has kicked in earlier and harder, with growth this year up a full 2% on forecast and growth up next year 0.5%.

Oops.

Now Malcolm Turnbull hasn't been quiet either. He came out today and laid the good news all at the feet of China – China's economy was the reason Australia's economy had weathered the Global recession so well.

His argument is rather lacking in political punch because if you follow such logic through to its proper course it means that the entire boom period under Howard had nothing to do with the Australian Government and was all to do with China. Now that might be true, but I don’t think it quite fits with the Liberal Party narrative that the mining boom happened because of Howard policy (especially IR). If China can still lift us out of recession despite the Rudd Government's changes to IR etc, then they can’t have been too bad than can they?

The other problem with Turnbull’s (and Hockey’s) line is that it totally ignores the impact of the stimulus.

Here’s a graph from MYEFO that caught my eye (and that of a Possum at Crikey). At August-September last year you could see that the rest of the world’s retail spending was going into steep decline. In October the Government went into action, handed out stimulus payment, and more importantly in some ways, gave the impression to the public that they had things under control and were acting fast and targeted.

As my dear Economics’ thesis supervisor used to say, sometimes a good graph can make your whole argument for you.

Look at our retail spending compared to everywhere else. In bad times retail spending goes south because people have no confidence and thus save every penny. You only spend because you are confident your job is safe, and you only feel your job is safe if you think the economy is going to stay strong.

That this belief occurred can be attributed completely to the Government.

No doubt the Newspoll figures out Tuesday morning will show some fall for the Government (heck they were at 59%, they can’t very well go up!). But the MYEFO shows that while the asylum seeker issue may give some joy to the Liberals, when it comes to the economy they have a lot harder task in front of them. And just ask yourself what do you think will be the issue of the election – asylum seekers or the economy?