NATSEM Budget Analysis 2017

The 2017 Australian Budget has been launched at a time of social and economic uncertainty. The Australian economy is presently characterised by a modest growth rate of 2.4%1, falling business and consumer confidence, subdued wages growth, a cooling housing market, and gross debt of $490 billion (as reported by the Australian Office of Financial Management). Moreover, the latest Grattan Institute research argues that Australia’s low investment environment risks “economic stagnation” as reflected in a five-year fall in mining investment. However, there are also signs that the Budget deficit is stabilising and nominal GDP evaluated at current market prices grew by 3% due to last year’s surprise mini-boom in commodity prices.

Although this is likely to temper concern over whether Australia will lose its AAA international credit rating, the prospects of the deflationary pressures easing over the year are unlikely given that global markets continue to be unnerved by the prospects of the British exit from the European Union, and a Trump Presidency. The election, however, of a more acceptable centrist populist politician in Emmanuel Macron to the French presidency has mitigated predictions of the imminent demise of the European Union. Crucially, Australia remains extremely vulnerable to volatility in China’s economic performance as it now more dependent on China as an export market than it has been on any other country since the United Kingdom in the 1950s. The key issue here of course is whether the Australian economy has the resilience to absorb the shocks of a further global economic downturn. As noted in Chart 1, the global economic outlook continues to paint a gloomy picture and revise projections downwards.

Against all of this, public confidence in the capacity of government to address policy fundamentals is very low. Two surveys conducted in 2016 and 2017 by the Institute for Governance and Policy Analysis (IGPA) and Ipsos suggest that a majority of Australian citizens only trust Federal Government to tackle issues of defence and national security. Notably there has been a significant decline in perceptions of the government’s ability to manage economic matters which will be of concern to the Prime Minister (see Figure 1). Political trust in political leaders and the institutions of politics matters, as it provides the glue that holds together the Australian political system. So how has the Turnbull Government responded to these economic and social pressures in Budget 2017?