Translating MYEFO forecast changes for regions
Yesterday’s release of the Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) generated a great deal of economic commentary, with estimated write-downs in the underlying cash balance in the order of 10.6 billion between MYEFO and Budget for 2014-15 alone, falling commodity price assumptions and expectations of the lowest national income growth in around 50 years.
When looking at this from a regional perspective, there are two main elements of MYEFO to examine. The forecast changes to the economic situation will have implications for the prosperity and wellbeing of regional communities, while the changes to the budgetary situation will have flow-on implications for government services in these areas.
Let’s begin with the economic outlook. First and foremost, the majority of the real changes to the economic outlook that most commentators are focussing on have occurred on the ‘nominal’ side. These changes relate to prices received for our commodity exports, for example. This naturally has an effect on value of exports, but in terms of how this translates to real economic activity – particularly for regional Australia, where our commodity wealth originates – this is less of a problem than it appears at first glance.
The majority of the mining boom that was actually felt in Australia, and especially so in our regional communities, was associated with the investment and construction phase of the wider global commodities boom coming to Australia’s shores. However, this investment phase has essentially passed – meaning that these changes in global commodity prices should have only limited implications for flow-on economic activity in regional communities stemming from mining.
Of course, this begs the question ‘what about future investment projects?’. Gas-rich regions in Queensland immediately spring to mind. Changes in global commodity markets, and the global economy more broadly are certainly important here. Stabilising growth in China and improving growth in the US suggest improvements in global economic conditions – and hence the viability of major resources projects likely remains intact.
But, just as the Australian economy isn’t solely based on mining, neither are our regional communities entirely dependent on mining as an income source. While Australia’s terms of trade may be forecast to fall further than at Budget, this is also associated with a weakening Australian dollar – which is good news for export-oriented industries across the country. With few commentators expecting to see the dollar rise to the highs experienced just a few years ago, this could be the beginning of a boost to export competing industries in our regions – which to date had been somewhat stifled by a high dollar that had accompanied the mining boom.
Forecast changes to wage growth and general labour market outcomes are unambiguously more concerning for regional communities, however. Treasury is forecasting the lowest rate of national income growth in around half a century, and this will have wide ranging implications for regional Australia – particularly as the Reserve Bank of Australia has very little space to move on monetary policy to provide a boost to growth. While rising dwelling investment may provide some support to household wealth, it would be unreasonable to assume that this would be distributed evenly across Australia – particularly many parts of regional Australia, which have not been subject to the same sorts of asset prices pressures as our major cities.
Forecasts for modest employment growth and rising unemployment are likely to have a disproportionate effect on regional Australia. But it is also worth noting that not all regional communities are alike – and some will weather this adjustment better than others. Regional Cities, for example, have diverse and self-sustaining local economies. Their internal labour markets are sufficiently large and varied to absorb some of these shocks in the same way that major metropolitan areas can.
Even so, as structural adjustments begin to take hold of the Australian economy, it is reasonable to expect a relatively high level of displacement in regional labour markets that aren’t large enough to absorb these shocks in a short period of time. Many of our Industry and Service Hubs and Heartland regions could be subject to this kind of prolonged structural adjustment. It is important to emphasise that just as structural adjustment may be inevitable, a disruptive adjustment is not. It is up to regional leaders to be proactive in managing this transition.
It is important to keep in mind that the notion of inevitable structural adjustment in a post-mining boom world has been well publicised. As much as the downgrades to the economic and fiscal position since Budget have been rather large, they are consistent with this narrative.
Indeed, on the budget outlook, addressing the challenge of getting the budget back into a structural surplus position is important. While Australia’s debt position might be enviable when compared to our peers at an international level, experiences during the Global Financial Crisis have shown the importance of fiscal prudence during good times, to allow room to act during tough times.
As noted earlier, much of the change in the budget position has to do with lower than anticipated revenue collection – tied closely to the nominal economy. In of itself, this is of minimal significance to our regional communities, but it becomes important upon consideration of the fact that collecting these revenues is important for financing the expenditures that deliver essential services. The majority of Australia’s federal budget expenditures relate to healthcare and social services which are particularly important to many regional communities – arguably more important than in our major metropolitan areas, on a per capita basis.
For now, MYEFO indicates that the Government has committed to undertaking various infrastructure and other expenditure programs despite revenue write-downs. But, as the debate unfolds in Parliament, the revenue and expenditure outcomes in MYEFO today may look very different in practice in the future. In this sense, the upcoming White Paper on taxation, and the debates surrounding this, will be the issues of real importance for regional Australia on the fiscal policy front.