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Nuance is lacking in Australia’s economic debate

Try making a technical argument in this political climate.

Finance Minister Mathias Cormann tried to last week, on Sky News, when he was asked for his opinion on Labor’s plan to lift the minimum wage.

He said he didn’t agree with it and it wouldn’t be wise to impose higher wages by “government mandate” when the economy was so weak.

He said the fact that wages have been growing so slowly in recent years has helped the unemployment rate decline to near record-lows — currently 5 per cent — despite weakening conditions.

He then linked the minimum wage to labour market flexibility, explaining that flexible labour markets are important because they help the economy during economic shocks and downturns.

“The whole reason why it (is) important to have flexibility in the labour market … (is) to ensure that wages can adjust in the context of economic conditions to avoid massive spikes in unemployment, which are incredibly disruptive,” Cormann said.

“That is a deliberate design feature of our economic architecture.”

It seemed clear to me that Cormann was talking about Australia’s economic architecture, not the Coalition Government’s.

And the broader point he was trying to make about labour market flexibility didn’t seem exceptional — it was an oversimplified version of theory in introductory economic textbooks: if the rate of wages growth is allowed to rise or fall to match economic conditions, wages will grow more slowly during downturns than during upturns.

However, if wages are mandated to grow at a faster rate than economic conditions demand, the unemployment rate will rise more than necessary during a downturn.

But some people on Twitter were having none of it.

They heard Cormann use the words “deliberate design feature” and “our economic architecture” and interpreted them very differently, sharply reminding him that the Coalition had supported penalty rate cuts for workers on Sundays and public holidays, and that Newstart hadn’t been increased for 25 years, and that ongoing weak wages growth was strongly linked to the rise in underemployment in recent years.

“Stagnant wage growth is your absolute plan,” one Twitter user shot back at him.

It didn’t help that independent senator Derryn Hinch was happy to misrepresent Cormann’s argument on Twitter, tweeting to 75,000 followers:

“Mathias Cormann just told Laura Jayes on SKY low wages was a deliberate ploy. Think he called it “design feature” of the government’s economic policy. What a great election platform.”

Cormann tried to tell Hinch that wasn’t what he’d said, but it didn’t matter.

The political climate is such that he should have known that people would not react well to economic-sounding arguments justifying anaemic wages growth (especially when there’s real world evidence that increases in minimum wages can boost economic growth).

It was a reminder of the difficulties the Coalition is facing in the run-up to the Federal election in May.

Labor knows the low-wage issue is an electoral killer for the Government, and it will hammer the issue hard for the next two months. The Government’s on a loser here.

And while it tries to fight Labor on that front, it may have to start engaging Labor on another potentially explosive one.

Economists from Capital Economics sent a note to their clients yesterday warning that irrespective of the incoming government’s planned policies, the deterioration in the economic outlook means fiscal policy will have to become “stimulatory” to avoid exacerbating the downturn.

“The economic outlook both domestically and internationally is deteriorating,” chief economist Ben Udy said. “We expect that deterioration to become more pronounced over 2019 until eventually, the Reserve Bank cuts interest rates. But given how low interest rates are already, monetary policy may not provide as much of a boost as it has in previous downturns.

“Therefore to stimulate the economy the new government may need to use expansionary fiscal policy. And given Australia’s relatively low levels of net debt, Australia actually has considerably more room to run expansionary fiscal policy than most other developed economies.”

Udy noted that shadow treasurer Chris Bowen has suggested Labor will use the fiscal headroom and engage in fiscal stimulus if a downturn occurs. In contrast, the Coalition has set a new fiscal objective of eliminating debt within a decade.

Those policies would have a very different economic impact.

“Based on the forecasts presented in the mid-year Budget update and our own downbeat view of the economy, we estimate that eliminating debt over 10 years would require spending to be reduced by around $5 billion or 0.3% of GDP a year,” he said.

“We think this target, and the Coalition’s surplus target, should be abandoned in the near term in order for the government to support the economy.

“However, given that politicians on both sides have not yet meaningfully acknowledged the domestic downturn, there is a risk that the new government becomes yet another drag on the slowing economy.

Udy said the incoming government would have a range of stimulus options available to it, including giving potential homebuyers grants to ease the burden of falling house prices.

Infrastructure investment could make use of some of the spare capacity in the construction sector, but tax cuts “may not feed through to stronger consumption growth as we expect households to respond to falling house prices by increasing their savings.”

“Therefore, any tax cuts should be targeted towards low-income households who have a higher propensity to consume,” he said.

He concluded: “For the moment, we have pencilled in a small fiscal stimulus of around 0.3 per cent of GDP in each of 2019-20 and 2020-21. But if policy makers are even more reluctant than we anticipate, fiscal policy may end up acting as a contractionary force on the economy and exacerbate the current downturn.”

Is the Coalition ready, in the run-up to the election, to engage in serious discussions about the need for fiscal stimulus?

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