Michael Pascoe really puts the boot into "Hockeynomics", with an analysis that will warm the heart of Labor:
The Hockeynomics contradictions were front and centre on Friday. You can either be appalled by the forecast rise in unemployment and give the impression you would reduce it, or you can be appalled by the larger deficit and give the impression you would reduce it – but you can't do both at the same time.
If you accept that the economy will grow more slowly this financial year, that there's a bit of a gap in the transition from the resources construction boom to the rest of the economy lifting its game, the very good news in Friday's economic statement was that the deficit is indeed being allowed to grow. After heading in opposite directions over the past year, fiscal and monetary policy are now aligned, both providing stimulus for a year when growth will be softer.
Just as the politics overshadowed the most important economics in the May budget, the higher deficit and unemployment rate grabbed the economic statement's headlines – they're the two simple issues that dominate the political screaming match.
Lost was the admission that the record fiscal contraction was even worse than published in May. The budget papers estimated 2012-13's public final demand (net state and federal government spending) would shrink by 0.5 per cent. The economic statement says it actually contracted by 1.5 per cent. The budget intended to keep public final demand flat this year. After the revised shortfall in revenue, the government is letting the “automatic stabilisers” do their stuff and public final demand is forecast to rise by 0.75 per cent this year and by 0.5 per cent next year before efforts to reduce the deficit kick in.
The new deficit forecast of $30.1 billion represents 1.9 per cent of gross domestic product, compared with the May prediction of an $18 billion deficit worth 1.1 per cent. Any business doing it tough should be grateful for that extra 0.8 percentage points, given that the economy is only expected to grow by 2.5 per cent. Yes, if a lunatic took control and immediately cut spending by $30 billion to balance the budget, GDP would theoretically grow by just 0.6 per cent at best – and actually by considerably less due to knock-on impact.
So if the forecast 6.25 per cent unemployment rate is displeasing, there's no point demanding an immediately smaller deficit.
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