Interest rate cuts are becoming less and less effective at creating conditions for people to spend and businesses to invest, and are sitting so near zero that probably only one or two more 25 basis point cuts are feasible. It falls to the government to get the economy moving again.
There is little doubt, as we head into 2020, the economy needs help.
The economy grew just 1.7 per cent in the year to September. Household consumption is less than half the trend growth rate, housing construction went backwards by about 10 per cent in the year to September and business investment is down 1.7 per cent over the past year.
The first is through economic reform – making the economy more efficient and creating conditions and incentives for businesses to invest and hire workers. The problem is that these reforms take a long time to have any effect and the economy needs help now.
Anyway, it's all beside the point, because aside from a bit of tinkering here and there, the government isn't undertaking any economic reform.
The other way governments can help the economy along is by spending more and taxing less.
Injecting money into the economy gets people spending and businesses investing, stimulating economic activity.
But Morrison has shown no willingness to do this.
Instead, he plans to return the government's budget to surplus for the first time in over a decade.
The economy fell into deficit during the global financial crisis, when the then Labor government had a big spend-up – new roads, school halls, insulation for every home, $1000 handouts – to shore up the economy as the impact of the GFC stated to bite.
It wasn't pretty and there was a lot of badly spent money, but the fiscal stimulus is the reason Australia, unlike just about every other developed economy, sailed through the GFC without falling into recession.
History is being rewritten by Morrison. Instead of acknowledging the role the rapid and timely cash splash played in supporting the economy, he is portraying Labor as economically irresponsible for pushing the economy into deficit.
And now, to prove what prudent financial managers he and his Liberal National Party colleagues are, he has promised to return the budget to surplus.
As we head into 2020, there is little doubt the Australian economy needs help. Photo / 123RF
It is the central economic policy of his government and the only significant one.
Morrison is leaving all the heavy lifting on the economy to the Reserve Bank. Usually monetary policy – adjusting interest rates – and fiscal policy work together. When the economy needs a lift, interest rates get cut and the government spends more.
But in the current downturn, Morrison has been reining in spending to get closer to surplus. This renders monetary policy less effective because he is taking money out of the economy that otherwise might have been spent or invested. The Reserve Bank of Australia and the government are essentially pulling in opposite directions.
At the same time, interest rate cuts themselves are becoming less effective because banks are passing less and less of each cut on to borrowers in order to maintain their profit margins.
In fact, the official cash rate has been cut from 4.75 per cent in late 2011 to 0.75 per cent now, with little apparent effectiveness.
RBA governor Philip Lowe has been telling the Morrison government for months that the government needs to start spending to support the economy; business leaders agree; and the OECD has also chimed in. Last month the global economic body noted that the economy is growing at its slowest pace since the GFC and said: "A more expansionary fiscal stance may be warranted given that the economy is growing well below its potential and the relatively low public debt burden."
But Morrison has chosen not to acknowledge the weakness in the economy and not to heed these calls from a diverse range of experts.
In using the economy as a club with which to beat the Labor opposition, Morrison is playing a politically risky game.
If the economy does go into recession, a budget surplus won't cheer up voters. That hard-won surplus will rapidly disappear as tax revenues shrink, leaving Morrison with nothing upon which to base his dubious claim to be a Prime Minister who can be trusted with the economy.
Worse though, is that he is playing this game with the Australian economy. His gamble could cost people's jobs, their ability to buy and pay off a home, and fund a comfortable retirement. It could also hamper the government's ability to build better hospitals, schools and public transport.
