The Australian’s Adam Creighton has written an interesting article today imploring the Federal Government to emulate their UK Conservative cousins and slash Budget expenditure:
George Osborne’s fifth budget, delivered on Wednesday in the House of Commons, would have been his most satisfying: economic growth and jobs are accelerating faster than expected and with them his chances of remaining chancellor after the general election in May next year.
For the ideological purists, his budget consolidation hasn’t been tough enough — the deficit is still above pound stg. 100bn ($183.3bn), and total debt is a whopping 74 per cent of GDP — but the Cameron government and Osborne in particular deserve credit for sticking to their program in the face of shrill opposition from Keynesians and a populist opposition…
Britain’s example nevertheless contains valuable lessons for the Coalition about what is politically feasible as it begins to draft its first budget. While the federal government’s fiscal position is not nearly as bad as Britain’s, it is deteriorating rapidly…
Creighton then goes on to describe the Conservative’s budget cuts, including among other things:
- withdrawing child benefit payments (similar to Australia’s Family Tax Benefit scheme);
- indexation of all government allowances to CPI, rather than wages growth; and
- establishing an independent Office of Budget Responsibility (OBR).
While reforms of the above nature would be beneficial in Australia, it is also worth pointing out that Osborne’s latest budget, released earlier this week, has relaxed pension rules in a bid to win over the grey vote. Under the new scheme, retirees would be allowed to withdraw all their tax-favoured retirement savings rather than be required to purchase an annuity – a move that could result in the faster running-down of retirees savings (or losing them in ill-judged investments), sowing the seeds of a future budget crisis as they fall back on government welfare.
Another point worth noting is that the improvement in the UK’s budget position has been achieved, in part, through “kicking the can down the road” by encouraging the build-up of household debt. The £130 billion “Help-to-Buy” mortgage guarantee scheme has encouraged home buyers to leverage-up into housing and kicked-off another housing bubble. While this policy has helped to boost consumption and growth in the short-term, improving the budget position in the process, it is neither sustainable or desirable from a longer-term perspective and will only heighten the imbalances that caused the UK economy’s malaise in the first place.
The OBR seems to agree, recently claiming that: underlying public finances had not improved; household debt was rising back to pre-GFC danger levels; exports were weak; and productivity growth had been “exceptionally weak”.
