The Parliamentary Secretary to the Prime Minister, Alan Tudge, has produced an incredibly one-eyed assessment of the Budget in The Australian, blaming the former Labor Government for the Budget’s ills and warning that Australia faces a Greek-style crisis if balance is not restored:
During the Rudd-Gillard years, we had the fastest budget deterioration in modern Australian history. Despite its repeated assertions it was delivering surpluses, it continued to have record budget deficits. Worse, it locked in real annual spending growth of 3.7 per cent, despite the economy growing only by less than 3 per cent. Without the discipline balancing the books provides, it simply kept bowing to pressure groups who always sought higher rents.
The Intergenerational Report now provides a clear choice in terms of addressing our budgetary problems.
The first is to go down Labor’s path and follow the debt trajectory of Greece, albeit across a slower timeframe. The alternative is to fix the budget while growth is returning, inflation is low and before debt becomes unmanageable. We are well down this latter path and, for the sake of the nation, let’s hope Labor will one day join it.
As expected, most of the commenters in the article have lapped-up Tudge’s propoganda without providing any critical assessment.
While I was no fan of the former Government, I can at least view the facts objectively. And the primary factor separating the budgetary fortunes of the Howard Government to the Rudd/Gillard Governments is that Howard governed during a period of benign macroeconomic conditions, both locally and abroad, whereas conditions were largely unfavourable to the Rudd/Gillard Government.
The diverging fortunes are perhaps best illustrated by the next chart, which shows the rise in Australia’s tax-to-GDP ratio enjoyed by the Howard Government, and the subsequent sharp decline suffered by Labor:
The key reason for the good fortune enjoyed by the Howard Government is that it presided over the most lucrative part of the resources boom when commodity prices and the terms-of-trade exploded, providing the key impetus for the rising disposable incomes (see next chart).
In turn, nominal GDP, which is the dollar value of what’s produced and earned across the economy and is also the measure that drives federal taxation revenue, surged, as it reaped the benefits of growing personal and company taxes, not to mention increased capital gains taxes as asset markets boomed. In fact, nominal GDP averaged 6.8% annual growth throughout the Howard Government’s rein, whereas it was a comparatively low 5.6% throughout Labor’s time in Government (see next chart).
Another factor behind the Howard Government’s good fortune is that household debt levels literally exploded during its 11 years in Government (see next chart).
This extra demand (spending) by the household sector meant that the Federal Government was able to run bigger surpluses, without adversely affecting overall demand in the economy (see next chart).
By contrast, when the Labor Party came to office in late-2007, the ratio of household debt to disposable income flatlined as households dramatically lifted their savings rates. This deficiency of household demand (spending) effectively left a whole in the economy that had to be filled by increased demand (spending) by the Federal Government, which pushed the Budget into deficit.
Overall, it is clear that the Howard Government had ‘the rub of the green’ when it comes to good fortune and timing. It enjoyed near perfect global and domestic macroeconomic conditions – something that neither the Rudd/Gillard Government’s enjoyed, nor the current Abbott Government.
Sure, an argument can be made that Labor wasted taxpayer funds on pink batts, cash handouts, and the like. But it did at least have the GFC and an impending global depression as an excuse. The same cannot be said for the Howard Government.
Who can forget the ballooning of entitlement spending aimed at middle class families, the aged, and wealthy retirees under the Howard Government, which has arguably contributed much more to Australia’s current structural budget deficit than any policies implemented under Labor. Remember all the baby bonuses handed out, increases in aged pensions (weaker means testing), and the generous tax breaks implemented for superannuation – including tax free superannuation for retirees and cuts to the superannuation contributions surcharge on higher income earners. There was also the Howard Government’s short-sighted decision to end indexation of petrol excise, which now costs the Budget more than $5 billion per year.
The truth is, neither side is faultless when it comes to the Budget’s current predicament.
Given Tudge’s strong concerns about the Budget, does he support dramatically winding back superannuation concessions, negative gearing, the capital gains tax discount on investments, and tighter means testing of the Aged Pension? And does he support broad-based agenda of tax reform?
If not, then he is merely talking out of his arse.
