The AFR is busy continuing its biased and unhelpful coverage of the budget today:
Federal Treasury has told the Gillard government that weaker revenues will slice $12 billion from the budget bottom line this financial year, but the Prime Minister says the government must continue with plans for big increases in education and disability spending.
The revelation about the revenue slump – to be outlined in a speech by Prime Minister Julia Gillard in Canberra on Monday – means the headline deficit for 2012-13 will be at least $11 billion before any new spending commitments are taken into account, compared with the $1.1 billion surplus forecast in October.
Senior ministers are confirming the budget strategy will not seek to offset the collapse in revenue projections but will keep a cap on net spending, outlining savings to fund new spending measures including the massive Gonski education reforms and the disability insurance scheme.
Ms Gillard’s comments, along with those of Treasurer Wayne Swan and Assistant Treasurer David Bradbury, come amid a growing realisation that the weakness in tax collections poses a huge problem for both sides of politics going into the election.
Two major reports in the past week – by the Grattan Institute and modelling firm Macroeconomics – have highlighted the structural problems facing the federal budget for years to come as a result of revenue weakness and spending trends, particularly in health.
…Mr Bradbury said the government was “not going to take the country down a philosophical pursuit that says that we will trash jobs, and trash the economy, in order to simply balance the budget”. “We will do what is necessary in a responsible way, but we will do what we’ve always done, and that is put jobs first.”
I note in passing that the mining sponsored budget report by hired gun Macroeconomics has now moved into the realm of pure objectivity so far as the paper is concerned. Having said that, a $12 billion black hole over six months is a poor look for the Treasurer and Treasury.
That point aside, the government is absolutely right to not seek a structural surplus in the year ahead. The AFR quoted Saul Eslake over the weekend insisting that we should aim for a better structural budget position:
Bank of America Merrill Lynch chief economist Saul Eslake said the GST was worth addressing.
“Compared with the alternatives that state governments in particular might have to contemplate if they don’t have a better source of revenues, such as cutbacks in their core spending on health, education, transport and the like,” he told Sky on Sunday.
Mr Eslake also warned that Australia could face a recession in two or three years when the LNG construction boom ends, compounding the need to address the deficit.
“It may not be that the federal government gets back to a reported surplus in the next two or three years,” he said. “What I’m suggesting is they take the sort of measures that put the budget in much better structural shape so it can withstand the cyclical pressures better.”
Hiking GST rates makes more sense than public austerity, but it will still damage growth. Then again, growth is going to be damaged whatever we do. The real discussion is about who should carry the burden of adjustment, and households are going to have to do their fair share. Using a broad based consumption suppressing tax to share the burden makes plenty of sense in this context.
However, weighing against that is the fact that the recession risk is not two or three years away. It’s next year and then the following two years as we go over the mining investment cliff to the tune of $30 billion per year withdrawn from investment. I’m wondering if its not better to just let the budget slowly bleed into deficit. $20 billion deficits for the foreseeable future would retain the AAA rating for a few years at least and offer support to the private sector as it slowly adjusts to lower prices via the currency, productivity falls, constrained spending and maybe even inflation.
Of course, if the RBA continues its madness of seeking to revive house prices and consumption, hiking the GST is not a bad way of limiting the further economic wreckage that will result as private sector ‘borrow and spend’ blows out the current account deficit and global markets ultimately move in for the kill.
As I’ve argued since the GFC, the houses and holes economy is in a trap. Once the external account boom ends, the current account deficit will blow out whether its public or private sector induced. But cut ‘borrow and spend’ in either too quickly and growth falls in both. At that point, with our overvalued assets, all bets are off.
So, which political party is better positioned to deal with this rapidly emerging reality of shared sacrifice? The Government has a raft of policy proposals that will need to be funded via big cuts to spending elsewhere. Both the Gonski proposals and the NDIS are productivity related reforms (over the long term). If the savings are found in less constructive areas to fund them then that’ll be a net gain.
The NBN is a big productivity policy and boosts growth through public investment to the tune of $40 billion over the next seven years. The MRRT can be tightened to produce more revenue. It might be argued that the carbon tax is a burden on investment at this juncture but not if you believe in the risks of climate change, as most Australians do, and scrapping it leaves a big budget hole.
We don’t have much to go on yet from the Opposition but what we do have is not well suited to the emerging context. Simple austerity pledges make no sense in Australia’s post-mining boom economy (which is why they’re disappearing). Dumping the MRRT makes no sense, either, because we’ll need every public dollar we can get.
Offering a half-arsed NBN is openly ridiculous policy. It cuts another $20 billion out of Australia’s future investment profile, does bugger all for productivity, and makes no budget savings. Direct action carbon reforms are more expensive to the economy and government over the medium term not less.
As MB has been arguing for years, the way out of Australia’s trap is productivity gains, investment in tradable industries, and national savings via shared sacrifice. In this context, the philosophical frameworks of each party offer pros and cons. The Liberal’s individualist and libertarian leanings could be well deployed in a narrative of hard work and limited welfare, such as Joe Hockey has done already.
On the other hand, Labor’s underpinning’s of protecting jobs, social democracy, public investment and greater orientation towards policy reform is an advantage.
On balance I would say that Australia’s medium term future is better suited to a competent Labor government than a Liberal government. That the Government is so far behind in the polls tells you something about just how badly they are managed politically. Regardless, the challenge ahead for Tony Abbott is daunting.
