From the AFR today comes news that the Coalition has identified $75 billion of expenditure cuts and tax increases over the next four years required in order to address the “fiscal emergency” and return the Budget to surplus:
Furthermore, the Coalition is backing about $13 billion savings Labor announced before the budget, but has yet to implement, including private health rebate cuts, and so far will block almost $6 billion in spending measures contained in the budget..
“The budget is in a mess,” Mr Hockey said. ”We will have to do what we have to do.”
Separately, Tony Abbott has stated that the Coalition has “no plans whatsoever, absolutely no plans to do anything at all to the GST’’, effectively ruling out any moves to increase its rate or broaden the base.
While the Coalition’s strive back to surplus is good politics, providing the impression that they are fiscal conservatives, it could very well end up being poor economics. As illustrated below, the post-GFC expansion of public debt (spending) was required in order to offset increased savings (pull back in spending) by households and businesses.
The fact is, the best time to have been fiscal conservatives was during the pre-GFC boom in private debt levels, incomes and consumption. Resorting to austerity now, just as commodity prices and mining-related capital expenditures are unwinding, risks contracting demand even further, exacerbating any downturn.
A better alternative would be for the Government to increase productivity enhancing expenditures, such as infrastructure investment, which boost demand, support incomes and jobs, and expand the economy’s productive potential and living standards.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
