Yesterday, Shadow Treasurer, Joe Hockey, delivered his budget reply speech to the National Press Club (below), which contained some spurious assertions about the causes of recent budget deficits, whilst ignoring the former Howard Government’s role in creating the current structural budget deficit. Let’s take a look.
The Government’s sixth budget fundamentally lacks integrity. Like everything else, they have over promised and under delivered.
Let me give you five reasons why you can’t believe the Budget promises.
Firstly, they have broken the most solemn promise already.
On over 500 occasions they boasted that they were delivering a surplus this year and the Prime Minister even boasted that the surplus had already been achieved.
But this budget has just delivered more deficit and debt. In fact it is a $20 billion deterioration in just six months.
Next years forecast surplus of $2.2 billion has now become a deficit of $18 billion. Again a deterioration of $20 billion.
Now the government expects you to believe that they will deliver a modest surplus in four years time, that is after two more elections. It would be comical if it wasn’t so tragic.
That means 7 straight budget deficits from Labor. That is the longest period of successive deficits by one government in more than a generation.
Secondly, even if we were to believe the new numbers, the government will continue to borrow more money…
Labor will never balance the books and will never stop borrowing money for at least the next four years.
Thirdly, under Labor, gross debt, that is the money we actually have to repay, has been going up and up.
The face value of Commonwealth securities on issue will pass $300 billion within the next four years.
The government has already increased the debt limit on four occasions, firstly to $75 billion, then $200 billion, then $250 billion and then $300 billion. On each occasion they said they would never break the limit.
Now the price we will pay is $35 million a day in interest. That’s $13 billion a year…
Fourthly, in addition to the obvious deterioration in Budget outcomes, the Budget itself makes some courageous assumptions about the future…
The sum of all this is that the Government does not have a revenue collection problem… it has a revenue forecasting problem, all of its own creation.
You, the Australian people, are not to blame for paying too little tax. The Government is to blame for spending too much of your money…
Under Labor the Budget will never come back to surplus. The debt will keep growing.
It’s true that the Treasury’s budget forecasting has sucked, a fact acknowledged on Tuesday by the Secretary of the Treasury, Dr Martin Parkinson. Through a bigger than expected fall in commodity prices (the terms-of-trade), in combination with the stubbornly high exchange rate, growth in nominal GDP has slumped, adversely affecting tax collections (particularly company tax receipts).
In fact, nominal GDP grew by just 2.0% in the year to December, far below real GDP growth of 3.1%. While the fall in nominal GDP below real GDP is unusual, having happened only a handful of times since the late-1950s, it has happened twice under the current Labor Government’s watch: during the GFC and currently – both on account of falling commodity prices (see next chart). Looking ahead, nominal GDP growth and, by extension, tax receipts are likely to remain weak as commodity prices and the terms-of-trade continue to decline.
By comparison, the Howard Government experienced ever growing nominal GDP growth as commodity prices surged, whereby it reaped the benefits of growing personal and company taxes, not to mention increased capital gains taxes as asset markets boomed. It then gave away much of these windfall revenue gains in the form of pre-election bribes and tax cuts, placing the Budget in deficit as soon as the Global Financial Crisis (GFC) hit and revenues stopped growing. In fact, the Parliamentary Budget Office (PBO) estimates that Australia has been in structural deficit since 2006-07, having developed under the Howard Government’s watch.
The contrasting fortunes are also illustrated by the below Treasury chart, which shows tax revenues to GDP booming under the Howard Government and then collapsing after the Labor Government took office just prior to the onset of the GFC:
In a similar vein, the Commonwealth bureaucracy – as measured by public administration & safety employment in Canberra – ballooned under the Howard Government, contradicting its “small government” (“fiscal conservative”) credentials:
This analysis is by no means designed to excuse the Rudd/Gillard Government’s fiscal performance, which has been lukewarm. Rather, it is intended to demonstrate that Hockey’s budget claims do not stand up to rigorous examination. The fact is, the Howard Governemt’s reign was a dream time to be in government as revenues rose year after year and global economic conditions were benign. The current government has not been so lucky, faced with sharply deteriorating global economic conditions and, more recently, declining commodity prices (terms-of-trade).
That said, there were some good policies in Hockey’s speech yesterday. The promise to undertake an new financial system inquiry, if elected, is welcome, as is its proposed White Paper on tax reform (assuming it doesn’t produce hair-brained reforms like halving the rate of capital gains tax and reduced taxes for older Australians).
Tasking the Australian Office of Financial Management with exploring longer dated issues of Commonwealth Government securities to provide long term investments for superannuation funds and, potentially, longer dated fixed term mortgages, as exists in the US, is also interesting. Ditto the proposal to bring more accountability to the Australian Taxation Office and to potentially separate its functions into administration and prosecution.