Joe Hockey ignores budget truths

ScreenHunter_43 Jan. 24 08.38

By Leith van Onselen

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.

ScreenHunter_12 Apr. 16 15.18

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:

ScreenHunter_01 May. 22 08.00

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:

ScreenHunter_10 May. 22 16.47

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.

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Joe Hockey Press Club Budget Response (22 May 2013)

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Comments

  1. Thanks leith.

    ” 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.”

    With the exception of 08-09 I believe Govt revenues have risen in all ALP Govt years, including this FY which will see a revenue increase of some 7%? To the extent that Govt reveniews are now some 50Billion p/y more than the last Howard/Costello Budget. I think that is pretty dreamy too- unless of course spending is out of control.

    The current Govt has not been so lucky? On the contrary, this Govt inherited a nett CASH position of some $20 Billion and then was gifted tens of Billions in additional revenue yet has not managed to produce or plans to produce a single surplus in 6 years(+3 more in the forward estimates). You don’t think they have produced their own luck – much to our expense?

    A Govt that has not produced or plan to produce a single balanced Budget over the 9 reporting and forecasted years has performed lukewarm while one that produced balanced Budgets in all it’s last term is flayed. Strange standards.

    • outsidetrader

      GSM – When the Abbott Government fails to deliver a surplus in its first term, I wonder if you will be as critical of them as you have been of labors efforts?

      • outsidetrader,

        You bet I will. In fact , I’m growing cooler by the day for Abbott and Hockey thus far. Their timidity is getting irksome. Does it mean I alter my support for them? Given the alternative of the last 6 years I’d say extremely doubtful.

        But I have yet to see you present your position. Going to state your own case , or fall in with the groupthink?

      • outsidetrader

        GSM – I’m not aligned one way or the other – but my voting history would suggest I’m not a fan of govt in general. I’ve been voting for a more than a decade, and have voted for the opposition (be it red or blue) on every occasion.

        I expect this September will be no different.

      • General Disarray

        Groupthink? Give it a rest.

        You just parroted the same talking points that appear on pretty much every comments section when similar topics are discussed.

      • @Outsider, I’m with you when it comes to voting against incumbents.

        @GSM, I don’t think there’s any chance that Abbott/Hockey will deliver a surplus in their first term – I’ll be impressed (not sure that’s quite the right word but it will do) if they make the cuts that will be necessary to do so. I expect that quite a few courageous decisions will be required.

        Sir Humphrey: There are four words you have to work into a proposal if you want a Minister to accept it.

        Sir Frank: Quick, simple, popular, cheap. And equally there are four words to be included in a proposal if you want it thrown out.

        Sir Humphrey: Complicated, lengthy, expensive, controversial. And if you want to be really sure that the Minister doesn’t accept it you must say the decision is courageous.

        Bernard: And that’s worse than controversial?

        Sir Humphrey: (laughs) Controversial only means this will lose you votes, courageous means this will lose you the election.

      • drsmithyMEMBER

        I’ve been voting for a more than a decade, and have voted for the opposition (be it red or blue) on every occasion.
        For the last decade, the difference between “red” and “blue” has been basically zero.

        If your objective with voting is simply to be contrary, at least pick a minor party so we can get some more diversity.

      • outsider,

        My first voting experience was voting in Whitlam as a young apprentice back in the day. I also voted for Hawke. Not Keating.

        I don’t believe I am “married” permanently to any one side either but I do declare who I back and why.

        I think people who waste their vote by voting informal are showing contempt for all those who have gone before us who sacraficed so much that we can enjoy democracy – imperfect as it sometimes is. They are underserving of their good fortune. So no matter who you decide to vote for, in my book it really does count in that respect.

        GD,
        Your lightweight sniping is meaningless.

      • outsidetrader

        Dr Smithy – I should clarify.

        I vote for a few minor parties first – but I vote below the line and you know that the reality is that your vote will inevitably end up with one of the majors – so that’s the part that “counts” as it were.

        GSM – I agree an informal vote is a wasted vote. It’s not that hard to number a handful of boxes once every few years.

      • drsmithyMEMBER

        I don’t believe I am “married” permanently to any one side either but I do declare who I back and why.
        Your inability to accept the possibility of anything except far-right viewpoints being valid suggests otherwise.

      • “I think people who waste their vote by voting informal are showing contempt for all those who have gone before us who sacraficed so much that we can enjoy democracy – imperfect as it sometimes is. ”

        I don’t. A vote is confirmation that you are happy for that person/party to represent you. What if you don’t want to support any of the choices put before you?

      • drsmithyMEMBER

        I don’t. A vote is confirmation that you are happy for that person/party to represent you. What if you don’t want to support any of the choices put before you?
        Have you ever seen a political party (or even individual independent) anywhere, with whom you agreed on every single issue ?

    • doc,
      You have always been wrong regarding my views. You are the one constantly wedded to your beloved Left, no matter what.

      I’m not suggesting anything. I am unable to accept ANYTHING from this current inept Labor Party while they are run and corrupted by Unions. Not one thing. They are a complete failure and one only has to witness how their most senior and respected people have been treated to know that. They are destroying themselves, so I should blindly support that clusterf*^k of an enterprise?

      That doesn’t mean I have never or will ever support a Labor policy or Govt. It means this Labor crew don’t deserve my or anyones support but I accept that those who materially benefit from the incompetence of Labor will latch on to that teat until the bitter end.

      • drsmithyMEMBER

        You have always been wrong regarding my views.
        Well that’s a matter of perception. You have yet to voice an opinion I’ve found surprising.

        I’m not suggesting anything. I am unable to accept ANYTHING from this current inept Labor Party while they are run and corrupted by Unions. Not one thing. They are a complete failure and one only has to witness how their most senior and respected people have been treated to know that. They are destroying themselves, so I should blindly support that clusterf*^k of an enterprise?
        No-one is asking you to support Labor.

        What we find mystifying is that you think an equally corrupted and historically far less capable and ethical group will do a better job.

      • doc,

        As usual you pervert my commnents. Let me dum bit down a little.

        Right now the choices are ALP and LNP for Govt. No, there are no other contenders for Govt. From these 2 and 2 alone well, you know what I choose. I base this on what I have experienced over the last 6 years, not what I read in GreenLeft Weekly or hear at the coffee shop over a latte.

        Does that imply I think LNP is absolutely perfect and has always been so? No. It means of the choices presently available I have chosen what I think is best , by far.

        There. Hope that helps.

      • drsmithyMEMBER

        There. Hope that helps.
        Not really. Doesn’t explain your inability to accept the possibility of anything except far-right viewpoints being valid.

    • GSM: “…On the contrary, this Govt inherited a nett CASH position of some $20 Billion…”

      I am sure that in the Fin Review, or the Australian, that would be a killer argument.

      However, here, there are a few people that understand that the financial position of any government (or business) does not hinge on a cash balance at any one instant.

      If one has accrued that cash balance by selling off of assets, then one has to look at the price one received for the asset (for example Peter Costello’s stellar decision to sell gold at a low low price),or the revenue foregone compared to the interest paid (you know, Telstra dividend vs the bond rate).

      If one has accrued that cash balance by neglecting productive infrastructure, then does that cash balance and interest income outweigh the extra costs in terms of productivity of crap infrastructure?

      Without even a half decent analysis of these issues, stating a cash balance amount is worthless. On political sites like Catallazy, I am sure you would be applauded; on sites that have even a modicum of financial expertise, you might expect to be derided, and it is nothing to do with group think.

      Unless you can put down the concept of having the state of one’s finances consider all the above issues as accountancy/economics/engineering group think?

      • emess,

        Thanks for the condescending lesson, but no thanks. I’m sure you can twist sound economic management and commonsense into a longwinded anti LNP advertorial. Many here always do. Bottom line simply is this; if you think you can defend the Govt’s abysmal performance economically or in any way then get on with it. Please explain all the wonderful accomplishments of this Govt.

      • outsidetrader

        GSM – Raising $10 billion in debt at circa 4% to buy an AAA rated asset (RMBS) paying circa 6% sounds like a reasonable financial move to me (I don’t have the numbers right, but the return on RMBS is certainly greater than the cost of government debt).

        But the Coalition complains that this policy has just driven the government further into debt and that they want to sell it to improve the government’s balance sheet. Borrowing to invest is a mugs game for most, but can work out well when you can borrow at the Commonwealth bond rate.

      • GSM, there is a reason for me sounding condescending.

        In your reply, for example, you just raised a strawman. Why should I be anything other than condescending if that is all you have? Once people start using strawmen, goal post shifting or bluster in a debate, the other party deserves to be a bit condescending.

        Just because I point out that analysis of a Government (Labor or Liberal) rests on more than just the cash position, apparently I am a supporter of one side or the other. Bollocks.

        Nobody with a grain of common sense would buy shares on the basis of a company’s cash position alone, nor would anybody with an ounce of nouse analyse a government’s performance on its cash position alone.

        That is not a political position, do you see?

  2. Yeah but Leith, didn’t you read affable Joe’s “solutions” outlined in the speech?

    To repair the budget position and to pay for any new initiatives, the Coalition has already announced an extensive list of budget savings, including:

    • A 12,000 reduction in public service headcount through natural attrition.
    • Abolishing the mining tax and associated spending, including the Schoolkids Bonus,
    the low income $500 superannuation rebate and the deferral of the increase in the
    superannuation guarantee levy for two years.
    • A reduction in the humanitarian refugee intake from 20,000 back to 13,750.
    • Stopping the asylum seeker boats.

    Apparently abolishing the mining tax will improve the budget position. WTF?

    The school kids bonus costs around $600M/year out of a $19,000M deficit.

    They’re happy whack low income earners super while allowing (much more costly) tax concessions for the wealthy.

    Stopping the boats now qualifies as serious fiscal policy?

    On top of this, they’ll keep all the (very generous) carbon tax compensation, while abolishing the carbon tax itself and introduce an extremely generous paid parental leave scheme for rich people.

    Its good to know we’re in safe hands.

    • Yeah, there’s a lot of stupidity there. I particularly hate the abolishion of the low income super tax offset. It’s a disgrace that someone on the top marginal tax rate would get a 30% super tax deduction, whereas someone on the lowest marginal tax rate effectively gets nothing. Which group’s tax concession costs the budget more and which group is more likely to go on the aged pension?

      • dumb_non_economist

        In fact lower income earners are getting screwed! The rate on 37K pa is 10%, 50K pa is 15%.

      • It’s a disgrace that someone on the top marginal tax rate would get a 30% super tax deduction, whereas someone on the lowest marginal tax rate effectively gets nothing.

        Well said. Still voting for them then?

    • outsidetrader

      Lorax – you missed this gem:

      “we will sell down the $10 billion of Mortgage Backed Securities on thebalance sheet of AOFM as market conditions permit, and reduce the associated borrowings.”

      This won’t help the Budget bottom line either, as I can guarantee the returns they are earning on these assets will be higher than the interest costs payable on the debt issued to fund their purchase.

      This is why the focus on gross debt as opposed to net debt completely misses the point.

  3. “Now the price we will pay is $35 million a day in interest. That’s $13 billion a year…”

    Perhaps Joe could also give us the figures on how much interest we pay per year on our private debt?

  4. Alex Heyworth

    A pox on both their houses.

    What a useless bunch. Have we ever had a more incompetent and inept government and opposition? If so, it is not in my memory.

    • +1 Both Gillard and Abbott are washed up failures that only exist because they played the game in the old firm the hardest the longest. Like bad weeds they have managed to out compete all that had potential or utility.

      Yes indeed a pox on both their houses.

  5. AB,

    “@GSM, I don’t think there’s any chance that Abbott/Hockey will deliver a surplus in their first term – I’ll be impressed (not sure that’s quite the right word but it will do) if they make the cuts that will be necessary to do so. I expect that quite a few courageous decisions will be required.”

    You may well be right,unfortunately. In this economic environment and what is being forecasted I will then be seriously interested to see a complete re-alignment of Govt spending priorities where the fruits of significant cuts and savings are directed into paying down Labor’s Debt faster and then funding real and productive measurable outcomes – in areas like Education, Health and Infrastructure.

    If the LNP gets in and cannot get to surplus, then at the very least the spending must be directed toward much more productive and sensible outcomes than we have seen of late.

  6. Gentlemen and women. let’s start with some principled words.

    The danger is not that a particular class is unfit to govern. Every class is unfit to govern. Lord Acton

    “Nobody made a greater mistake than he who did nothing because he could only do a little.” Irish statesman Edmund Burke (1729-1797)

    “All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter.”
    Irish statesman Edmund Burke (1729-1797)

    Leith is defending the vote. The right of the populace to be informed.

    Compromise and barter IS the way forward.

    The way forward -direction-is always being intimated on MB, whether you agree or not is for us to debate.

    David (HnH). keeeps asking the strategic question–direction. Fools keep on sailing with should the wind blow Left or Right. To put it simply in the vernacular, there are winds, currents and direction(compass).

    Show me the great voyagers who tossed the compass overboard to engage in a knife fight over the winds?

    Which way in the fog banks without a compass, charts depthline and current?

    Stick to your left/right wind shite and walk the plank, plonkers.