Who’s a fiscal conservative then?

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The drip feed of exclusive Government budget cuts to the AFR continues today with carbon tax cuts next on the chopping block:

Labor’s carbon package is in tatters, with $1.4 billion of tax cuts scheduled for 2015 to be dumped in next Tuesday’s budget, and cuts to clean-energy initiatives, because a slump in the European carbon price has forced Treasury to halve the revenue expected from the sale of carbon permits.

The dumping, or indefinite deferral, of a second round of tax cuts that were supposed to be funded by the carbon price will damage Labor’s attack on the Coalition over its plans to repeal all spending measures associated with the government’s clean-energy package, and all but one of the measures associated with the mining tax.

The government had previously ruled out dumping the 2015 tax cuts. But confronted by a yawning ­revenue chasm as the high dollar hits company profits and forecast company tax ­payments, Labor has been forced to axe spending and tax cuts to help present a credible last budget before the election.

The Greens are pressing the government to go further and dump funding for carbon capture and storage after the Parliamentary Budget Office found such a move would save $768 million.

Actually, what this will damage is Tony Abbott’s pledge to immediately stimulate the economy given he planned to remove the carbon tax but leave the tax cuts in place.

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Meanwhile, Abbott himself is very much struggling to sell his admirable but economically irresponsible parental leave scheme (yes, for the first time in my life I agree with Peter Reith):

The Parliamentary Budget Office (PBO) has estimated that the Coalition’s paid parental leave program will cost more than $5 billion annually, or about $2 billion per year more than had been previously estimated…

Not that it will change anything for the election but right now Labor is looking more fiscally in tune with Australia’s emerging challenges than Abbott’s big promising, big spending Liberals. The Government’s budget cuts are directly to spending plans and new spending on the NDIS and Gonski reforms are both productivity directed policies that come from redistribution and appear substantially funded.

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On the other hand, Tony’s parental leave scheme is profit and productivity destroying even if it does not draw on government revenues. And Joe Hockey mooted a new list of measures to “stabilise” the budget are not enough by half to pay for Coalition promises. From BS:

Mr Hockey said the coalition would seek to stabilise debt in its first term and reduce gross debt as a percentage of GDP over the medium term, through five steps.

“First, we will borrow less to fund our less expensive NBN,” he said.

“Second, we will abolish the Clean Energy Finance Corporation and the need for the associated funding. This will liberate up to $10 billion of debt over five years.

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

The shadow treasurer then flagged the sale of Medibank Private and “other appropriate Commonwealth assets”.

“And finally we will have an audit of all Government expenditure that ensures we deliver more for less, in a far more efficient manner.”

Debt from the NBN is negligible given it borrows off balance sheet. The Clean Energy Finance Corporation does borrow on balance sheet so that’s a real saving. The RMBS sale is not saving exactly given it’s a profitable investment but it will reduce debt which could be redeployed elsewhere. Medibank has an EBIT above $400 million so could get the government another $5 billion or so. Not sure what else there is to sell. Maybe Australia Post? The previous commitment to cutting 20,000 public servant probably delivers another $12 billion or so over five years.

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So, being generous, Joe Hockey is promising to free up about $40 billion to pay down debt. Maybe $8 billion per year. That’s a little over 16% of the current public debt and I think it is fair to say that any interest saving will be offset by reduced incomes from the sold assets.

If the Coalition said it planned to deploy these savings into its promised Carbon Direct Action Plan of $1.5 billion per annum and the promised lift to defense spending of $7.5 billion per annum then we might be getting somewhere. So far as I can tell, other promises like the removal of means testing for the private health insurance benefit and improvements to the indexation of military superannuation pensions plus a long list of state infrastructure projects would remain unfunded. The 100 dams and development for northern Australia doesn’t pass the laugh test. 

But taking Hockey at his word, that he’ll use his savings to pay down debt, the back of my envelope suggests he is currently carrying some $10-12 billion per annum in unfunded promises.

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Rounding us out, Access Economics’ Chris Richardson puts his numbers on future deficits:

Deloitte Access Economics economist Chris Richardson expects Treasurer Wayne Swan will hand down a deficit of $10.9 billion for 2012/13 in next Tuesday’s budget, taking into account a $12 billion revenue shortfall since the mid-year budget review last October.

…Mr Richardson is predicting a $13 billion budget deficit in 2013/14 because a recovery in revenue won’t be as fast as Treasury has been projecting.

…Further ahead, he sees a $6.6 billion deficit in 2014/15 rather than a previous forecast $3.5 billion surplus, and a $5.7 billion deficit in 2015/16, compared to the $6.4 billion surplus predicted in MYEFO.

He said while these were not big deficits, they could be worse if commodity or carbon prices stumbled and substantial spending pressures emerged as the true costs of Gonski and DisabilityCare hit the budget, leaving a “sizeable repair task” beyond 2015/16.

The deficits will be bigger.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.