Fiscal instability spreads

From the AFR:

The federal government faces a forecast revenue shortfall of more than $20 billion over the next four years, prompting a robust internal debate about whether the budget razor gang should make cuts to offset all the losses or delay the surplus yet again.

Cabinet’s Expenditure Review Committee is due to meet again on Friday amid rising concern that a fresh round of severe budget cuts on the cusp of an election campaign would be political suicide.

Measures under consideration to help plug the revenue hole include increases in tobacco excise, abolishing loss carry-back tax provisions for business, and tightening family tax benefits and so-called middle-class welfare.

The ERC is looking to finalise savings measures so Treasurer Chris Bowen can release an economic statement before an election is called.

Ten days into the campaign, Treasury will release its own pre-election ­fiscal outlook (PEFO). The government wants to get the economic statement out first to pre-empt any shock the ­revenue write-downs in the PEFO would create.

But shadow treasurer Joe Hockey told The Australian Financial Review the process was becoming a sham and the Coalition would no longer respect the figures in either the economic ­statement or PEFO.

Previously, he promised to release detailed costings of Coalition policies only when PEFO was released. Now, he said, that pledge may no longer hold.

…“The government can’t stop spending, spending like there’s no tomorrow,” he said.

Both Howard and Rudd spent the boom on tax cuts. Now the boom is gone and the largess must reverse. Should we slash and burn and get it over with?

Not unless we want to risk our worst post-war recession as we go over the mining investment cliff. The automatic stabilisers should be allowed to work. And we should ramp up our borrowing.

But that’s not enough. Deficits must still be managed towards surplus across the cycle lest the AAA rating be stripped and the nation’s cost of funds begin the rise. Both sides of politics, either side, need a long term narrative and plan that outlines the seriousness of the challenge.

The population must be prepared for mutual sacrifice. We can allow deficits to rise through a transition plan from terms of trade driven growth to other drivers but cuts must be made so government can re-allocate spending to more productive spending. Middle class welfare is a good place to start. That’s what we’ve seen in the FBT cuts. More is needed.

Treasury needs to take a deep breath and slash its terms of trade and GDP projections. The happy-day material pumped out of BREE should be dumped. I’m no fan of Ricardian Equivalence but let’s face it, constant fiscal instability is going to destroy household confidence. And we haven’t yet seen the biggest ToT correction to come, in iron ore prices.

In short, we have a choice right here and now to get ahead of this debacle as a nation, to manage it as adults, or we can crisis manage for the next three years with every vested interest in the country crying blue murder as we go.

The rhetorical challenge is the real one. A strong, serious and detailed narrative on these topics is required urgently. Labor has blundered by seeking to neutralise its political hot-button issues before it established the narrative more strongly.

But the LNP is clearly unable or unwilling to break free of its “point-the-finger” at Labor strategy, reaffirmed in Hockey’s ridiculous declaration today that the LNP will no longer cost anything.

Roy Morgan yesterday released new research showing that economic issues remain by far the largest issues confronting the nation:

July 2013, Australians believe Economic & Financial issues are the most important set of problems facing Australia (35%, down 1% since April 2013) and the World (39%, up 7%) according to the latest Roy Morgan Research.

Give the people an adult to follow and they will.