Tough Budgets are here to stay

ScreenHunter_152 Nov. 07 10.05

By Leith van Onselen

How times change. This time a decade ago I was working for the Australian Treasury. The mood was high, the Australian economy was motoring, and the Budget was starting to see the rivers of gold flow from the initial phase of the once-in-a-century commodity price boom.

After dishing out some modest tax cuts the previous year (the 2003 Budget), there was the widespread expectation that the Coalition would once again play Santa Claus and return more funds to taxpayers in the form of income tax cuts.

Rather than something to fear, the Federal Budget was a time for celebration and a highlight for the Treasurer, Peter Costello, who got to take centre stage and claim credit for Australia’s improving fortunes and his ‘gifts’ to taxpayers.

Fast forward ten years and the mood is the polar opposite. Commodity prices and the terms-of-trade are falling, crimping the tax take from profits, and workforce participation is entering a structural decline, brought about by the large scale retirement of the baby boomer generation. Rather than playing Santa Claus, messrs Abbott and Hockey now have to play grinch to the electorate, unwinding entitlement programs and implementing new taxes.

While some commentator’s have claimed that Joe Hockey’s first Budget will resemble the ‘tough’ first (1996) Budget from Peter Costello, others, like The AFR’s  Geoff Kitney, believe that it has more in common with John Dawkins’ 1993 Budget, which was a “brutal, wake-up-to reality budget that revealed Labor’s election triumph six months earlier had been based on an undeliverable set of economic goals and policies”:

Labor’s 1993 election victory – famously dubbed by Paul Keating as “the victory for true believers” – was brilliantly engineered by Keating who turned then Liberal leader John Hewson’s economically tough ­“Fightback” manifesto into an instrument of torture…

Keating went to the election having legislated huge tax cuts – his infamous two­instalment L-A-W tax cuts – which he insisted that the economy could afford as it emerged from deep recession.

But weeks after the election, Dawkins smashed the exultant mood of the Keating cabinet with a pre-budget outlook that revealed harsh truths about the state of the economy and the budget that were glossed over in the campaign…

A month later Dawkins brought down a budget that cut Medicare benefits, increased indirect taxes, raised the tax on unleaded petrol, announced a wide range of spending cuts and the winding back of election promises on issues such as extending childcare… the budget created a political nightmare.

The parallels are real. In the lead-up to last year’s Federal Election, the Coalition lambasted Labor’s “great big new taxes” – the mining and carbon taxes – along with their measures aimed at improving the long-term sustainability of the Budget, including cuts to fringe benefits concessions on company cars and superannuation concessions for higher income earners.

Now in Government, they have been forced to confront the reality of a Budget in long-term structural decline, and now must contradict their earlier positions and deliver expenditure cuts and tax increases.

It will be a bitter pill to swallow for those who believed the Coalition’s rhetoric that they could magically turn around Australia’s budgetary fortunes without the electorate wearing any pain. It also highlights why populist positions taken in opposition can easily come back to bite once in Government.

Ultimately, with key drivers of the Budget – the terms-of-trade and demographics – in structural decline, the ‘good old days’ of Budget surpluses and widespread giveaways are over, soon to be replaced by an annual program of cutbacks and tax increases. Best we all get used to this new normal.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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  1. GunnamattaMEMBER

    ‘Ultimately, with key drivers of the Budget – the terms-of-trade and demographics – in structural decline, the ‘good old days’ of Budget surpluses and widespread giveaways are over, soon to be replaced by an annual program of cutbacks and tax increases. Best we all get used to this new normal.’

    But the real question is whether the wealthy and prominent will continue to get their jollies openly and shamelessly, while imposing discomfiture on the younger through budget allocations

    Is this a #RolfHarrisBudget ?

  2. We all know how the story ends, we’ve seen it before.
    Hockey hands down his austerity budget, the electorate grumbles. Then the economy tanks (properly) partly from external issues, partly because the money that used to be coming from the feds was actually hiding a lot of hideous issues in the wider community.
    The newstart system is suddenly flooded with people who are suddenly “looking for work”, budget gets worse. One Term Tony faces his Keating moment, until suddenly the Ukraine turns into a shooting war and he gets saved.

    • nexus789MEMBER

      Don’t see how the Ukraine would ‘save’ the Abbott unless it goes nuclear. If it did he would probably be the last PM of Australia.

  3. ceteris paribus

    Nice historical perspective in this article. Always good to remind us where we have emerged from.

  4. Ah… the Third Way… right wing economics sprinkled with an assortment of social ID gifting… nice~~~

  5. Stephen Morris

    Looking beyond the superficiality of provincial Australian problems, the real issue here goes much deeper. It is a problem facing the entire world: the failure of the system of elective government to cope with the increasing demands on government.

    The late economics Nobel laureate James Buchanan (in “The Reason of Rules”) described the problem of elective government – or “franchised monopoly government” – as follows:

    “[S]uppose that a monopoly right is to be auctioned; whom will we predict to be the highest bidder? Surely we can presume that the person who intends to exploit the monopoly power most fully, the one for whom the expected profit is highest, will be among the highest bidders for the franchise. In the same way, positions of political power will tend to attract those persons who place higher values on the possession of such power. These persons will tend to be the highest bidders in the allocation of political offices. . . . Is there any presumption that political rent seeking will ultimately allocate offices to the ‘best’ persons? Is there not the overwhelming presumption that offices will be secured by those who value power most highly and who seek to use such power of discretion in the furtherance of their personal projects, be these moral or otherwise? Genuine public-interest motivations may exist and may even be widespread, but are these motivations sufficiently passionate to stimulate people to fight for political office, to compete with those whose passions include the desire to wield power over others?”

    Under such conditions (and in the absence of true Democracy) it is totally predictable that:

    a) the system will adversely select megalomaniacal (and possibly psychopathic) political agents who act in their own interests, with minimal regard for the subjects they rule;

    b) such politicians will deliberately misrepresents the state of affairs to the public in their desperate attempts to secure votes (as shown by the examples in this article);

    c) such politicians will engage in obscene competitions to hand out bread and circuses – each side seeking to outdo the other to secure power – running up unsustainable public debts in the process; and

    d) such politicians will engage in grubby auctions, buying off special interest groups and powerful lobbies piecemeal with gifts from the public purse . . . and look to receive favours in return, either in the form of support in government or employment in later life.

    The system of elective government is broken beyond repair. Things are only going to get worse.

    Fundamentalist libertarians (of the sort who seem to have congregated at “The Economist” in recent years) argue that government should simply be “scaled down”, that the state should do nothing more than the bare minimum needed to protect the property of the wealthy.

    Of course, that wouldn’t solve the problems of widespread market failure. It would simply render everyone else hostage to the oligarchs who wield market power. It would do nothing to stop the relentless concentration of wealth and power in fewer and fewer hands.

    The solution to this problem will require economists to become a lot more unconventional than they have hitherto shown themselves to be. It will require lateral thinking on a greater scale than we have seen up till now. It may require some people to question their most sacred beliefs.

    Buchanan himself thought that the solution – or part of the solution – lay in greater Democracy:

    “In sum, the effects of direct democracy add-ons to existing decision rules surely work toward reducing the range and scope for politicization, a result supported by classical liberals.”

    For those willing to think even further outside the square, we might question the monopolistic nature of the state itself.

    The creation of ever larger and ever more concentrated polities (the EU, for example, or the relentless concentration of power in the Australian central government) works to increase the biggest regional monopolies of all: the monopolies on power which are “the state”.

    The solution to that might lie in devolution. (Genuine devolution, not the “responsibility without power” that the Coalition is offering the Australian states.)

    Of course, devolution and democracy go hand-in-hand. Democratic governments tend to be devolved governments. Think of Switzerland.

    And centralisation of power is usually achieved against the democratically-expressed wishes of voters. Think of the Euro, where the only countries given a direct vote on the question (Denmark and Sweden) voted No. Think of the “European Constitution” which was rejected by voters and then rammed through against their wishes anyway. Think of Australians who on 30 out of 32 occasions voted down referendum proposals to increase the power of the central government, but had it imposed upon them anyway.

    If we want to look beyond the superficialities of today’s budget, Democracy and Devolution would be good places to start.

    • Kudos on your comment…. as Aidiott said.. Were Open for Business~

      Now the only quibble I have with it is the myopic use of “politician” as the agency by which all things become actionable. The history is quite clear on where the mobs drove the ideological agenda, in an attempt to secure their benefits.

      Democracy was monetized, it is those that forwarded that agenda, that concocted the playing field.

      skippy… so with that observed you should actually forward the case with monied interests perverting the democratic process via politicians.

      • migtronixMEMBER

        You can’t monitise democracy at the same time you demonitise the entire worlds banking system.

        In fact, they indebted democracy, and your votes are just down payments…

      • Citizens United in the states and slush funds here down under mig.

        BTW the banking system [payment system] would be just fine with out the crazy ideologues that infested it 40ish years ago.

        skippy… I. E. Deposits and Reserves are not fungible… grok that and proceed.

      • migtronixMEMBER

        I. E. Deposits and Reserves are not fungible

        Aaahahahhaha tell that Jon Corzine..

    • Great Comment.

      Unfortunately there is nothing new under the sun, and these problems were recognized by everyone from Athenian (ancient ones!) philosophers to Benjamin Franklin and fast forward to the modern day..

      We have been well aware of the basic problems with ‘Democracy’ for over 2700 years and haven’t found a solution yet.
      Every now and then however, it reaches a stage where it simply isn’t sustainable anymore, and a reset (usually by means of disaster) is required to get back to something workable. I can’t help but feel much of the Western World (EU, US, Aus et al) are rapidly nearing this point.

      Personally I favour the ‘Swiss Model’ of democracy. Beautiful to see it in action. Still not perfect however it does prevent a degree of the suicidal (for society) self interest that seems to infest the halls of power.

  6. “Coalition would once again play Santa Claus and return more funds to taxpayers in the form of income tax cuts” God I love NewSpeak, such a wonderful language.

    Santa gave me a present this year by not stealing down my chimney and robbing me blind.

  7. Continued austerity will grind the economy into the ground because:
    GDP = G + P + E.

    P are geared to the hilt in Australia so little capacity to borrow to spend. Private debt is the real crisis at abut 7 tmes governemtn debt.

    E is about to be hit by the fall in commodity prices and terms of trade and the shuttering of the automobile industry.

    If G goes to continual fiscal consolidation it is hello recession.

    I predict that the confected “crisis” will be solved at least 1 budget before the election and we will move to fiscal expansion just in time for vote buying..

    • Stephen Morris

      There is no fiscal consolidation (at least not for the time being).

      Believe it or not there is fiscal expansion. It’s just that it’s being hidden off balance sheet through asset sales and public-private “partnerships”.

      The essential structure of this budget was predicted last year (2 September 2013 here) but it took some time for people to catch on.

      The problems of this approach are outlined here.

      The long run consequences of this budget are horrendous. The proliferation of private monopolies and tax farms will permanently increase the cost of doing business in Australia and make Australia uncompetitive. . . all for the benefit of a few Mates.

  8. The Patrician

    Abbott/Hockey: The worst of both worlds

    The risk is dumb grinding crony austerity with no structural reform

    If they do not limit NG to new-builds they should be condemned.

  9. TP
    There’s a lot of biased baloney going on in here about a ‘confected’ crisis. We have a crisis that is getting very close to it’s pointy end between that piece of granite and the hard place.

    However “If they do not limit NG to new-builds they should be condemned” This limitation looks to be a fundamental easy first step in any reform process. Mind you it is still a subsidisation of the consumption/non-productive by the productive sector.
    The sacrifice of the productive efficient sectors of the economy to keep non-productive consumption sectors booming has to stop or those reckoning we don’t have any ‘crisis’ might find out that said crisis is not as confected as they think.

    We cannot continue to fund our over-indulgent consumption by selling our assets to foreigners. Despite the widespread belief by commenters here that this is both desirable, so that we don’t have to take a hit, and infinite in time and scope, it ain’t so.

    • migtronixMEMBER

      +many flawse though the biggest piece of our ludicrous over consumption, by many orders of magnitude, is property…

      How’s your recent purchase going?

    • “We cannot continue to fund our over-indulgent consumption by selling our assets to foreigners. ”

      I do look forward to Abbott and Hockey massively reducing the limits for FIRB approval. Or is that exactly the opposite of what “open for business” means?

      Sorry if that’s a load of biased baloney.

    • The Patrician

      Ok, let’s have a look at that flawse

      Hockey/Abbott have just delivered the most over-indulgent PPL scheme in history and zero NG tax reform. Nothing. Nada.

      The REIA will be celebrating this morning.

      It is a fail.

    • migtronixMEMBER

      If you’re under 30 you just got thrown in the heap! Oh but tradies can now get into debt too!

      • flyingfoxMEMBER

        Yeah that was disappointing but predictable. Having said that, the medicare co-contribution will have a impact for them.

        Double the NHMRC budget on the other hand was a welcome surprise. Might consider staying in academia a little longer.

      • migtronixMEMBER

        Hmmmm sounds like another gift to boomers and it means keeping them around longer… Not sure I welcome that… But still gotta keep the AMA on side for when you start “rationing care”…

  10. migtronixMEMBER

    Man that was so tough on the boomers, poor guys almost shed a tear, good thing they won’t leave the place worst than they… Oh.. Wait

      • So I can’t access my super until I’m 70? What BS. It’s going to be ‘fun’ watching labourers drop dead at work.

        All of a sudden my 25 year home loan seems shortish…….

      • migtronixMEMBER

        Let’s do some back of the envelope logic here :

        Cut company tax rate
        Companies pay out more divided
        Boomer held trusts are primary beneficiaries…

      • So I can’t access my super until I’m 70?

        It’s your fault you weren’t born in an awesome era.

        If you studied a bit more, worked a bit harder, you’d be born in the right year and commence a tax-free TTR at age 60

      • Age 65 is the current general condition of release (i.e. lump sums with no conditions)

        You can access transition to retirement starting at age 55, and it becomes tax free at 60.

        You can activate a release at age 60 if you retire (i.e. bullet point “reached preservation age and retire”)

    • Boomers are the untouchables. Maybe it’s because they actually pay for the utter shit we have for media, and watch it on TV. That’s got to be one of the reasons. Whilst the young are out getting shit faced and trying to get laid.

  11. That was a shit budget delivered by a shit Government. Abbot is starting to remind me of Dubya. My boss is ten times the speaker with ten times the charisma of Testosterone. Who the F voted for these flogs!? Go punch yourself in the face.

  12. Greg Davidson

    Tonight’s budget is fair.

    I don’t usually support Lib’s: I think it’s a well spread result.

    My low income fluctuates wildly, my family doesn’t qualify for family tax B yet I know people better off than us who were getting it.

    Great to see middle class welfare handouts stopped, because it wasn’t fair and didn’t benefit those who are the worst off in society.

    • Is it true than millionaires are going to be paid 50k to procreate? Or is that Labor spin?

      • Greg Davidson

        We live in a society where women comprise less than 1 in 10 executives of ASX 200 and 500 companies this scheme that comprises less than 2% of the total budget. At present in Australia, mothers take around 32 weeks of parental leave, even though they are entitled to 52 weeks by law, representing an underutilization of approximately 18 weeks that is often attributed to affordability issues. This scheme will give more middle income earners the same opportunities to nurture their babies.

      • Middle income earners can support themselves while they have small children. I know because I am one (89k) and have a ten month old. We go without a few things and the missus raises bub full time. I don’t expect, or need, a family on 50k to subsidise our decision.

      • Greg Davidson

        My income is not secure, I have had over 50 labour hire contracts in 12 years some have payed more than others = electing to report our family income at tax time has meant we have not received part B, whereas other families who guestimated their incomes and provide a figure were paid it.

    • migtronixMEMBER

      Yes middle class welfare was cut, sure, like PPL. But what about corporate welfare? Company tax cut mining tax cut carbon tax gone. Really fair that..

  13. The debt laden are often families with kids who live in the suburbs. They’re the backbone of the country and the economy. They produce the next wave of doctors, nurses, teachers and, horrifically from time to time, RE agents.

      • I reckon even an illiterate, ignorant old fool should be able to join those dots

      • flyingfoxMEMBER

        I reckon even an illiterate, ignorant old fool should be able to join those dots

        That is the problem with join the dots. Everyone joins them how they see fit.

        The solution is not to get into more debt and for those not in debt to subsidize those in debt.