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 two–instalment 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.