The Grattan Institute found that providing tax cuts in the never-never while reducing government expenditure from 24.9% of GDP in 2018-19 to 23.6% during the next decade will necessitate cutting existing programs by more than A$40 billion a year in 2029-30. That should have been the story of the week, but somehow it wasn’t.
Essentially S&P want to see the budget under control. Explicitly:
There is a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.
In their usual sloganeering fashion Abbott, Hockey, Cormann and others constantly refer to the ‘budget debt and deficit mess’ (or disaster) they inherited from Labor. In the post Resolving the budget ‘crisis’ I attempted to show that Labor left the budget in reasonably good shape. In so far as there is a mess or a crisis now, the author is Hockey and company.
From comments I may have not made the case plain. In what I hope is my last post on the budget of 2014, I lay out the case again, with additional information.
In the 2013 budget Wayne Swan went beyond the usual four-year projections to lay out expected receipts and payments over 10 years. He did this to reflect how the numbers would work out, given that the major payments for Gonski and NDIS did not cut in until after the four-year budget cycle. Swan left the budget in good fiscal shape.
When Bowen and Rudd took over from Swan/Gillard they had to rejig the budget to accommodate the early change from a fixed carbon price to carbon trading, plus some new policies. Labor’s legacy is reflected in the Pre-Election Fiscal Outlook (PEFO) prepared independently by Treasury and Finance and published under the charter of budget honesty in August 2013 before the last election is shown:
This graph has the budget back in surplus in 2015-16, an ongoing surplus of about 1% of GDP (about $16 billion) and a restoration of budget receipts to about 25% of GDP. The forecast assumed no tax cuts to offset bracket creep. In effect the government would take back some of the eight tax cuts delivered by Costello and the one delivered by Rudd.
Six years of Labor had seen debt increase through the unaffordable tax cuts and Keynesian stimulation to counter the GFC. Nevertheless debt was modest by international standards.
First, he has added $68 billion in debt over the four-year budget cycle.
Second, he has delayed major cuts until the fourth year, as Ross Gittins has pointed out. (Ironically he has done this to stimulate the economy in transition from reliance on the resources boom. In fact consumer confidence tanked from the pre-budget talk of austerity and remains at levels of the 1991 recession.) Hence the budget does not reach surplus until 2016-17, one year later than Labor.
Third, Hockey has restrained receipts to 23.9% of GDP, according to Gittins, one election promise he has kept. Hockey has put the budget into a straight jacket entirely of his own making. This decision is based on his austerity/small government ideology.
The transition from Swan to Bowen to Hockey is reflected in this graph a form of which was published in the AFR at the time of the Mid-Year Forecast and Economic Outlook (MYEFO) last December.
Swan’s embarrassment and a fair bit of the negative view of Labor’s reputation as an economic manager is reflected in the difference between MYEFO for 2012 and the 2013 budget. Swan/Gillard had bravely forecast a budget surplus for 2012-13, but had to give up and defer for two years because of failing revenue. Treasury and Finance seemed to be completely blindsided by what was going on but the repeated failure of revenue to meet forecasts made the government look incompetent.
I understand revenue picked up a bit in the weeks before PEFO 2013, mainly due to better receipts from the mining and carbon taxes. I believe it was stable between PEFO 2013, Labor’s legacy, and MYEFO 2013, Hockey’s mess.
You will recall that the from ABC Factcheck confirmed Bowen’s contention that Hockey added $68 billion of debt to the forward estimates:
In the overall narrative the focus should be on what Hockey has done in increasing the deficit and in establishing a 23.9% of GDP limit on receipts. Instead we have sloganeering and a welter of numbers in an attempt to sheet home the entire blame to Labor. The LNP keeps saying that they gave us the budget the country needed and that there was no choice. There was choice in the overall budget framework as well as the allocations within it, which privileges the rich and the corporates and punished everyone else. Infrastructure and defence have also received increases, beyond normal inflation, though the former is limited to roads, neglecting public transport.
One sloganeering tactic is to state (true) that we are paying $1 billion in interest every month, and then rattle off what could be achieved with $12 billion extra in the budget. This entirely overlooks the need for debt to counter the GFC and the state we would have been in had we followed LNP policies.
Another is to say that if nothing were done then in 10 years the debt would be $667 billion pa. No economic commentator has had a good look at this claim, but it’s based on the Hockey mess, not Labor’s as such.
Based on that $667 number, they now have dazzled everyone with a ‘blizzard’, to borrow Bernard Keane’s description, of numbers derived from it. The interest bill becomes $2.8 billion per month, or $25,000 for each man, woman and child in the country, $100,000 for a family of four. Each Australian’s share of the interest would be $9,400 over the next 10 years, and so on and on.
Keane says it’s a Howard trick, although Howard had the gumption to stick to one number. Does anyone remember the ‘Beazley black hole’, the gigantic deficit left to the Howard government in 1996? This graph shows the budget balance history going back to when Howard was treasurer:
The graph is interactive. I’ve taken a screen shot with the blue marker bar over the socalled “Beazley black hole” It wasn’t a black hole and it wasn’t even Beazley’s as he was finance minister; Ralph Willis was treasurer. The deficit in that year was a benign 1.1% of GDP.
[This graph has replaced the less good one I had in the original post.]
The Tories have form, they specialise in lies. I’m inclined to think this present lot are liars, clunkheads or both, Laura Tingle’s assessment in 2010, and unfit for government.
Joe Hockey has mightily offended Bernard Keane by making his austerity a moral issue, evoking a trenchant critique. The shorter Keane is that if you turn budgeting into a moral issue you are held to a higher standard. On this basis Hockey comes out as a prize hypocrite.
More of Keane later, first let’s wrangle some numbers.
I’ve made a table of the 15 major expenditure items identified by the National Commission of Audit as causing concern over the long term, omitting the eight years of 2015-16 to 2013-24 for convenience. The intervening data does tell some stories. For example, after growth spurts both Schools and the NDIS settle to much flatter growth in the out-years. The table was reprinted in the AFR.
To me the most important numbers are the two in the bottom right. When all is said and done total Commonwealth payments would grow by 0.2% of GDP over 10 years. In today’s dollars that’s about $3 billion dollars. Sounds a lot, but in a $400 billion budget it’s a rounding error.
Hockey is trying to achieve two main goals. (Here I’m drawing mainly from Phillip Coorey, but also Laura Tingle in the AFR.)
First, he is aiming at a small surplus in 2019-20 and a surplus of one per cent of GDP by 2023-24. Economists and others can argue about timing and quantum but this aim seems to me fair enough.
Secondly, Hockey wants to shrink expenditure as a proportion of GDP. This is ideological, not moral.
Hockey claims that if he takes his hands off the wheel expenditure will grow by 3.75% per annum, reaching 26.5% of GDP by 2023-4. From memory, I think that’s roughly where it was under Howard and Costello.
The CIA’s world Factbook has a country comparison of tax and other revenues as a proportion of GDP. Obviously they use a particular definition (probably includes GST) since Australia comes in at 33.2%. By contrast we have Canada at 37.7%, New Zealand at 38.5%, the UK at 40.4%, then follow the Europeans up to the Scandinavians at above 50%. If Australia’s share was lifted to Canada’s the government would have an extra $55 billion available.
All I’m saying here is that lifting the share by a few percentage points is not self-evidently a crime against the people, immoral or even economically foolish.
The audit commission has assumed that tax receipts must remain limited to 24% of GDP, for reasons unknown.
Before the election Hockey was saying that he would take 1% off tax receipts as a proportion of GDP. He hasn’t nominated a percentage now that I know of, but he has deemed that growth in expenditure will be limited to 1.75% per annum. That’s harsh. Tingle says Labor’s aim, not always achieved, was for a 2% limit, also austere.
Again we are told this 1.75% limit is right, responsible and moral, without any supporting argument.
Wayne Swan, I understand, reduced outlays by a couple of percentage points of GDP. His problem was that revenues were a couple of percentage points shy of outlays. Still, Labor had a long-term plan back to the black. The following graph is from the Pre-Election Fiscal Outlook (PEFO) published under the charter of budget honesty before the last election. I displayed it in my ‘liars and clunkheads’ post back then.
I understand it involved allowing bracket creep. One has to ask why Hockey’s self-imposed austerity path is supposed to be superior.
Hewson on tax concessions
One way of fixing the budget would be to allow bracket creep, ruled out by the audit commission and Hockey.
A startling fact is that the percentage of retired folk receiving at least a part pension is projected to remain at 80%. Hewson says that superannuation policy robs the poor in favour of the rich, and in amounts that matter. He calculates super tax concessions at around $44 billion, roughly the same as the aged pension but growing faster.
Tax concessions overall are around $120 billion rising to $150 billion by 2016/17. Today’s AFR identifies some of the budget sacred cows, leading with $15 billion in protecting the family home from capital gains, $13 billion in not broadening the GST. Tightening the age pension means test to include the family home would save $7 billion.
By contrast the mooted ‘deficit levy’ would only yield hundreds of millions even if implemented widely. It’s small change. Such a move must be regarded a political rather than economic.
Keane asked Hockey what he was going to tell his granchildren about what he did to prevent global warming. They will pay.
Why were Labor’s efforts to reign in middle class welfare either not commented on or termed “class warfare” or “the politics of envy”?
Why did the LNP fight tooth an nail cutting back the private healthcare rebate to high-income earners?
In November, Hockey abandoned Labor’s plan to reduce the extravagant tax concessions enjoyed by superannuants earning over $100,000 a year, costing billions. He also restored a fringe benefits tax rort, an actual rort, for novated leases, again worth billions.
Hockey wants to cut carbon pricing and the mining tax.
Hockey is talking to us about the “moral imperative” of fiscal discipline while handing billions to large companies, wealthy retirees and tax rorters.
One minute Hockey is complaining about
a “massive increase” in defence spending beyond forward estimates and that it was a budget boobytrap, a fiscal “tsunami coming across the water” created by Labor.
The next minute he’s committing billions to F-35s which “wouldn’t cost anything” because it’s already in the budget.
Then of course there is the rolled gold parental leave scheme.
Keane reckons Hockey has cut revenue by about $15 billion. He would have increased spending by a similar amount. Then he complains about a budget mess and dresses up his austerity program as a moral crusade.
I think we’ve been short of revenue since Rudd matched Howard’s tax cuts in the 2007 election campaign. There’s nothing broken about the budget that a steady hand, a mature review of priorities and a gradual return to revenue levels prevailing under the Howard government would not fix, together with a modernisation of the whole tax regime. Time to look seriously at Ken Henry’s review.
In the Weekend AFR Phillip Coorey in an article The budget crunch is John Howard’s baby too reckons the budget problems date back that far. Apart from generous handouts to middle Australia in the previous years, Howard/Costello promised a $31.5 billion tax cuts in the May 2007 budget. One day into the election campaign he added a promise of $34 billions worth of further tax cuts (we’re talking four-year budget cycles). Rudd matched him, in addition to his own spending plans. The half-year budget update did find an extra $59 billion worth of revenue.
No-one foresaw the GFC and the end of the salad days.
Also Chris Bowen has an article pointing out that scrapping the low income superannuation contribution (LISC) and deferring the increase in the superannuation guarantee will take $55 billion out of our national savings pool over the next 7 years. These policies, he says, were designed to reduce the numbers of middle and low income earners requiring pension support in the future. Do this rather than lift the retirement age, he says.
Bowen’s comment received specific support from Tony Shepherd, chair of the audit commission.
There are two possible explanations for how an opposition presenting itself as an alternative government could end up with an $11 billion hole in the cost of its election commitments.
One is that they are liars, the other is that they are clunkheads. Actually, there is a third explanation: they are liars and clunkheads.
But whatever the combination, they are not fit to govern.
But what is more extraordinary is that now, having been caught out, Tony Abbott, Joe Hockey and Andrew Robb are continuing to try to bluff their way through, suggesting there is nothing more than a gentlemanly difference of opinion between them and the bureaucracy.
The brazenness of the three men only becomes really clear when they claim the bureaucrats’ document actually proves the budget would be $7 billion better off under the Coalition.
There is no other term for any of this except “complete bullshit”, to use one of Abbott’s favourite terms.
Ever since those three brazen bullshit artists have been rubbishing the institutions that called them on their incompetence and/or perfidy.
On Tuesday this week Treasury and Finance issued the Pre-Election Fiscal Outlook (PEFO) in which the charter of budget of honesty requires them to identify “all other circumstances that may have a material effect on the fiscal and economic outlook”. Laura Tingle explains how Treasury and Finance have used the modelling at their disposal to project receipts and payments over the next ten years. The results are inconvenient to the common view that we are headed down the crapper. You see they found that receipts are going to pick up in the out years, so that in ten years time net debt will be restored to around zero. Continue reading Are they liars and clunkheads still?→