18 Feb 2013

The Coalition's Hypocrite Economics

By Ian McAuley
Shouldn't Tony Abbott be happy that the mining tax was a fizzer? Doesn't he want to abolish it? The Coalition and its supporters in the Murdoch press need to start telling the truth about economics, writes Ian McAuley

To read the Murdoch media's account of Australia's budgetary position one would believe that the Gillard Government's economic management is in chaos, and that we rank just behind Greece and Spain in terms of fiscal profligacy.

Much political mileage has been made out of last week's release of the Commonwealth's financial statements for the period to December 2012, which show a $22.3 billion cash deficit for the half year, in contrast to the May Budget which had forecast a cash surplus of $1.5 billion for the full year.

Before we join the panic, let's put these numbers in context.

First, the larger-than-expected deficit is not the result of profligacy. The Commonwealth's spending over the six months to December was $187.3 billion, exactly half its estimated $375.0 million for the full year. The shortfall is on the revenue side, specifically a fall in tax revenue.

Second, the revenue fall results from large once-off factors, including a large negative flow of tax refunds — almost certainly associated with excess collection of provisional tax relating to 2011-12. Another was a slump in mineral prices in the first half of the fiscal year. As a result the Government's Mineral Resource Rent Tax (MRRT), which should have raised $1 billion by December, raised only $126 million.

There has been a subsequent recovery in iron ore prices, and in the current company reporting season there are some strong results coming in, particularly from the finance sector, which should see a rise in capital gains and company taxation. The second half of this year could see a significant improvement in tax revenue, particularly on an accrual basis, because some of the cash receipts will be in the 2013-14 year.

Third, even if the budget deficit were to come in at $5 or $10 billion, this is hardly serious. The Commonwealth's net debt of $164 billion is only 11.1 per cent of GDP — very low by the standards of other countries. Another $10 billion of debt as a result of an unexpected budget deficit would increase it to $174 billion, but if nominal GDP grows at a modest 5 per cent (corresponding to a real growth of about 2 per cent) it would remain at 11.1 per cent of GDP.

In short, there is no budgetary crisis. The government's policy of stabilising debt before allowing it to contract remains in place.

There is a political problem, however, and it is partly of the government's making. It confidently talked about a fiscal "surplus", as if that were the sole measure of economic policy, and did not couch its rhetoric with some acknowledgement of conditionality. When politicians tout precise figures, particularly when those figures are based on the slim difference between two uncertain quantities, they leave themselves open to "gotcha" questioning by partisan journalists and ridicule by their political opponents.

The political noise around the government's embarrassment in missing its "surplus" target and its poor design of the MRRT is masking two important economic issues: serious deficits that don't show up in the Commonwealth's accounts and our seeming inability to capture an adequate return from the resource boom.

Our fiscal deficits are minor in comparison with our deficits in public assets. Whether we are talking about the shabby public transport systems of Sydney, Melbourne, Brisbane and Adelaide, the dangerous goat tracks that are known as the Bruce, Pacific, Dukes and Midland Highways, or the interstate rail system running on century-old alignments, we are talking about transport deficits.

Many of our environmental resources, ranging from old mine sites through to our national water supplies, need remedial investment — investment which would provide an economy-wide return but no immediate financial return for a private investor. Similarly, if we are to renew our electricity systems to take advantage of our natural resources of renewable energy (which are remote from our coal mines) we need public investment.

We have low public debt, but this has been achieved at the cost of a depleted stock of public assets. If Australia were a public company, its board would be condemned for having let its balance sheet run down.

By a quirk of accounting, however, if the Commonwealth does spend on roads, public transport or other assets, these have to be expensed on the Commonwealth's books, because most capital payments are passed through to the states. The Commonwealth budget deficit widens and its balance sheet looks worse, while the states' balance sheets improve. It shouldn't matter, because nationally the transactions cancel out, but it matters politically because the Federal Opposition and the Murdoch media have made such an issue of the Commonwealth cash deficit.

The world's successful economies are those which have used public debt wisely to invest in public assets — countries such as Germany and Singapore, with net public debt around 80 per cent of GDP, and the Nordic countries with public debt around 40 to 50 per cent of GDP, all countries with excellent public assets. Rather than becoming obsessed with the details of the government's cash flows, we should be discussing the nation's public balance sheet.

The opposition has floated some thought bubbles about infrastructure, but has given no indication of funding (its expenditure cuts wouldn't go far), and its priorities are on a 1950s "develop the north" agenda — an agenda which may please Gina Rinehart and Clive Palmer, but which wouldn't do much for those Australians who live south of the Tropic of Capricorn. For them the only infrastructure promise is that it would kill the National Broadband Network.

The other issue concerns the government's MRRT. Its original design was sound by several economic criteria, but it was poorly put together. New Matilda readers who wish to compare the original proposal with the anaemic deal negotiated by the Commonwealth can read my analysis in Dissent (warning — equations).

Both the Rudd and Gillard governments had an opportunity to present themselves as standing firmly against the voices of greed, and they could have made the opposition appear as economic traitors, but they buckled on the MRRT, and have been paying the political price since. The electorate rightly reacts with disgust when they see their government, elected to defend the public interest, give in to bullying. That disgust is most strongly directed against Labor governments, for there is a belief that while the Liberal Party is the natural ally of big business, Labor has a broader constituency.

We now have the absurd situation, however, where most criticism of the MRRT is directed at the Government, ignoring the policy position of the opposition, re-asserted on Friday in Abbott's speech to the Committee for Economic Development in which he rightly criticised the MRRT for raising "hardly any revenue at all" but then repeated his intention to kill it. You can read his speech at the Liberal Party website (warning — hypocrisy), but for an interpretive analysis, drawing attention to its inaccuracies and contradictions, see the Macrobusiness website.

The impression generated by the focus on the Government's poor design is that the opposition must have something better, but it has no plans to invest the benefits of mining revenue in the national interest. Those who focus criticism on the Government are inadvertently playing into the hands of the Opposition and the mining industry, who wish to see the tax abolished, but today's Fairfax/Nielsen poll shows that 60 per cent of voters want the tax retained or strengthened.

Is it possible that the opposition and media obsession about accounting details is a way of distracting us from real economic issues — the state of our public assets and our fleeting opportunity to invest the proceeds of the mining boom? Or is it just that journalists in the mainstream media are too lazy to address difficult issues?

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punch
Posted Monday, February 18, 2013 - 17:43

Abbotts LNP comes across as all noise, no substance. The blatant economic misinformation peddled by all and merry in the Coalition would be laughable except it is not funny. Abbott has fudged the MRRT, the carbon price, the GFC, the health of the Australian economy, the NBN, the so-called surplus, tries to stymie Gonski and the NDIS. Its endless, pitiful and cowardly. Thank goodness I along with many others can seek information elsewhere as the main stream media are letting everyone down.

This is a very wealthy country with strong institutions and a decent, democratically elected government (Labor, Greens and Independents) which has steered us through very dangerous financial times without being given enough credit for a good job done. Its been a much more representative government and it has worked. Its time people stood back, ignored the LNPs repetitive slogans and felt pretty good about the end result despite the volatility.

Our PM Julia Gillard said 'stiffen your resolve' - well I say to all Australians don't listen to the LNPs desperate noise. They must be resisted. What's important to you, tick those boxes as you compare policies already put in place and the foundations of those still to be fulfilled. Legislated for the many not the few and those policies are being put in place for the benefit of todays and tomorrows Australians.

We have a really good government which is taunted and hated by the majority of main stream media. Its now the time for all decent Australians to stiffen their spine and resist this dreadful opposition and their supporters.

Bazzio101
Posted Tuesday, February 19, 2013 - 15:47

This well articulated statement exposes the Government's paucity of capable and intelligent strategic policy annunciation.

Question Authority

Anthony M
Posted Tuesday, February 19, 2013 - 15:55

I think the article and the first comment hit "it on the head". I am horrified at the prospect that Australians buy the opposition rhetoric and the polls are so dire. It seems clear that mainstream media has a large degree of bias if not incompetence, yet knowing this does not help.

Amongst many people I know a deep depression seems to be setting in, which seems largely based on what appears to be a failure of democracy. It is not that people "may choose the opposition" over a fairly effective government who is or has made some big changes that were long needed, but that when people voice why they would vote for the opposition they refer to poor arguments.

The Ju-lier concept is the worst of these. Do people not realise that after the last election and the horse trading was taking place to form a government that Abbot was negotiating with the independents in such a way that if he managed to form a government he could be accused of the same thing?

I voted for some of those who hold the balance of power, they represent me and I have the right to do so and for my representatives to do the best they can with the power they can negotiate - yet many Australians seem to consider the government illegitimate - how dare they.

It is the emotional and feelings of things spinning out of control and rational debate that is most disappointing. If the coalition comes into power I think I will become much more active that at present in my attempt to protect the environment and reduce inequality because we know Abbot will not.

This user is a New Matilda supporter. dazza
Posted Tuesday, February 19, 2013 - 16:09

Well said, Anthony M.
Yes, it is a great pity that our future is in the hands of the Mindless Moronic Millions, who will vote according to the their loudest Right Wing shock-jock, and the Murdoch "Australian". Unfortunately, this is their forest, it is what they can see, and no trees stand in their way, to distract them. Not ones that they want to notice, anyway. If they did, they may have to actually THINK!?
Poor Fellow, My country!

jeremiahwuzza
Posted Thursday, February 21, 2013 - 12:23

It's clear that there are major moral issues raised here. A democracy is crumbling before our eyes - led by a rude and ignorant opposition front bench, a media run by unscrupulous and venal men or superficial twits (that's for the ABC).
How is it that this handful of rich selfish men has any right to persuade the naive and simple minded to vote for their mates?
The problems:
a bloody minded misinformed electorate;
a dreadful political system with layers of government that will not cooperate for partisan reasons;
Increasing gap between rich and poor;
Deteriorating education standards;

Poor fellow my country indeed, Dazza

This user is a New Matilda supporter. aussiegreg
Posted Saturday, February 23, 2013 - 16:52

Now Ian, you should do better than to refer to Commonwealth tax revenues as having "fallen", when they have in fact gone <i>up</i> by 6%!

The revenues are less than the wildly-optimistic estimates in the last budget, that is true, but did you know anyone outside the Labor Party and its cheer squad who thought there was any chance revenues would increase by over 10%? And a 6% increase is pretty damn good by the standards of wage and salary earners – do you know anyone outside the public service and the mining industry whose income went up by 6% last year? I know mine didn't.

As for the impact of the mining tax in its various incarnations, you needn't have worried about your various graphs to show off the difference between the RSPT and the MRRT because there was only one number that mattered: the mining industry's budget for its anti-government advertising campaign. Gillard showed the political nouse you and so many others in the punditry so conspicuously lack – she saved the Labor government's hide and spared us the Abbott government a continuation of that mining industry campaign would undoubtedly have delivered, given there was only one seat in it at the finish.

Which is not to say that Abbott government would have been entirely wrong to abolish the tax, for a reason which has little to do with how much revenue it has (or will have) actually raised. I have an American client who in turn has a friend who runs an investment fund in Sydney specialising in attracting American investors into various Australian markets. I have this only second-hand from my client who is no fan of the Labor government, so with that caveat I report that on the day after the mining tax was announced, most of the American investors in that fund rang Sydney asking to withdraw their money. And the fund had a much lower exposure to the mining industry then your self-managed superannuation fund.

The overseas investors were not people, by and large, who had invested in Australian mining through the lean years of the 1990s (when few mining companies delivered dividends and almost all saw precipitous falls in the value of their shares) but who had hung on in hope of a big payday in the future, only to see the government swoop in, vulture-like, on that payday, to take a chunk of the long-awaited revenues in new taxes and increased royalties on top of the world-beating rate of company tax and all the other greatly-increased tax totals the company's employees and suppliers were now paying.

In the investment game it's called "sovereign risk", and the government's way of introducing this new tax as much as the tax itself spooked investors in other parts of the Australian economy as well. They suddenly felt the analysis on which that investment had seemed sound had been undermined by an unpredictable and avaricious government, to the detriment of Australia's need for investment.

They are people who know how to read a balance sheet, though, and they know the consequences of dramatically and rapidly increasing the liabilities – the debts – of a company, or indeed of a government. This government has set a record, not only for Australia but for the OECD, in the <i>rate of increase</i> in public debt, from a cash surplus of over $50 billion when they took office in 2007 to the figure you find so untroubling, $164 billion last year, a deterioration of over $214 billion in just four years. And looking at that national balance sheet, what income-earning assets do we have to show for all that borrowed money? Come on, Mr Public-infrastructure-always-justifies-whatever-we-spend-on-it, where is the income stream that will pay the interest on that new debt, let alone repay the principal?

There are many reasons to vote Labour in this coming election (as I will be) but economic competence is not one of them.