The Imaginary Budget Emergency


Tony Abbott has been out on the hustings this week, yesterday in the western Sydney seat of Reid, talking up Liberal candidate Craig Laundy.

He's recovering from a minor hiccup. His highly-regarded chief of staff Peta Credlin was nabbed for drink driving last week. Credlin was breathalysed outside her Canberra home on Thursday night, after having one too many drinks after Abbott's budget reply speech. Abbott defended Credlin yesterday, saying she is “a really outstanding chief of staff.”

“She’s done the wrong thing,” he continued. “She accepts that and it will now be handled in the usual way.”

Speaking of Abbott's budget reply speech, it was largely successful, at least in the sense that he made no gaffes and kept the focus squarely on the Government's supposedly poor economic management.

Hardly a masterpiece of economic thinking, the speech and subsequent statements by Abbott and shadow Treasurer Joe Hockey are useful mainly for hints they give about future Coalition fiscal policy. If you read carefully, you'll find a set of economic policies that will retard Australia's future economic wellbeing.

The Gonski schools reforms, for instance, remain unpopular in the federal Liberal party. “The key to better schools, at least as much as more money, is better teachers, better teaching, higher academic standards, more community engagement, and more principal autonomy,” Abbott said in his speech. The Coalition is holding to its promise to dump Gonski if all the states don't sign up.

On the other hand, the Coalition remains committed to the National Disability Insurance Scheme. “I would not have ridden 1000 kilometres, the week before last, to raise money for Carers Australia if I was half-hearted about the NDIS,” the Opposition Leader said last Thursday.

On the broader issues of taxing and spending, there can be no doubt that some serious austerity is on the cards should the Coalition take office. “Thanks to Labor’s poor management over five years, there is now a budget emergency,” Abbott claimed, a statement that must rather surprise the finance ministers of Greece and Cyprus.

To fix this supposed emergency, Abbott put forward a number of tax hikes and benefit cuts, including raising taxes on superannuation for low-income earners, slashing twice-yearly benefit allowances, and delaying Labor's planned increase in compulsory superannuation to 12 per cent. He claimed these measures would save around $5 billion a year, “which is more than enough for tax cuts without a carbon tax”.

Given the budget is forecast to be in deficit next year by around $10 billion, and he could only identify savings of $5 billion, it sounds like Tony Abbott is promising tax cuts ahead of a budget surplus. But, of course, no-one expects the austerity to end there. As Ian McAuley wrote in NM yesterday, “Abbott's promise to cut taxes, increase spending and balance the budget just doesn’t make sense, unless, as is likely, there are yet-to-be-disclosed savage cuts”.

Given the dismal record of austerity in Europe, the UK and the United States in recent years, where deep cuts to public spending have only worsened the economic malaise, it's a little worrying that an incoming Abbott government seems fairly transparently committed to similar failed policies here. But, should the Coalition win government on 14 September, big cuts to federal government services seem inevitable.

Some aspects of federal spending are indeed wasteful and unnecessary. On the other hand, which parts of the government you most hate tend to depend on where you're placed on the political spectrum. For leftists, vastly expensive weapons boondoggles like the Joint Strike Fighter spring to mind. For the libertarian right, it's overseas aid, arts grants and the ABC.

Even so, Australian government spending is actually pretty low by international standards, generally in the bottom quarter of the OECD, depending on how you measure it. In return for this small government, Australians receive world-class education and health-care, as well as a tightly targeted social safety net that actually contains very little of that dreaded extravagance, “middle-class welfare”.

Indeed, one of the more high-profile examples of middle-class welfare, the baby bonus, appears to be doomed, after opinion polls showed voters welcomed Labor's decision to phase it out in favour of less generous family tax benefit payments. The Coalition has also signalled it will abolish the payment.

The baby bonus was first introduced by Peter Costello in the later years of the Howard government, and it now looks like one of the best examples of the fiscal profligacy of the mid-2000s, when Commonwealth coffers bulged with money and the Coalition could deliver tax cut after tax cut, year after year, all while returning healthy surpluses. Now, in more straitened times, the major party consensus is that we can't afford it.

That's demonstrably untrue. Australia is one of the richest nations in the world, and if we want to shower new families with money, we can clearly do so. Indeed, that is exactly what Tony Abbott proposes to do, in the form of his amazingly-generous paid maternity leave plan, which will see women earning $150,000 receive as much as $75,000 from taxpayers, paid for by a great big new tax on the nation's biggest companies. I would have thought that scheme would have been the first to go, if we really were in a “budget emergency”.

The truth is, as Tim Colebatch argued today, Australia's deficit and debt debate is almost completely disconnected from reality. Australia does face important economic challenges, but they have nothing to do with our tiny deficit and negligible government debt. Australia can pay its bills, as our triple-A rated government bonds attest. What's really required for long term fiscal sustainability is a modest increase in tax rates, particularly on high-income individuals, as well as productivity-enhancing tax reform. Abbott has at least gestured in that direction with a promise for another go at tax reform mid-way into a hypothetical first term.

If we turn from the budget to the broader economy, the big challenges are about raising the nation's productivity. On this topic, the Coalition has very little to say. What policies it does have might even be harmful. As Anne Summers has recently argued, Abbott's maternity leave scheme, which will still force working mothers to choose between returning to work or spending lots of money on childcare, will do far less to raise productivity than better and more affordable childcare.

Similarly, abandoning Gonski will be fine for the private schools that educate the children of the elites, such as Christopher Pyne's three kids. But the real low-hanging fruit comes by dragging up Australia's worst-performing schools to the levels of their more affluent peers. This would make a big difference to living standards long-term. The Coalition is throwing away a generational chance at schools reform.

Abbott's carbon policies are equally counter-productive. Australia has one of the most fossil-fuel intensive economies in the rich world. Right now, that's driving tax revenues and economic wealth, even if the benefits are largely accruing to foreign corporations, mining billionaires, and a relatively small section of the workforce. But in the years and decades to come, this fossil fuel wealth represents a huge economic vulnerability, as the looming crisis of climate change drives away countries that currently buy our coal, gas and iron ore. China, as Ross Garnaut has been telling us, is already well on its way to a much less carbon-intensive economy. That's going to have a big impact on Australia's resources sector, but seems to be little understood in our business community, let alone among Coalition politicians.

All the more reason, then, to embrace Australia's carbon price, a policy which Abbott was committed to as part of John Howard's 2007 election platform. The best way to understand carbon pricing is not as a way to rapidly reduce carbon emissions – rapid retirement of coal-fired electricity generation would do that more quickly – but rather as an economic policy to prepare Australia for an increasingly decarbonised world. Abbott's direct action policy will abandon that, creating further uncertainty in the resources and renewable energy sectors. It's undoubtedly the Coalition's worst economic policy.

Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.