5 Aug 2013

Black Hole? What Budget Black Hole?

By Ian McAuley

Chris Bowen's economic statement revealed a revenue shortfall. So has he lost control of the economy? Hardly. Blame long-term policy settings and international uncertainty, writes Ian McAuley

The Treasurer’s Economic Statement has drawn a great deal of comment, little of which is enlightening.

The Opposition, true to form, has chosen emotion over substance. “Labor has lost control of the Budget” and “the Budget is in freefall”, Shadow Treasurer Joe Hockey announced on the ABC on Friday. Journalists who are too lazy to read the statement are talking about a $33 billion “black hole” that has opened up since the Commonwealth Budget was brought down in May.

OK – Treasury got it wrong, just as businesspeople and stockbrokers get it wrong.  Who, for example, could have predicted that the Australian dollar would go from parity with the US dollar on 14 May (the day the Budget was brought down) to 89 cents last Friday? Who could have predicted that China would suddenly move to a more conservative financial policy?

Treasury’s revisions have seen its estimates for receipts in this financial year fall by $8 billion, and its estimates for outlays rise by $4 billion. Receipts are down because GDP is forecast to grow less slowly. The Budget estimate was for 2.75 per cent real growth this year; last week’s economic statement brings that down to 2.50 per cent. The Budget is hit particularly hard by a fall in nominal GDP, from 3.25 per cent to 2.50 per cent. In other words, some of that revenue fall is simply a result of lower prices rather than any contraction in real activity.

And to put those figures into perspective, they are within a $350 billion Budget. Receipts have been revised by 2.2 per cent and outlays by 1.1 per cent – hardly a “freefall”. As a result the cash deficit for this year is now estimated to be 1.9 per cent of GDP, rather than 1.1 per cent of GDP as estimated in the Budget. If our Government has “lost control”, what does Hockey have to say about the USA, where the deficit is 4.5 per cent of GDP, the UK where it is 7.6 per cent of GDP, or Japan where it is 8.3 per cent of GDP? We are still doing well in tough times.

If Hockey really wanted to challenge the Government’s economic policies he could do far better than to nitpick about minor errors in its fiscal estimates. He would be addressing two of the Government’s basic economic policy shortcomings, which have been evident for some years and which are revealed once again in Friday’s statement. These are the obsession to balance the budget and the inadequacy of our taxation base. Hockey is like an accountant who, in his attention to the neatness of bookkeeping, fails to understand how the figures convey basic information about a company’s performance.

To start with the balanced budget obsession, what stands out in Friday’s statement is that the investment phase of the resources boom is over.  It had been expected to contract, but not so suddenly. The table below, taken from that statement, shows the severity of this contraction.

Bowen is right when he says that Australia is undergoing an “economic transition”. It’s a transition brought on by an external economic shock. We knew the party would end, but we didn’t expect the ending would be so abrupt.

The textbook response to such a shock, particularly when it comes from a downturn in business investment, is for the government to counter it with stimulatory measures.  We can pretty well bank on a further cut in interest rates, but monetary policy is slow to take effect, and as US experience shows, over-stimulation of the housing sector has severe consequences. The other side of a stimulus has to come from public spending, preferably public investment.

As the mining sector calls less on our construction and heavy engineering resources, those resources could be turned to providing much-needed public infrastructure, particularly in areas such as surface transport. The workers and machines now involved in earthmoving and tunnelling could be turned to building urban metro systems, interstate highways and railroads, and accelerating the National Broadband Network.

These projects are unlikely to be funded by the private sector, not because they are uneconomic, but because of problems of linking payments to benefits and because of spillover benefits. (“non-excludability”, “non-rivalry” and “network externalities” in the language of economists).

This is hardly a radical idea. It is standard counter-cyclical economics, and the same point is made in the “Action Plan for Enduring Prosperity” published last month by the Business Council of Australia.

If the Commonwealth were to make such investments, its plan for a balanced budget by 2016-17 (for which a razor-thin $4 billion cash surplus is forecast) would have to be abandoned.

Does it matter, if, as in any well-managed business, we borrow to fund productive assets?  Provided such projects have positive benefit-cost ratios, such investments would actually strengthen our national balance sheet.

Unfortunately, thanks to an accounting convention, most such expenditure would appear as “expenses” on the Commonwealth accounts, and as assets on the state accounts, because those assets would be under state ownership and control.  (The NBN is an exception, because for now it is a Commonwealth-owned asset.)  The effect would be a reported increase in the Commonwealth’s net debt, exactly offset by a decrease in state net debt – in other words no change in the nation’s net public debt.

Our present and past Treasurers shoulder much of the blame for letting a “balanced budget” become the main indicator of economic competence. But even more of the blame can be sheeted to the Coalition, which, with the support of the Murdoch media and the passive compliance of other media such as the ABC, has dumbed-down the debate on economic policy, and has wasted no opportunity to build on consumers’ and investors’ fears and to create business uncertainty.

A “strike of capital” would serve the Coalition well.  The Coalition’s recent announcement that it distrusts Treasury costings needs to be seen in this light – as an attempt to undermine international confidence in our public financial institutions, for nothing would suit them better than a downgrading of our Government’s AAA credit rating between now and the election on 7 September.

The other point an aspiring treasurer could make from the Opposition benches is that our taxation base is too weak to support our legitimate demand for public goods and services – education, health care, defence, infrastructure, social security – to name the main outlays.  Some of these services can be provided only by government, while others can be provided by the private sector, but only at a much higher cost, with higher administrative overheads, and with large leakages to the financial sector. Toll roads, private health insurance and privatised electricity and water utilities are expensive, inefficient and inequitable alternatives to public provision.

In a process that started with the Howard Government and continued with the present Government our public revenue base has been weakened through tax cuts and other concessions broadly classed as “middle class welfare”. To its credit, the Gillard Government wound back some of this waste, but it never engaged with the community on the need to increase our taxes, which are almost the lowest in the developed world. The Rudd Government has fared little better. (Even its modest clawback of a rort on company cars has evoked squeals of protest, the most recent being the absurd suggestion by the Motor Trades Association that it will result in our buying fewer cars.)

Rudd’s tax initiatives on tobacco, company cars and bank deposits are all, in themselves, responsible by any reasonable economic criteria, but they do not address the fundamental problem of strengthening our public revenue, particularly our personal and company taxes.

Is it possible in our democracy to have a serious discussion on tax? In this election campaign will Abbott and Hockey do better than the patronising drivel they have served us so far? Will Rudd and Bowen address the question of our long term tax base?  And will the mainstream media challenge our politicians when they lie, obfuscate or avoid hard issues?

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aaron
Posted Monday, August 5, 2013 - 20:32

Stop making excuses for treasury, their forecasts have been hopeless and much worse then those that have come from the private sector. Maybe  they should have listened to the many commentators who were saying loud and clear how unrealistic the forecasts were.

Next point I think we need to stop looking at Europe and the US and saying everything is okay because we are not doing as bad as them. Firstly just because we are not as bad as them does not mean our deficit is okay. Secondly the US and Europe have been going through terrible recessions we have not. Thanks to China and our Asia our economy has relatively strong. Imagine if this is our deficit when the economy is fairly healthy what it would be in a recession.

The main reason the budget is in such a bad way is not primarily external factors rather it is waste and excessive spending by Labor on unneeded stimulus and poorly implemented programs as well as policies which have impacted negatively economic growth and productivity such as FWA, the carbon tax and excessive regulation.

Higher taxes will not fix the problem, what will fix the problem is less government involvement/interference in the economy and lest spending on wasteful programs/welfare.

 

listohan
Posted Tuesday, August 6, 2013 - 16:49

Is it possible in our democracy to have a serious discussion on tax? Not during an election campaign when the news is dominated by stumbles in shopping centres. It is hard enough to have such a debate, much less start it then.

In this election campaign will Abbott and Hockey do better than the patronising drivel they have served us so far? Leopards? Spots?

Will Rudd and Bowen address the question of our long term tax base? Governments must learn to take their case to the public rather than bend to the force of each new advertising campaign. If you can't fix a tax rort for what it is, you are not fit to govern. They must address the question, whether elected or not. And putting the Costello stewardship in its true light is a starting point. When did this concept of "consulting" about taxes or the imposition of a tax being a "sovereign risk" arise?

And will the mainstream media challenge our politicians when they lie, obfuscate or avoid hard issues? MSM's grip must be declining as it becomes for overtly partisan. And it is to be hoped this is not wishful thinking. What do they teach kids in media studies these days?

GeorginaY
Posted Tuesday, August 6, 2013 - 21:52

This is really a very bug reason to worry leading economist are thinking about the feasible solution for this problem.

business broadband

bill hartigan
Posted Tuesday, August 6, 2013 - 23:29

Australia's Government debt must include both Commonwealth and State debt, given the intergrated nature of public finance.. This year that will amount to about $500 billion. Most of that debt has been incurred in recurrent expenditure. Most of it, as well, is not self funding, and must be paid for out of recurrent income now or later. This is accounting not ideology. Australia got through thr GFC despite, not because of, Labor.In the early years of Labor the revenues from mineral exports denied any economic down turn. Indeed the RBA's major concern was inflation, thus thevery high prime rates compared to the rest of the first world and the consequent increase in the value of the Australian dollar as capital inflows sought s profitable homes in this rich interest rate environment.. Labor, presumably, thought this would go on forever, and recurrent debt could be covered by eternally increasing revenue. It was a dreadful misadventure, and the progressive collapse of the tradeable sector was hidden by enormous growth in the non trafeable public sector, without the necessary m atching growth in Governments' revenue, revealing what is obvious- that sustainable growth in the non tradeable sector  is entirely dependant on growth in the tradeable sector.

What is clear to those who thought about the way public finance was mismanaged by Labor, was that borrowed money Governments threw in panic at the first sign of the GFC, should not have happened and interest rates and exchange rates should have been allowed to decline in line with what happened elsewhere, supporting the private tradeable sector. to maintain tax revenue. Rather Labor has got some million and a half public servants whose cost of employmen alone  is $ 150 billion. The recent financial Statement by the Treasurer, includes the recognition that the budget should return to surplus, reaching this objective byusing inflted revenue and employment numbers.

The level of Government debt is rising inexorably in the absence of corrective action by Governments, that will require increased taxation, and reductions in expenditure. No sign of this happening, so that the collapse of the economy continues, particularly in the private tradeable sector. The Opposition if it wins will have some very serios issues to deal with in addressing the issue of sustainable economy and no easy solutions.

imcauley
Posted Wednesday, August 7, 2013 - 08:30

Thanks, Bill, for your comment.

It's essentially the monetary vs fiscal policy argument, -- a perennial in economic policy.  What is the counterfactual?  I'm skeptical about monetary policy because it operates with such a lag.  But I do think that both the Howard and Rudd Governments should have been far more aware of the exchange rate risks to our economy. -- too tempting to offer low inflation, cheap imported cars and cheap overseas travel.

Regarding aggregate debt, I guess your figure of $500 billion to be about right. Unfortunately some years ago the ABS gave up producing figures on consolidated net debt (there are still figures on gross debt.)  The problems of asset valaution are just too hard. Perhaps some has gone to consumption, perhaps some to stranded assets, but I don't know, and I do know that on the other side some state assets are significantly undervalued -- many of the roads we drive on are written down to zero, for example.

The point I am stressing in this article, and others, is that arguing over the cosmetics of a "surplus/deficit" is fairly pointless.  There is far more to economic management, and, as in any economic enterprise, it's necessary to look at both sides of a balance sheet -- i.e. net debt rather than gross debt..