Just how bad are Australia’s money problems? The Coalition's answer to that question tells us a lot about the politics we'll see over the coming year.
This week’s release of the government’s Mid-Year Economic and Fiscal Outlook (MYEFO) is a taste of things to come. A few months after coming to office, the government has discovered (some would say engineered) a huge blow-out in the federal budget deficit. The deficit, which was $18 billion in May and $30 billion in the pre-election budget statement, has now reached $47 billion.
Some of the deterioration is due to falling commodity prices and a softer economy, but plenty is due to tax and spending decisions made by the government since coming to office. Nearly $9 billion was given to the Reserve Bank in a one-off hand out, and a raft of Labor’s planned tax increases have been abandoned. Most notably, the carbon tax is no longer budgeted for. That decision alone wipes $13 billion from the forward estimates.
Is a budget deficit of $47 billion a terrible thing for the nation? The bald figure certainly looks bad, summoning up images of insolvent Mediterranean states.
Joe Hockey is certainly pushing those buttons. “Unless we pull back on government spending then Australia is going to face some very, very hard times,” Hockey told Channel 7 this week. “The worst thing we can possibly do is leave our children a lesser quality of life than that which we have inherited. That is what we are going to end up doing unless we take immediate action.”
$47 billion is only 3 per cent of Australia’s roughly $1.5 trillion economy. Expressed in these terms, it’s a small deficit on any international or historic comparison. Foreign bond-holders can’t get enough of Australian government debt. They love the deficit, which allows them to invest in AAA rated Australian sovereign bonds.
Like most rich economies, the Australian government normally runs a deficit during economic downturns. Failing businesses and higher unemployment cause revenues to fall; responsible governments normally hold spending steady in order to pump money into the economy. This is exactly what the Rudd government did in 2008-9.
It’s also normal for revenues to take a few years to recover. And so it has been this time: Australia’s revenues have climbed back slowly from their bottom during the global financial crisis. Companies that ran up huge tax losses wrote those losses forward, giving them buffers against paying tax in future years.
Income tax is also recovering slowly, in part due to big tax cuts given away at the end of the Howard years. In the 2007 election campaign, for instance, John Howard promised huge income tax cuts totalling $34 billion. Labor under Kevin Rudd decided to match 90 over cent of these, or around $31 billion, to neutralise tax as an election issue. When these tax cuts were duly delivered in Wayne Swan’s first two budgets, income tax revenues were permanently lowered.
Labor did move to raise extra revenues in office, mainly from mining and resource companies. The two key measures were the mining tax and carbon permits. As we know, those measures were rounded on by big business and the Coalition, and became serious electoral disadvantages. The Coalition plans to scrap the new taxes.
As a result, Australia has a revenue shortfall. Under John Howard, tax receipts regularly surged above 25 per cent of GDP. The GFC punched a hole in revenues. In 2010-11, they fell to 21.9 per cent. In the MYEFO, they are still only at 24.0 per cent.
What about the spending side? Actually, government spending has stayed pretty constant as a percentage of the economy. You wouldn’t know it from the way the media has reported Hockey’s doom and gloom, but government spending under Labor was restrained. Federal government spending in Labor’s last full year in office, 2012-13, was 24.1 per cent of GDP. That’s exactly the same as government spending in the latter years of John Howard: 24.1 per cent in 2004-05 and 2005-06.
In other words, Joe Hockey is dead wrong. Even when compared to the Howard government, the budget woes are not the result of too much spending. They are because of too few taxes.
Raising taxes – or even allowing them to return to 2005 levels – is not a comfortable choice for the Abbott government. Smaller government is the heart of conservative ideology. Hence, a manufactured budget crisis will be used to slash government spending for entirely political purposes.
It’s no coincidence that, after a dismal start to its first term, the Abbott government has seemed more confident and assured this week. Debts and deficits are much more favourable political terrain for the Coalition than schools funding or foreign affairs. A giant scare campaign on debts and deficits allows Hockey to demonise Labor for its poor economic management, while pleasing the Coalition’s base, who want lower taxes and less spending.
Hockey is making no secret of this. On 8 November, for example, the Treasurer gave a keynote speech to the right wing think tank, the Centre for Independent Studies. In a wide-ranging address he homed in on Australia’s fiscal challenges as an excuse to reduce the size of government.
Praising the centre's campaign to reduce government spending, he told the assembled tinfoil hat wearers that he shared “the same ultimate goal of restraining government's share of the economy so that the private sector has room to grow.” You can’t get much clearer than that.
We’ll see a lot more of this in the new year, with the Commission of Audit due to report before the May budget. The false crisis of the budget deficit is being used as a softening up tactic to ready Australia for a horror budget. Get ready for austerity in 2014.
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