BEN ELTHAM: A Glass Half Full Budget, But Full Of What?

Joe Hockey strode to the lectern at the media conference for his second budget looking calm, relaxed – even relieved. The stress of the past weeks was behind him. The budget papers were out. All that remained was for the Treasurer to bat away some media questions, and deliver his parliamentary speech.

Why was he looking so confident? What was there in this budget to be so pleased about?

The answer: there was nothing. And that’s kind of appropriate. For this was a do-nothing budget.

There was nothing in the way of nasty surprises. No stern lectures on the end of the end of the age of entitlement. No scary benefits cuts, or radical changes to social policy. No big tax rises, either. Almost no new capital investment. Very little new spending of any kind.

Most of all, there were no new announcements. Almost everything in tonight’s budget was old news: either previously announced or strategically leaked in recent weeks.

There were some extra details. The families package that ran into such trouble over the weekend is in the budget, as are the promised tax cuts for small business, the tweaks to pension eligibility for the very wealthy, and yet more spending on national security and spies.

But that’s about it. About the only surprise of the entire budget was the backflip on the policy of denying dole for the under-30s, which has morphed into a new jobs program that will apply only to under-25 year olds, and only for four weeks. Because the unemployment rate is still going up, the measure will actually cost the government money.

There is, of course, a deficit. The budget is $41 billion in the red for the 2014-15 year, which is a bigger deficit than the one Labor left Hockey in September 2013. And the forecast deficit is $35 billion for 2015-16, falling to $7 billion by 2018-19. It’s both a slower and more expensive return to surplus than Labor’s planned trajectory on leaving office.

Just like its predecessor, this government too predicts the budget surplus will one day reappear. Joe Hockey claims the mythical return of the surplus will finally occur in 2019-20 – but of course we’ve heard such promises before.

In fact, the return to surplus is proceeding rather gradually. Perhaps that’s appropriate, given the weakness of the economy. Importantly, mild austerity is still in the pipeline. The average pace of consolidation is 0.5 per cent of GDP, which is significant in an economy that the Reserve Bank has recently decided required two interest rate cuts.

The government calls it a “steady and credible trajectory”, but another word for it is cautious. If you turn to the economic outlook painted by the Treasury in Budget Paper 1, you can see just why that caution is justified. Whatever the spin, the hard figures show that the economy remains subdued.

Unemployment is predicted to keep rising this year, peaking at 6 and half per cent. It will stay above 6 per cent until 2018-19. That’s not a boom, in anyone’s language.

With so many workers still sitting idle, it’s not surprising that wages will stay contained, growing at just 2 and a half per cent through 2016-17. Inflation will also be contained, staying well below 3 per cent throughout that period.

In fact, another way of reading the budget papers is to say that the economy is weak, and not likely to get stronger any time soon. As we know, the Chinese economy is slowing. China is forecast by this budget to slow to 6.25 per cent by 2017. Japan remains economically stagnant, Europe barely better. The US economy is a bright spot, as is India. But will these economies be enough to drive Australian growth?

If we turn to the domestic economy, the picture remains uncertain. The budget papers claim the outlook “remains positive”, driven by lower petrol and electricity prices, record low interest rates, expanding housing construction and a lower Australian dollar driving exports. The Treasury thinks dwelling investment will be above 6 per cent in 2015-16. Household consumption has also perked up lately, growing at its fastest rate in nearly three years in the December quarter.

But read deeper, and there are plenty of concerns. What if the property bubble currently inflating Sydney house prices suddenly bursts? Or what if consumers fail to spend their windfall gains? The budget papers say that “the extent to which the household saving ratio will fall to support consumption growth is a key risk surrounding this outlook.” Indeed, the budget warns that “if demand and confidence fail to lift, there is a risk that the recovery in non-mining business investment could be further delayed.”

All up, it’s a budget forecast that needs plenty of things to go right if the economy is to keep growing. Even if everything goes to plan, the mining boom is still unwinding, unemployment will stay elevated and wages growth will be constrained. That’s a recipe for a stop-start recovery. It won’t feel like a boom. In fact, for many parts of regional and outer urban Australia, the economy will seem pretty somber.

In such an economy, traditional macroeconomics would suggest that a modest and immediate stimulus would be beneficial, particularly if it put money in the pockets of consumers, and boosted business confidence in the short term.

But the budget contains no meaningful stimulus, beyond a small business package that gives an instant depreciation write-off for businesses spending up to $20,000 on a new investment.

Ironically, this was the very measure that Hockey abolished in last year’s budget (it was originally a policy brought in by Wayne Swan). Now the instant asset write-off is back, as the centerpiece of the government’s “jobs and small business package.”

On the face of it, a write-off on new investment should encourage small businesses to spend. Budgeted at just $1.8 billion over the forward estimates, it will certainly be welcome by the small business lobby. There’s an additional $3.3 billion in small business tax cuts. Even so the total adds up to just a billion or so in extra stimulus a year. That’s not likely to be enough to kick-start non-mining investment.

The other classic way to stimulate a weak economy is by capital investment. This is traditionally what governments do best: investing in productive capacity in times when the economy is weak, so as to raise economic growth in the medium to long term.

But there is essentially no new capital investment in this budget. Just $2.1 billion has been allocated from Hockey’s vastly over-rated Asset Recycling Fund to spend on infrastructure. Indeed, the Asset Recycling Fund is actually getting bigger, as the government tips in the proceeds of the sale of Medibank, without spending the funds on capital infrastructure. In a telling commentary on the government’s priorities, one of the few capital measures in Budget Paper 2 is the $99 million committed to the new Sir John Monash Centre, a World War 1 museum in France.

In his media conference today, Hockey claimed that the document “balances the challenges of the current economy.” The Treasurer painted a rosy picture of a “glass half full.” Housing investment, the low Aussie dollar and low interest rates would encourage consumers, he argued. Hockey urged small business in particular to “have a go.”

In a companion article, New Matilda outlines the major budget measures by portfolio. The detail is important, but the overall settings are a wash. With few new spends and few new savings measures, the budget is largely on auto-pilot.

Look at the budget aggregates and you can see that spending remains above the level bequeathed by Labor. Revenue is also up, again above the levels that Wayne Swan enjoyed. The end result is a small deficit by international comparisons, with spending and tax redistributed according to different priorities.

Fiscal policy is neutral, at a time when the Reserve Bank is cutting interest rates to record lows.

So is this really an austerity government? No, and it never has been.

If last year’s budget seemed austere for ordinary Australians, that’s because it didn’t so much cut government spending in total, as redirect it. Support was taken away from low- and middle-income earners, and given to big companies and wealthy individuals instead. That was the reason it was such an unfair budget, as both economic modeling and street-level perception confirmed.

Nothing in this budget does anything to arrest that unfairness. While some of the worst of last year’s budget measures have been abandoned – no dole for the under-30s, and the GP co-payments – the longer term redistribution in favour of the wealthy remains.

So, for instance, the government is still intending to deregulate the university system – Hockey again confirmed it in today’s media conference. The government also intends to press ahead with its regressive cuts to family benefits – indeed, it is counting on them to help pay for its families package. $80 billion in health and education funding cuts for the states and territories is still baked into the forward estimates, and Hockey confirmed that he is relying on these cuts for his “credible” return to eventual surplus.

Most importantly, this budget does nothing to address the real inequalities of Australia’s political economy, such as the vast subsidies for wealthy superannuants, the huge tax breaks for landlords and property investors, and the amazing levels of support given to big mining companies and greenhouse gas polluters.

In contrast, little is invested in future prosperity. Scientific research is cut, yet again, after last year’s bloodbath, and no attempt has been made to resolve the policy impasses that are crippling Australia’s university system and renewable energy industries.

Perhaps most importantly, the structural deficit remains. Australia is still not collecting enough revenue in the medium term to pay for the high-quality public services and capital investment we clearly need.

With unemployment up, growth anemic, and capital investment missing, this is hardly a good news budget (though I’m sure some of the conservative media will try and spin it as a success).

But if Hockey looked confident tonight, remember that he looked equally confident last year.

Is this really a “glass half-full”? Time will tell.