War. What Is It Good For? Distracting From a Budget Emergency!

Nothing illustrates the rather skewed playing field that our politicians play on than the weird optics of budget emergencies.

When Labor was in office, the budget’s bottom line often blew out. The causes were generally over-optimistic budget projections and disappointing tax revenues, but the government took the blame.

Every time the budget deteriorated, the media and a rabid Coalition opposition leapt on it. In 2013, for instance, after Wayne Swan brought down his sixth and final budget, Tony Abbott declared that Australia had a “budget emergency”.

So it’s strange that, in government, the Coalition’s fiscal performance has largely been ignored.

And yet, we still have a budget deficit. Indeed, we have a bigger budget deficit than when Tony Abbott rang the alarm about a budget emergency. We also have a bigger budget deficit than when the Coalition took office.

The bad news was revealed by Treasurer Joe Hockey on Thursday last week, when, rather conveniently, the rest of the nation’s media was transfixed by the twin spectres of war and terrorism.

The release of the 2013-2014 final budget outcome uncovered a $48.5 billion deficit, or $18 billion more than the $30 billion deficit the Coalition inherited on taking office.

Wholly predictably, Hockey blamed Labor.

“The Government inherited a shambles of a Budget, a weakening economy and rising unemployment,” he said in a media statement. “Off the back of a weaker economy, receipts had to be written down further to a more accurate number in the 2013-14 MYEFO, and have since broadly stabilised.”

Hockey is right that Labor left the government with a budget deficit. The Pre-Election Fiscal and Economic Outlook (PEFO) has the figures in black and white.

But Hockey is wrong when he blames Labor for the deterioration in the budget since he became Treasurer. Most of the blowout has occurred since September, under his watch.

Let’s do the maths. The PEFO forecast a budget deficit of $30.1 billion in underlying cash terms. Now that the final figures have come in, the true figure is $48.5 billion. Joe Hockey has presided over an $18.4 billion deterioration, in just nine months.

Why did the deficit increase? In the main, because of decisions taken by the government. The biggest ticket item was the perplexing $8.8 billion given by the government to the Reserve Bank, to shore up its cash reserves.

We still don’t have an adequate explanation for this decision. Hockey said the money was a special top-up to rebuild the Reserve Bank’s foreign exchange buffer fund. Reserve Bank Governor Glenn Stevens said something rather different: that, while the Bank wanted to recharge the fund over time, it didn’t need to replenish it all at once. According to Stevens, “the effect of this is that instead of it taking many years to rebuild the capital, it will occur in the current year.” As a result, Hockey can raid this fund in future budgets if he wants – for instance in an election year.

The government has taken other decisions that have blown out the budget bottom line. Immediately after taking office, it abandoned nearly $3 billion worth of Labor’s savings measures, which had been budgeted for, but not yet legislated. The government explained this as “removing uncertainty”, but it also removed $2.9 billion of revenue. The government also committed to extra spending: $995 million in infrastructure, for instance.

Bigger hits are still to come. The government has abolished the carbon tax, worth at least seven billion over the forward estimates. It has abolished the Mineral Resource Rent Tax, worth hundreds of millions this year and billions down the track. It wants to spend up on a gold-plated Paid Parental Leave scheme, commit Australia to a huge increase in defence spending, and spend billions more on infrastructure.

As we discovered in the May budget, Hockey plans to pay for all of this by slashing health, education and welfare spending, especially for Australia’s poorest and most vulnerable.

Even so, the numbers don’t really add up. At 25.6 per cent of GDP, government spending this year is higher than every year of the Labor government except 2009-10, the year when most of the stimulus spending was accounted for.

As we argued back in May, the government hasn’t slashed spending much overall, but has instead redistributed it upwards, away from poorer Australians in the form of welfare benefits and social services, and towards corporate Australia in the form of tax cuts and increased spending on the things the Coalition likes.

Does any of this matter? Economically, no. Australia’s budget is in robust health, and while a figure of $48 billion looks like a lot of money, in the broader scheme of things, Australia has a small and manageable deficit.

In the medium term, Australia will have to make some hard decisions about what sort of society we want to live in. If we want to keep the sort of Australia we’ve become accustomed to – one in which the sick can visit a doctor and the poor can access a minimal level of income support – we will have to pay higher taxes. We can’t support our current social safety net – already badly fraying – while taxing at only 22.7 per cent of GDP.

The good news is that we can pay more tax without major pain. No-one thinks of the Howard government as a high taxing government, but in fact it collected revenues of 25 per cent of GDP for the entire 2000s.

Much of this was a windfall in company tax receipts, but even so, it underlines the reality that the current deficit is a result of low revenues, not high spending. Given the huge political benefits that Peter Costello enjoyed delivering surpluses off the back of healthy company tax receipts, you’d think that Joe Hockey would be doing his utmost to get all the corporate taxes he can.

Instead, Hockey is committed to cutting corporate taxes, and has done little to address the loopholes that allow many corporations to minimise taxes and shift profits offshore.

According to the Tax Justice Network, one third of Australia’s top 200 companies pay less than 10 per cent in corporate tax. Some big companies, like Westfield and James Hardie, pay nothing. And the worst culprit for using shady havens and creative accounting? None other than Rupert Murdoch’s 21st Century Fox.

What has the Coalition done about corporate tax dodging? Not much. On taking office, it announced it would abandon some of Labor’s measures to stop corporate tax avoidance. For instance, Labor wanted to kill off section 25-90 of the Income Tax Assessment Act, which would have cracked down on so-called “thin capitalisation”. Under pressure from the big end of town, Hockey backed down on that and other measures; the total impact was a revenue hit of more than $1.1 billion. He has slashed thousands of jobs from the Australian Tax Office.

As Labor’s Andrew Leigh noted yesterday, the government is telling young unemployed people they can’t access Newstart for six months, at the same time it has abolished the carbon and mining taxes and left open loopholes like thin capitalisation.

“Instead of continuing to push his unfair budget measures,” Leigh told New Matilda, “Joe Hockey should be directing his efforts to closing tax loopholes and delivering the OECD’s agenda on tax evasion.”

“His failure to take action on these things shows that the Treasurer doesn’t really care about making big companies pay their fair share.”

So with tight economic times ahead, one question remains: how are we going to pay for this war?