Budget Preview - What’s the state of play?
After the political stalemate surrounding first budget of the Abbott Coalition Government in 2014, Treasurer Joe Hockey has to chart a new course. Last year, both Treasurer Hockey and the Prime Minister said they had to make ‘hard decisions’ with some ‘tough measures’ due to the ‘budget crisis’ or ‘debt crisis’ they said they had bequeathed from their predecessors. But now after the ‘near death’ experience of the Prime Minister in surviving the February spill motion, the Government has said it has to bring down a ‘fairer budget’. The Prime Minister said after the spill that “Good government begins today” so this it better be a good budget or at least one they can get through the Senate as technically the 2014 budget never passed the upper chamber. Joe Hockey doesn’t want to be like Jim Cairns – a Treasurer who never passed a budget – although Jim’s distractions were of a different nature to Joe’s.
End of the surplus fetish?
In the lead up to the 2014 Budget, the Government has used the commission of audit’s report in the lead up to the budget to leave the perception that there was a ‘budget crisis’, or ‘debt crisis’. They also said that hard measures were needed in expenditure to get the budget ‘back to surplus’ as though that is the main goal of economic policy. But like former Treasurer Wayne Swan who also foolishly made a surplus commitment, Joe Hockey has leant the same lesson about the difficulty of making such a pledge when tax revenues are falling as the commodity prices fall off their peak historic highs. In fact Prime Minister Abbott has also back off on some of last year’s claims, even making the point that Australia’s debt levels are ‘reasonable’ particularly when international comparisons are made.
In fact the whole ‘surplus fetish’ debate has been unhelpful in the budget context. There’s no credible economic rationale to achieve a surplus at all times at whatever cost, and it can be found to be counterproductive as the austerity advocates found out in the UK and the rest of the northern hemisphere. Fortunately, the Government has learnt the lesson of the former Treasurer Wayne Swan who got sucked into promising a budget surplus when it was neither possible nor desirable. The (then) Opposition and the media made a big deal of it, whilst realising that it was a confusion of ends and means. It makes sense for a Government to spend to avoid a recession (and in 2008 Swan faced a big one, the Global Financial Crisis, GFC), but then to pull back when times improve depending on the state of employment and economic activity. The important thing is that employment and living standards improve over time and you adjust the budget to allow the economy to achieve this. A government is not like an individual household, it has to provide infrastructure, defence, education and healthcare (known as ‘public goods’) that an individual household or firm would struggle to provide on their own. And furthermore, as the famous British economist Roy Harrod found, if the economy is not static or a steady state, and is growing (as the Australian economy has been for over two decades) then it makes sense for governments to undertake investment in necessary infrastructure in the provision of public goods (particularly at such low interest rates). The public does want governments to invest in productive public infrastructure, as was demonstrated at the recent NSW election.
Dead buried and cremated – Vale the GP levy?
There’s one constant in modern Australian politics – Australians love their universal health system Medicare. Efforts to tinker with its universality make Governments hit the rocks quickly. Who could forget an attempt by then Deputy Prime Minister and Health Minister Brian Howe to bring in a $10 co-payment for a GP visit when he was trying to stave off a challenge to then Prime Minister Bob Hawke by Paul Keating? Brian not only had to drop it like a hot potato, but then he accidentally walked into a broom closet after a press conference! In 1996, Opposition Leader John Howard had to pledge loyalty to retaining Medicare as if he was a life-long social democrat, after Dr John Hewson’s Fightback! package placed doubt about his commitment to Medicare. Howard made the commitment and won the election to become Prime Minister. Now we have the most recent tinkering, a proposed the $7 co-payment to visit a doctor, which has now been scrapped by the new(ish) Health Minister Susan Ley. Even the sweetener to provide the revenue raised by the co-payment to a Medical research future fund wasn’t enough to save the co-payment. This was an attractive policy given Australia’s great international reputation in medical research, but I would imagine some economists would see it as a huge industry subsidy to one sector, but better than a subsidy to price gouging private health insurance companies via the private health insurance rebate (part of the age of entitlement that needs to be brought to an end?).
Time for Tax
Tax reform is the hope of a first-best world, but as economists know we live in a world of second best. In last year’s budget one reason the Government passed on the burden of financing education to the states, was because they didn’t want to raise the GST rate in their first term. The idea was that the states would squeal so much the pips squeak (they did) and will call for “new arrangements” (i.e. a GST increase) and cop the blame.
But now a GST increase is on the table, not for this term but maybe the next, there is talk of a bank deposit tax (previously rules out) and a different mix of rates between income and corporate tax. There is a view that Australia needs to reduce Corporate tax rates to more internationally competitive rates or Australia will rely too much on income tax and also the GST. By taxing capital at lower rates, the arguments more revenue will be raised and more jobs created that will make up for the revenue foregone from lowering of the rate. Of course, getting capital off shore to pay tax at all is a challenge, hence the calls for more international co-operation to get Google, Microsoft and (even Bono and U2!) to pay some tax.
Talking about my Inter Generation
Intergeneration reports serve different purposes by different governments. When Peter Costello was Treasurer his report talked about the three ‘p’s productivity, population, participation, whilst Kevin Rudd and Wayne Swan used there’s to talk about climate change “the greatest moral challenge of our time” before Kevin quickly dropped almost in the next blink of an eye to go “fix our hospitals”. This Government has their own intergeneration report and they have used it to start a conversation about Australian in the long run envisaging what Australia may look like in 2055. They also use the three ‘p’s’ framework don’t talk so much about climate change but think of the demographic challenges facing Australia as our population ages towards 2055 but still requires superannuation income, health care and related services. One issue is the ‘problem’ of the ageing population but perhaps it could be expressed as ‘the asset of wisdom’ given the human capital benefits of experience that accrue to an economy. Another will be the future of higher education after the collapse of the Government’s universities deregulation bill and the withdrawal of Universities Australia support (a compromise may be in the offing where the Group of Eight Unis may be able to charge fees as a first step). But overall, the main use of the Inter generation report will provide some context for the framing of the budget which will allow the 2015 budget to be seen as ‘kinder and gentler” after last year’s effort that had the ill-fated commission of audit report set the scene.
Competition is good for you – but not me
On top of tax reform and the Intergeneration report is the neither small nor non-contentious Competition review produced by Professor Ian Harper. Some of the issues – like allowing big supermarkets and 7-11s to essentially become pharmacies will create some brawls, and like the Murray Review into the financial system, the Harper review will be a good test of the Government’s reform credentials – whether they are on the sides of consumers or rent seekers.
Next steps in The Asian Century? FTAs, Aid and the TPP
Despite the difficulties of selling last year’s budget and the woes is created for the Prime Minster and Treasurer, on the diplomatic front the Government has fared better. Trade and Investment Minister Andrew Robb, now has three free trade agreements (FTAs) with South Korea, Japan and now the big one, China under his betel and has had a few wins at the cabinet table too like getting Australia’s backing for China’s Asia Investment Infrastructure Bank too. He’ll find selling the Trans Pacific Partnership harder going through for fears from trade economists that its trade distorting and from community groups about the Investor State dispute settlement (ISDS) clauses. Foreign Minister Julie Bishop’s standing in cabinet and amongst the community will save the foreign aid budget from harsh cuts, and whilst Australia’s aid agency AusAid was folded into the Department of Foreign Affairs and Trade (DFAT) last year, Andrew Robb may postpone or cancel similar plans for Austrade.
The bottom line?
Last year’s budget was a train wreck but the Government has that valuable political commodity, time on its side to frame this budget and potentially another before facing the 2016 election. The spill and political atmospherics of early 2015 can change so there’s plenty of time to learn from past mistakes. The Senate cross bench has to decide whether to negotiate or block, whilst the Opposition will hold off on framing and presenting their alternatives until at least after mid-2015. The main challenge for the government is to get the atmospherics right, and regain the initiative using the advantages of incumbency and the main hope for the Treasurer will be an improvement in business confidence and no deterioration in the labour market over the rest if 2015.
*Tim Harcourt is the J.W.Nevile Fellow in Economics at the UNSW Business School in Sydney and author-host of The Airport Economist and Trading Places www.theairporteconomist.com