Sunday 22 December 2013

Emmerson: After panning Labor excess, Coalition launches $14bn spree

After panning Labor excess, Coalition launches $14bn spree

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MOST market analysts have concluded the Abbott government is deliberately pessimistic in its economic forecasts underlying the mid-year fiscal and economic outlook. Then, when the economy does better than forecast, the budget deficit will be better than expected and the government will claim the credit. But what if the economy does worse?
That's the distinct possibility considered by Ross Garnaut in his book Dog Days: After the Boom. Garnaut explained his thinking further in an Emmo Forum podcast with me, where he suggested that if the government did not make large savings through taxation and spending measures and the exchange rate remained overvalued, government debt would rise to about $700 million. The budget update forecasts gross debt of $667m, so Garnaut was on the money.
The budget is in trouble. The government and the opposition have a responsibility to repair it. Blaming the previous government for the budget deficits is a political strategy, not an economic one.
But here's the political problem blocking an economic solution: the Prime Minister must break promises if the budget is to be repaired. Only that way, Garnaut reasoned, might Australia be able to navigate a course through the end of the mining boom without recession.
When the Coalition declared a budget emergency in May, it pledged to set out its solution before the election. Its belated response just two days before the election left the budget bottom line virtually unchanged. Moreover, Tony Abbott repeatedly promised there would be no surprises and no excuses from his government. Yet the mid-year budget update is full of surprises and excuses.
It's all Labor's fault, Joe Hockey thundered at the National Press Club. Having argued that the Labor government didn't have a revenue problem, only a spending problem, the Treasurer announced further revenue downgrades that are responsible for more than 60 per cent of the deterioration in the budget position.
In response to this worsening outlook, the government will exacerbate the problem with $13.7 billion in new spending and revenue decisions made in just 100 days since the election. It also will proceed with repealing the mining tax, scrapping the reduced superannuation tax concessions for the wealthiest Australians and implementing an extravagant paid parental leave scheme. And the government will implement the promise that will do the most damage to the budget: scrapping the carbon price as a revenue source and substituting for it wasteful spending on its direct action policy. To achieve the promised 5 per cent reduction in carbon emissions by 2020, direct action will be horrendously expensive in the final three years to 2020.
The question is not if promises will be broken but which ones will be. This is where a government's ideology comes into play. By decisions such as the enhanced paid parental leave, rescinding the mining tax and restoring full superannuation tax concessions for the wealthy while reimposing a 15 per cent tax on the superannuation of the lowest income earners, the government is signalling it wants to support the high end while hitting those at the bottom.
When the Labor government pared back middle-class welfare the Coalition sought to block the savings. Hockey likened Labor's cuts to the Howard government's baby bonus for second and subsequent children to China's one-child policy. Abbott opposed reductions in family payments for high-income earners and the means testing of the private health insurance rebate, describing these payments as "tax justice".
Back in the mid-1980s, when commodity prices collapsed and Paul Keating warned of Australia becoming a banana republic, the Hawke government implemented the second largest spending cuts on record. But it knew the burden needed to be fairly shared, assuring the Australian people of "restraint with equity". The public reaction to the savings in the May 1987 economic statement was so favourable that Bob Hawke called an election for July and won with an increased majority.
Australia faces similar circumstances now, when the world is not paying us as much as it has been. Again we need to tighten our belts. But it must be done fairly. And the opposition needs to play its part instead of blocking the passage of its own 2013-14 budget measures.
At the same time the government cannot expect low-income earners to bear the brunt of the cuts while proceeding with an unaffordable paid parental leave scheme for high-income earners.
It would be to the shared credit of the Coalition and Labor to work together on budget repair.
If we are to avoid the dog days of recession that Garnaut fears, we must exercise restraint with equity.
If the Hawke government implemented the second largest spending cuts on record, which government made the biggest cuts? It was the Gillard government in the financial year just gone. So let's move beyond the blame game and show some rare but badly needed co-operation and fix the budget - fairly.

Craig Emerson is a former cabinet minister and was an economic adviser to prime minister Bob Hawke. He now runs his own economic consultancy,Craigemersoneconomics.com.

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