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May 7, 2014

OECD points to sensible fiscal policy, not 'budget crisis'

New data from the OECD shows that Joe Hockey's supposed "budget crisis" is a lot of hooey, write Bernard Keane and Glenn Dyer.

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Despite the “don’t cut hard” headlines, the message from the OECD’s Economic Outlook, published overnight, is positive for the Australian economy, and once again demonstrates how Treasurer Joe Hockey’s “budget crisis” is a myth.

In particular, the Organisation for Economic Co-operation and Development sees the economy in a considerably healthier state than Hockey tried to portray in December, when he released the Mid-Year Economic and Fiscal Outlook. The OECD forecasts 2.6% growth in calendar year 2014 and 2.9% in calendar 2015. That’s far closer to the forecasts made independently of any politicians by the Departments of Treasury and Finance in the Pre-election Fiscal and Economic Outlook document, prepared in August last year, than MYEFO: PEFO had growth at 2.5% for 2013-14 and 3% for 2014-15, but Hockey downgraded that to 2.5% and 2.5% in MYEFO, which along with his big downward revisions to nominal GDP, substantially increased the forecast budget deficit for next year. The September and December quarter GDP numbers, in fact, suggest the economy is travelling much closer to 3% than 2.5%, which might explain why, as at February, the budget deficit was tracking $3 billion below expectations for the first eight months of the year.

The OECD sticks to the official government story on the budget deficit, reflecting the fact that its forecasts are based on consultation with Treasury. Even so, it forecasts a significant fall in the budget deficit in fiscal balance terms from -2.5% this year to -1.4% in calendar 2015, which is about the average of the MYEFO forecasts for the relevant fiscal years. But that is still less than half the average fiscal balance deficit of the OECD, 3.2%, in 2015 — despite the OECD predicting that growth in developed countries will lift significantly next year.

And by the way, despite its consultations with Treasury, the OECD showed an interesting and unusual degree of independence when it pointed that Hockey’s decision to hand $8.8 billion dollars to the Reserve Bank to help the RBA boost up its reserve fund has contributed to the projected budget deficit (and the total federal government debt, of course). That’s the sort of independent analysis you don’t mind seeing from groups like the OECD.

And while the government mulls a debt levy and whether to incur the political damage of breaking a promise to support a tax rise that will be defeated in the Senate and not deliver a cent in extra revenue, other actions by Joe Hockey continue to confound the “budget crisis” line. We’ve repeatedly pointed out that any fiscal “crisis” is being made considerably worse by Hockey dumping the mining tax, the carbon price and Labor’s proposed tax on high superannuant incomes and its closure of the novated lease loophole. But last week the government was trying, amid the messaging carnage of the deficit levy and the Commission of Audit, to flog the line that the proceeds of asset sales could be directed to Tony Abbott’s quest to be “the Infrastructure Prime Minister” (as if little children decades hence will, upon hearing Abbott’s name, turn and nod to each other: “he was the Infrastructure Prime Minister”.) If there’s a real budget crisis, the proceeds of asset sales would go straight to paying down the debt Hockey seeks to portray as out of control thanks to Labor’s profligacy.

“If you want to see an example of how that works in reality, look at public housing construction.”

It was on infrastructure, by the way, that Tony Shepherd’s Commission of Audit displayed the sort of good sense that was entirely absent from the rest of that document, in effect saying the Commonwealth’s role should be limited to funding projects that would yield considerable benefits but would not otherwise go ahead, and that user pays should be fundamental to infrastructure financing, including not just building new roads, but user pricing for all vehicles everywhere. Bravo, Tony and Co. — pity no politician will touch that.

But at this point the only serious threat to the economy is if a clumsy government manages to so scare consumers with its talk about “crises”, higher taxes, lower spending and the need for self-sacrifice that they panic and stop spending, undermining the return to trend growth that should occur over the next nine months — which we may have begun to see in the March retail sales data, out this morning, which show sales were flat after a strong start to the year. And as the OECD points out, there’s a real risk of the government overplaying its hand on short-term budget cuts. The key to understanding that warning is what the RBA has been saying repeatedly, and which Glenn Stevens said yet again yesterday after the board decision to leave rates on hold: public spending is already flatlining and thus likely to have an effect on growth. A big round of budget cuts will be on top of already low levels of public demand.

If you want to see an example of how that works in reality, look at public housing construction. State governments are supposed to fund some level of public housing — indeed, the demand for that is greater than ever given housing affordability is once again becoming in problem in Sydney and Melbourne. But after the Rudd government’s GFC-era social housing investment, which temporarily significantly lifted the level of public housing being built around the country, the states and NSW and Victoria in particular slashed their own levels of public housing investment and have refused to lift it since then: building approval data released by the ABS on Monday showed in the last nine months NSW had spent some of its lowest levels on public housing ever recorded, while nationally in recent months public housing spending has sometimes plunged to one-tenth of the levels seen during Rudd’s social housing program. That means the construction industry — one of our biggest employers, and one of the sectors expected to do the heavy lifting for the economy as the mining boom fades in the rear-view mirror — has had to rely ever more on private activity.

With any luck, Hockey will be sensible next Tuesday — long-term cuts in areas such as super tax concessions and middle-class welfare, and maybe the restoration of fuel excise indexation — the sort of measures that will generate billions over time, but have a limited impact in the short term. As the OECD shows, there’s no need for panic.

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