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Federal

Mar 20, 2012

Playing fiscal games when we no longer set the rules

All politicians now need to accept that we face significant fiscal challenges for years to come. Bernard Keane and Glenn Dyer report.

One might have thought, for a brief moment, the seriousness of Australia’s fiscal position finally started to sink in to the opposition.

Its refusal to countenance corporate tax cuts associated with the MRRT might reflect its slavish adherence to the interests of the miners, but it might also reflect an awareness that the whole MRRT package will — assuming commodity prices don’t reach new highs and stay there for several years — end up having a substantial cost to the budget, primarily due to the cost of the shift to 12% compulsory superannuation.

Following Treasury secretary Martin Parkinson’s speech on March 7, in which he said “with muted growth in tax receipts projected for much of the next decade, Australia will need significantly greater expenditure restraint in the decade ahead than was seen in the first half of the 2000s” the penny has started to drop that the massive structural adjustment inflicted on us by the Chinese Communist Party will have profound fiscal consequences as well, and nowhere near as positive as we expected.

We noted in January that the higher dollar would have a substantial impact on federal and state revenues.

That impact will be exacerbated by the extent to which over the past decade we have made the budget ever more reliant on corporate tax, and in particular banking and mining profits, which two years ago provided over 50% of corporate tax revenue.

The government is already dealing with the impacts of a high dollar on revenue as it searches for savings to keep next year’s budget in surplus. So are state governments, which are facing falls in property tax-based revenue and flat or falling GST revenues.

Oppositions, collectively, have yet to get the message that the fiscal world has changed and they need, if only for their own long-term good, to be a lot more honest with voters about what they can deliver. Those at the pointy end of the electoral cycle, like the LNP right now in Queensland, are having to accept that the easy calls of “no new taxes” can no longer safely be made.

Tony Abbott and Joe Hockey have been pretending that once they’re back in government, it’ll be like stepping into a time machine that will whisk Australia back to 2006, when John Howard was set to rule forever and Treasury couldn’t keep up with the rivers of revenue flowing in from the mining boom and ultra-low unemployment.

That that period was accompanied by fiscal profligacy and high interest rates is left unsaid, of course, but never mind.

Has the opposition’s refusal to countenance Labor’s corporate tax cut heralded a new era of fiscal responsibility in the Coalition? Alas, the opposition isn’t opposed to a corporate tax cut — it’s just opposed to the government’s corporate tax cut. Tony Abbott promises a “modest” corporate tax cut of his own. Given the government’s tax cut is modest enough already — 1% — the opposition’s tax cut is likely to be downright self-effacing.

Throw into this mix is the problem that too-aggressive-an-approach on savings is going to further undermine growth in the non-mining sector of the economy. State governments are already tightening their belts. An accelerated reduction in Commonwealth spending — beyond even the rapid drawdown currently budgeted for by Labor — will subtract further from growth.

Joe Hockey said recently that he wants monetary policy to do more of the heavy lifting if there’s a need for economic stimulus.

He’s not the only one. Monetary stimulus is back in fashion after our brief global flirtation with Keynesianism during the GFC. But it’s problematic in Australia, because so few of us lower our mortgage repayments when interest rates fall. RBA cuts deliver perhaps only a quarter to a third of the apparent effect. And now there’s the growing tendency of the banking oligopoly, exploiting its market dominance, to ignore the RBA anyway and jack up rates, or lower them by less than the RBA, under the pretence that they are obliged to by higher funding costs.

Quite where this leaves the “heavy lifting” that monetary policy can achieve isn’t clear, but it’s not certainly not the magic bullet some would have us believe.

In a speech in Hong Kong yesterday, Glenn Stevens touched on this point in making a broader observation about monetary policy

“Monetary policy can play a role in supporting demand, to the extent that inflation performance provides scope to do so. But monetary policy cannot raise the economy’s trend rate of growth. That lies in the realm of productivity-increasing behaviour at the enterprise, governmental and inter-governmental levels. Improving productivity growth is just about the sole source of improving living standards, once the terms of trade gain has been absorbed. This is increasingly being recognised in public discussion, but it is important we do more than just debate it.

“Nor can monetary policy obviate the pressure for the production side of the economy to change in response to altered relative prices. These changes in relative prices are essentially given to us by the world economy; they are not driven by any policy in Australia.”

Essentially given to us by the world economy; they are not driven by any policy in Australia. This is a key point missing in economic debate. Our politicians, and particularly those without the responsibility of office, insist that we have far more control over our circumstances than we do. It’s time for more honesty from politicians, especially those without the responsibility of office, to acknowledge this.

The only workable strategy to resolve the dilemma is to put in place long-term cuts to big-ticket budget items such as middle-class welfare and corporate tax expenditures that will phase in over forward estimates, sparing an immediate economic (and political) impact but delivering real savings over the longer term.

But that requires a little responsibility and honesty on the part of the opposition.

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37 comments

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37 thoughts on “Playing fiscal games when we no longer set the rules

  1. John

    How about introducing a poll tax?

  2. paddy

    Sheesh! Keane & Dyer have turned into a couple of fantasists.
    An article calling for “a little responsibility and honesty on the part of the opposition.”???
    Shades of “we warn the Czar!”
    What a complete waste of electrons.
    It’s not going to happen and you both know it.
    While the polls continue to show the opp in front, neither the media or the rabble on the opp front bench has any reason to change their tactics.

  3. Jimmy

    Abbott environmental, asylum seeker, paid parental leave scheme and economic policy positions are universally derided by exeperts at every point in the spectrum and the massive amount by which he would have to slash govt spending to fund them will drive this country into recession.

    Abbott’s sole vision for this country is him leading it and he will do and say whatever it takes for that to happen and damn the consequences.

    The indexing of military pensions against wages growth rather the CPI and the removal of means testing the private health rebate will be a massive burden on the budget which gets worse as time goes by and this is on top of the massive black holes by the scrapping of the carbon & mining taxes while cutting income & corporate tax, increasing the pension and FTB, increasing the super guarantee and spending big on direct action. If anyone can see this not leading to complete disaster I am all ears!!

  4. David Hand

    There a lot of Owellian doublespeak in this article.

    “….back to 2006, when John Howard was set to rule forever and Treasury couldn’t keep up with the rivers of revenue flowing in from the mining boom and ultra-low unemployment.” Hang on a minute, I’ve listened to Wayne Swann bang on ad nauseaum about the mining profits going to greedy billionaires and the rest of us being denied our fair share, yet here we have the best and brightest of Crikey crediting our strong economy on the noughties to mining and resources.

    “One might have thought, for a brief moment, the seriousness of Australia’s fiscal position finally started to sink in to the opposition” Oh yes. Crikey, and from the rhetoric coming from Gillard and Swann this morning seem to think that Abbot and Hockey are running the country.

    Gillard this morning uttered the words “tax cut” about 8 times in 3 minutes. Yes folks! It’s a tax cut! Just like the Carbon tax cut!

    I expect the mining tax and the carbon tax to go in. Inner city left elites will opine loudly about how painlessly it has occurred and the rest of us will labour under the redistributive nature of both these taxes weighing on the productive sectors of our economy. We will subsidise unproductive sectors and the whole economy will take longer to go through the transition it needs to.

  5. Modus Ponens

    One thing that is within our parliamentarian’s policy controls is the amount we tax the extraction of resources – and they pissed it up against the walls. The Minerals Council must be sipping chardonnay today!

  6. Wallace Scott

    Relative prices, if that means in terms of imported inflation caused by other governments then we can’t really do anything about it. But in term of the value of our dollar I think the RBA has a small room to nudge the range of the dollar down a little which will make a whole lot of difference to the export industry, AUD carry trade is very sensitive to interest decision. Ideally the AUD should fluctuate between 95US cents to 105US cents, it is a perfect equilibrium for importers and exporters.

  7. Bohemian

    It’s got nothing to do with the bozos in power in Canberra – Liberal or Labor. The script is written from afar. America controls global currency through the City of London. The US is paying down its debt load by devaluing its global dollar. It has already done so to the tune of 30% against most of the major currencies in the last four years and even more against us. This is of course at the expense of its own population. We are all globalists now whether we like it or not apparently. Either that or the US could be trying to bankrupt the world in order to push the reset button on the same monetary system spawned from the loins of Modern Monetary Realism with a corrupt totalitarian twist.

    Australia appears to be number one fall guy due to an hopelessly inept government and Reserve Bank sucking it up while watching what little manufacturing or agricultural business left slip away as a result of an unsustainably high A$. In effect, we have to deal with higher production costs at home while getting paid in devalued US dollars or other global currencies against which we have re-valued 30% in the last four years.

    We, including the mining industry, are taking a massive haircut on goods we sell in US dollars, Euros, Yen or Pounds and another haircut trying to sell our goods or services in over-valued Australian dollars.

    There is only one reason international students from India, China and SE Asia are turning away from our universities and that is that they are paying 50% more in March 2012 than they did in Feb 2009. It isn’t just tuition. Parents have to stump up for housing and living costs as well. Unless you have so much money you don’t need to worry, even very well off parents in those countries have to take stock. We are pricing ourselves out of all markets including our tertiary markets, as a sop to low inflation which is largely an international effect any way. I think this happened to Japan in the 80’s and then along came China.

    If the Euro falls over (unlikely), the Aussie would slip dramatically as people retreated to the safety of the incumbent global currency despite its weaknesses. Thank goodness we have not started borrowing cheap US dollars because if we did and overnight the US re-valued, this country would go from “best case” to “basket case”.

    Fortunately, we are not running on the German Euro model which, if allowed to continue, will deliver the rest of Europe as vassal states to their German masters. We would we go to relax under that scenario? Rather we still have our own dollar. For the moment that is. So we can, if we want, devalue but as yet we have not.
    By the same token, if you want to rid your country of agriculture, manufacturing and even high level service industries in the name of interdependency, just keep the currency high in the face of what Jim Rickards calls this ongoing global currency war.

    On the other hand, if you want to keep our foreign debt at beneath stratospheric levels then we need to keep the $A high. Another possible benefit of a high A$ might be that those international banks busily buying up everything not bolted down around the world by virtue of their access to free $US money at the moment, are less likely to be inclined to buy over-valued assets in Australia when Greece must surely be beckoning. But then again, free money is free money and the quantum probably doesn’t matter all that much if it doesn’t cost anything and the whole system will be reset before it ever has to be repaid. lol

  8. Mark from Melbourne

    Sounds good – got some specific examples for us to consider? These always seem to be missing from these sort of articles.

    David Hand – in case you have missed the commentary, the mining sector has been judged as one of the least productive sector of our economy. Our mining companies dont create the product and in fact they have bugger all to do with the end market. They basically are relatively good at digging things up. If I read right they arent particularly good at transporting the stuff and look to the government to build the infrastructure.

    They dont even seem to be particularly good at re-investing all the profits they make, if you look at some of the massive investments that the BHP’s and RIO’s of this world have written off.

    And you have to wonder how come we dont have a viable steel industry given we dig the iron ore up, dig up the broan coal, ship it all overseas and then buy the finished product back. A lot of this has to with BHP whilst taking massive depreciation incentives against their tax bill actually failed to spend much on updating their mills and we got left behind in the 70’s and 80’s.

    I’m all for capitalism as it still seems the best system we have going for us but anyone who thinks businessmen are the people best left to determine how to build this country and how to invest need to bone up on their business history.

  9. David Hand

    I stand corrected, Mark.
    Resources labour productivity has been reported as falling. I should have used the term “wealth creating” because that’s really what I meant.

    But your negative attitude towards the contribution of mining to the prosperity of Australia can’t stand up to scrutiny. The entire state of Western Australia, including the 1.7m people who live in Perth, owe their prosperity to mining. Two towns in the north, Port Hedland and Karatha, will both become cities of over 50,000 in the next 15 years. It’s what everyone means when they refer to the two speed economy.

    I also wonder why we don’t have a viable steel industry. Of course, our steel industry does not own any coal or iron ore and so has to pay the high global price for it, But I would have thought thr capital invested in Port Kembla would have made them competitive. I think lack of labour flexibility has done them in. Closing one of their smelters and sacking hundreds of workers has never looked like the best path to me.

  10. heysoos

    Sigh….

    What is the worst that can happen to a politician?

    Forced from office (voted out) and retire to the north coast on an indexed pension and perks one can only dream about.

    And to us mere mortals? – Left to pick up the pieces.

    There’s no where near enough skin in the game!

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