For anyone with a deep interest in the future of the Australian economy over the next few years, it will be Opposition Leader Tony Abbott’s budget reply speech on May 16 that should be getting more attention than Treasurer Wayne Swan’s actual budget, two days before.
Why? Because four months after the budget, it will be Abbott who will very likely be prime minister, implementing his economic policy agenda.
The business community, financial markets and the electorate will no doubt have a keen interest in the federal budget on May 14 as Swan outlines the economic and fiscal framework that would underpin Labor’s plans for the coming four years.
The budgetary highlights will be how the remaining part of DisabilityCare will be funded (over and above the additional levy) and whether there will be savings to cover education initiatives. No doubt there will be some harsh savings measures implemented. It will also be important to see Treasury forecasts for GDP, inflation, unemployment and the terms of trade and there will, as usual, be tremendous analysis of economic themes and risks.
But all of this could be obsolete within a few months of it being handed down. The polls and betting markets suggest Abbott will win the September election in a landslide — he may even get control of the Senate according to some pundits. This is why for those interested in medium-term economic issues, Abbott’s budget reply speech should garner at least as much attention as the budget.
In the last few weeks, Abbott has backflipped on earlier promises to “deliver surpluses in each year of the first term of a Coalition government” and that the surplus aim to be a “prudent, frugal buffer and 1% of GDP we thought was about right”.
He and shadow treasurer Joe Hockey are perhaps realising that posting surpluses at a time of low inflation and weak terms of trade is difficult and painful. And they are unnecessary when there are growing signs of fragile conditions in the global economy that are filtering through to Australia.
Will Abbott recommit to boost defence spending to 3% of GDP and deliver other big-ticket spending items? Abbott will abolish the mining tax and carbon price and introduce a paid parental leave scheme, all of which will see personal income and company tax rates for large business increase. This could well be the crux of Abbott’s policy agenda — and his problem.
The revenue base for the government, all governments, has been eroded by very low inflation. Despite the biggest cuts in government spending ever seen, this year’s budget will likely remain in deficit. To achieve his currently stated goals, Abbott simply cannot reply on cuts in spending. Tax increases or levies are likely to figure in his plans or his sums will not add up.
For the budget reply to have credibility and substance, it must add hard costings and hard facts to a range of other policies that are still fanciful platitudes. From where Abbott stands, when dollar values are applied to these commitments, there is a clear gap between the extra spending, the abolition of the mining tax and carbon price and then a lower tax burden and eventually budget surpluses of any size (let alone the curious and senseless objective of 1% of GDP).
“To achieve his currently stated goals, Abbott simply cannot reply on cuts in government spending. Tax increases or levies are likely to figure … “
There are also legitimate questions relating to the government debt ceiling and future of the bond market. Will the banks have to pay for the deposit guarantee, which is something that advisors to Hockey have been advocating?
Last year’s budget reply speech from Abbott was largely unscrutinised other than for the short-lived talking point of teaching Asian languages in schools. In terms of other matters of substance, the speech confirmed Abbott has a poor reading of the economy and budget matters. Last year he stated:
“From an economic perspective, the worst aspect of this year’s budget is that there is no plan for economic growth; nothing whatsoever to promote investment or employment.”
Since then, the economy (real GDP) has grown by 1.9% in the three quarters to December 2012. This is an annualised increase of 2.5%. Private-sector business investment has risen by 2.5% in the three quarters to December 2012 to be a thumping 70% higher than the level of investment when the Coalition was last in office. The capital expenditure expectations data were, according to Westpac, “robust”, with investment likely to rise a stunning 11% in 2013-14 to record highs. Since June 2012 97,500 jobs have been created, 42,800 of these full-time positions. Abbott seems to have been dreadfully inaccurate with his forecasts. He also said:
“With a growing economy, it’s possible to have lower taxes, better services and a stronger budget bottom line as Australians discovered during the Howard era that now seems like a lost golden age of prosperity.”
He’s missed the fact the current Labor government is the lowest-taxing government since Labor was last in power in the early 1990s. Indeed, one has to go back to 1978-79 to find any year where a Liberal government delivered a lower tax-to-GDP ratio than was delivered in 2009-10 and 2010-11. Abbott said:
“… if a forecast $1.5 billion surplus is enough to encourage the Reserve Bank to reduce interest rates, what has been the impact on interest rates of his $174 billion in delivered deficits over the past four years?”
Well, the Reserve Bank’s official interest rate averaged 5.42% during the Howard government and it has averaged 4.50% under the current Labor government. Currently, the cash rate is 3%, a level that a Liberal government has not presided over since 1963.
It is to be hoped that in this year’s budget reply speech, Abbott adds some substance to the economic plans of the Liberal Party and some hard facts on the budget bottom line and how the economy will be shaped. It matters for growth, jobs and ongoing prosperity. It deserves close scrutiny.
*Stephen Koukoulas is a research fellow at progressive think tank Per Capita and a former Labor adviser