Sep 30, 2013

Budget emergency? Not if you look at Hockey’s new numbers

The recently released budget outcome reveals a different economic landscape to what Joe Hockey described. For a start, it showed the largest year-to-year fall in the budget deficit ever.

Stephen Koukoulas

Economist, Per Capita research fellow and former Labor adviser

Australia has just recorded the most contractionary year for fiscal policy ever seen. In releasing the budget outcome for 2012-13, Treasurer Joe Hockey and Finance Minister Mathias Cormann have revealed a range of very interesting records on the budget and fiscal policy not just for 2012-13, but going back to 1970-71. One of the first things to note is the fact that the budget deficit fell to 1.2% of GDP in 2012-13, 1.7% of GDP lower than the 2011-12 deficit. This is the largest year-to-year fall in the budget deficit ever recorded. This massive reduction in the deficit was driven mainly by a fall in government spending: it fell 1% in nominal terms -- something that has never happened before in Australia -- and it dropped by a record 3.2% in real terms. As a share of GDP, government spending fell to 24.3% in 2012-13, from 25.2% in 2011-12 to be well down from the recent peak of 26.1% in 2009-10. For comparison, the average level of government spending to GDP was 25% over the last 30 years and it averaged 24.1% under the Howard government. The final budget outcome also confirmed a few other interesting factual snippets. Contrary to conventional wisdom, Coalition governments have never once delivered a year where there was a cut in real government spending. Not the Howard government, not the Fraser government, not the McMahan or Gorton governments have delivered a real spending cut. In contrast, in the last four decades, Labor governments have had five budgets, including in 2012-13, where real spending growth has been cut. This makes no judgment on whether real cuts in government spending are necessarily good or bad -- that is a discussion for another column. The point is that the Coalition parties in office tend to recycle their spending cuts on individual programs into their pet projects and hence never deliver real cuts in government spending. In terms of the tax take, the final budget outcome for 2012-13 showed that it rose by 0.6% of GDP to 21.6% on the back of a slight upturn in economic growth through the year. This is a staggering 2.6% of GDP, or $40 billion per year, below the peak level in 2004-05 and 2005-06 and some 1.8% of GDP ($27 billion in 2012-13 dollar terms) below the average tax take of the Howard government, which looks like holding onto the record for the highest taxing government in Australia’s history for a while longer. In simple terms, the 2012-13 budget outcome for the Gillard government reveals record spending cuts, a low tax take and a wafer-thin budget deficit. It is easy to see why the economy recorded less than robust growth during the year. It was not simply the high Australian dollar or the fall in the terms of trade that chipped away at GDP, but the significant fiscal contraction was also a dampener on growth. The level of net government debt rose by just 0.1% of GDP in 2012-13, to reach 10.1% of GDP. This remains one of the lowest levels of government net debt in the world, with the aggregative change in the debt level from 2007-08 amounting to less than 14% of GDP, which is again one of the smallest increases in debt in the world over that timeframe. It is easy to see why the credit ratings agencies have no hesitation assigning a triple-A rating to Australia’s government finances and why global investors remain enthusiastic about holding Australian assets. When releasing the budget outcome last week, Hockey made the outlandish claim that the 2013-14 budget would be a legacy of the Labor Party. The Abbott government is obviously making decisions right now that are impacting on the budget bottom line and, what’s more, Hockey as Treasurer is in control of budget policy right now, today, with nine full months of the financial year remaining, whether he likes it or not. If he wishes, Hockey can cut spending tomorrow, alter tax scales or undertake a myriad of things to address what he calls a "budget emergency" or fiscal "crisis". He can alter the bottom line of the budget for 2013-14 by billions of dollars, something that he no doubt will do. The lack of urgency on the budget emergency is no doubt a reflection of the fact that Hockey inherited some of the best budget and government debt circumstances in the world. *This article was originally published at Business Spectator

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19 thoughts on “Budget emergency? Not if you look at Hockey’s new numbers

  1. Suzanne Blake

    Of course there is a budget emergency. The debt ceiling looks like blowing $300 BILLION.

    Thats around $48,000 for every taxpayer in Australia. Note taxpayer not welfare recipients.

  2. Thorn

    The real travesty here is that in 99.9% of the media (and I include the ABC in this) continually repeated the same old myths about Labor economic incompetence and Liberal success over and over for the last five years – regardless that the facts on spending and taxing by Swan compared to Costello have been available for all to read all this time and regardless that the GFC was crippling economies everywhere.

    If the media had been honest with the Australian people and not been preoccupied with pushing their own agenda (in spite of all the evidence to the contrary) then the level of optimism and economic activity would have been much higher.

    It is hard for people to feel comfortable spending when they had Abbott/Hockey/Robb and the media all saying that Australia was on the edge of ruin. For this reason Abbott’s period in power will be forever tarnished by his actions culminating with the 2013 election.

    I have never witnessed such a disgusting scorced earth policy as the one waged by the Liberals. They did not care a damn about the country as long as they gained power – the only conviction they had was that they had the right to rule.

  3. MG99

    All this criticism of Abbott and his team is too little too late. Recently the Fairfax media has a few articles with mild criticism of Abbott – specially his hiding the boats information and his debt and deficit harangues.

    Totally agree with @Thorn’s “scorched earth policy”. This resembles the behaviour of the Republicans in the US. I think the Liberals have copied the Tea Party antics.

    The Labor Party needs to develop strategies to handle this. Really tough considering 70% of print media, radio, TV and the ABC are so pro Liberal. We do not have a New York Times or liberal TV in Australia.

  4. bluepoppy

    This is what happens with a media that dictates the outcome of elections. Where is the proper analysis and scrutiny. There was never an emergency budget crisis. It is no surprise at all and just confirms what the ALP were saying prior to the election. Troubles is by then nobody was listening.

    The ALP are, and were, by no means perfect but the new lot is something to behold – and not in a good way. We already have a new government that seeks to act in secrecy and discarding all traces of transparent and accountable governments.

  5. klewso

    I don’t think “repeat a lie often enough, it becomes the truth” constitutes conventional “wisdom”?

  6. klewso

    …… “Conservative wisdom”? That’s different.

  7. Hamis Hill

    Which all adds up to an “illegitimate” government, won on lies, which has no option but to continue the lies.
    and of course supported by individuals with no commitment to, or respect for the truth.
    What could possibly go wrong?
    Oh, and supported by the palace eunuchs of the press, politicians in hiding, and constant strangers to the truth.
    To repeat, what could possibly go wrong?

  8. Daly

    I await this analysis, so factually done here, appearing on the front page of the Australian, Telegraph, etc. so that people can understand how they were deceived.

  9. Jimmy

    This article and another in the Age today by Kenneth Davidson – point out just how funny it is going to be to watch the Libs fibs about the state of the economy and various other things come home to roost.

    If there truly was a budget emergency (as Sb still bel i eves)why aren’t we getting the MYEFO now, why aren’t Hockey and Abbott swiftly moving to raise revenue and cut spending and why is Hockey talking of stimulous?

    The answer of course is because there isn’t a budget emergency but the govt will get cover from News Ltd to gradually change their position and the non thnkners (yes you SB) will gradually change with them until they are all calling for the govt to go deeper into debt “to fix the mess Labor created”

  10. cnewt27

    So Suzanne B, your point re “taxpayers not welfare recipients” what % of folks are both? Do I hear the phrase “entitlements”? Seems that those super women who will be getting $150,000pa to have a baby will fit into both categories.

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