Feel some sympathy for Joe Hockey, a man who has bent over backwards to look after the interests of Australia’s mining companies; now they’re repaying him with a humiliating collapse in revenue that has handed the beleaguered Treasurer another budget blowout. “Primarily as a result of the collapse in iron ore prices by over 30 per cent,” the Mid-year Economic and Fiscal Outlook stated yesterday, “and weaker than expected wage growth, tax receipts have been revised down by $31.6 billion.” With friends like those — like BHP and Rio Tinto, which are deliberately driving down the price of iron ore to push higher-cost competitors out of business — Joe doesn’t need enemies.
And what was that about “weaker than expected wage growth”? For a long time, the Coalition and business have been telling Australians workers that Australia is a high cost place to do business and they need to cut wages. Careful what you wish for, chaps: that’s exactly what’s happened over the last 18 months, and surprise surprise, what did it lead to? Softening domestic demand and lower tax revenue. And lazy Australian businesses, having demanded wage cuts for so long, have ignored the opportunity they presented.
The fall in iron ore prices since May, true, wasn’t seen by anyone. But the Reserve Bank’s data for its monthly commodity price index shows the index peaked (in Australian dollar terms) back in October 2008, fell, then picked up because of bad weather in late 2010 and early 2011, which hit iron ore and coal exports here and iron ore exports from Brazil, and gradually drifted lower; if anything, the slide in the terms of trade hit the Labor governments just as hard over a longer period. But Hockey has also copped a slump in oil prices and other commodities like wheat. The Reserve Bank’s commodity price index is currently back to December 2007 levels (in Australian dollars).
But this year, Hockey will still collect 23.6% of GDP in revenue — 0.8 points of GDP higher than 2013-14 and higher than any year since 2007-08, when Peter Costello collected one dollar in four of the economy (Swan’s highest was 23.3% in 2008-09). Even after downward revisions yesterday, the government is forecast to be collecting 24.8% of GDP in 2017-18. Far from being the party of smaller government, the Coalition is made up of the big taxers of Australians politics, and yet they still can’t get the budget back to surplus. The deficits now stretch as far as they eye can see and went up by a total of nearly $50 billion over forward estimates yesterday. The anticipated return to surplus is now far off in the Blade Runneresque year of 2019-20.
What’s Hockey doing about this? Well, he’s not chasing down revenue with savings (except when they apply to foreign aid recipients, who don’t vote, don’t shop and don’t work in Australia) — an approach he learnt from the predecessor he loves to mock, Wayne Swan. That will provide greater stimulus to the economy, preventing a self-defeating cycle of austerity undermining growth. But what else is he doing? There’s infrastructure, a “key component” of the government’s “Economic Action Strategy”. But as we know, the government isn’t actually spending anything on infrastructure that Labor wasn’t already spending, except Joe’s “asset recycling program”, where he’ll give state governments a helping hand to get projects underway using asset sales. Don’t hold your breath waiting for the economic shot in the arm from that.
“The government needs to abandon its ideologically motivated approach to cuts.”
And there’s the free trade agreements with Japan — now in recession — South Korea and China, where growth forecasts have now been cut back to the lowest in two decades. Again, don’t hold your breath. And that’s the limit of Joe’s inspiration.
So despite increasing tax collection to a level not seen since the Costello years, despite a return to trend growth, despite a dollar at US$0.84, Hockey will still be running big budget deficits at a time when Australia needs to be returning to structural surplus. And one of the reasons lies with Hockey and his government: the removal of the mining tax, carbon price and billions worth of tax measures on superannuation for high-income earners.
What was disappointing about MYEFO was the lack of understanding that the one thing that will help the economy in the next five years is investment. Housing is doing fine because the rate cuts have triggered the current rebound in building. But it’s non-mining commercial investment that needs help, and that’s where the budget can be used to support spending. Investment is falling because the huge gas, oil and mining projects are coming to an end. With the shut down of Australia’s car industry over the next three years, investment in manufacturing will also be weak. Investment elsewhere in the economy needs supporting, and not through Joe’s natural constituency, the big end of town, but through helping small and medium-sized businesses.
They’ll have a huge advantage from a weaker dollar, which will add confidence to industry to start tackling export markets and compete more effectively with imports. But Joe should have taken whatever savings he could wring from existing programs and committed them to helping underpin growth — say, by reintroducing the instant write-off of certain items for small business that was stupidly abolished when the carbon and mining taxes were removed. Or a general 10% investment credit for all small and medium businesses to start January or February 1 should have been introduced — something positive to start stimulate spending and investment from the sector, to get some of those in the business sector hungry again.
The government should also end its war on renewable energy and accept that, with the uncertainty around the Clean Energy Finance Corporation — which has gone from being on the Abbott hitlist to being something he boasts of to foreign leaders — and around the Renewable Energy Target, it has cut billions in investment off at the knees.
Moreover, the government needs to abandon its ideologically motivated approach to cuts. This is a government that is comfortable fulfilling its election commitment to waste a quarter of a billion on school chaplains while breaking its commitment not to cut the ABC, and cutting it by exactly the same amount. This is the government that happily restored a blatant fringe benefits tax rort and dumped a Labor plan to start rolling back tax concessions for high-earning retirees. Such an approach signals to voters that the government isn’t serious about economic management, that it is prepared to play favourites and silly ideological games, rather than adopt that “adult” approach to government it promised. That might start supporting consumer confidence as well: voters are more likely to back a government that it understands is making an honest effort to deal with economic difficulties.
But the focus needs to be on business. Reserve Bank governor Glenn Stevens got it right in his speech to the annual dinner of the Committee for Economic Development of Australia in Melbourne in November:
“… maximising our economic possibilities in the modern world requires sustained efforts at adaptation and innovation, at doing things better and, perhaps most of all, a willingness to take the occasional risk. I would be confident that we have, or can develop, the relevant capabilities. The only question is whether we are sufficiently determined to succeed in deploying them.”
He could have been talking about Joe Hockey’s challenge of returning to surplus.