With four weeks to go until the 2015 budget, the Treasurer has begun what appears to be a concerted effort to soften Australians up for a further deterioration in the nation’s finances. Senior Australian Financial Review journalists were given an extended audience with Joe Hockey, who lamented the obstructionism of the opposition, the difficulty of fixing the budget in the current political environment and falling revenues — all apparently without the slightest irony given his opposition role in obstructing Labor’s efforts to cut spending. You’ll recall that despite that, Hockey criticised Labor for “having a spending problem, not a revenue problem”.
In fact, according to his 2014-15 Mid-year Economic and Fiscal Outlook papers, Hockey will spend more as a proportion of GDP this year than any Labor budget but the GFC stimulus budget of 2009.
That of course is the right call by Hockey — like Wayne Swan after 2012, he’s had to abandon his fiscal disciplinarian act, for fear of undermining already weak economic growth, which is now at around 2% pa despite record low interest rates and a massively lower dollar than when Swan was Treasurer. But Hockey says the budget will still be “mildly contractionary”. What does that mean — and why is Hockey trying to contract already tepid economic growth? This year’s budget deficit is forecast to be around $40 billion, although on current estimates it might come in a little below that. Next year’s deficit was forecast in MYEFO to be around $31 billion. That is, Hockey was going to withdraw around $9 billion in fiscal stimulus to the economy — but he would still be pumping in a fairly healthy amount of money. So Hockey’s “mildly contractionary” comment suggests that the numbers might change — the $31 billion deficit might increase, say — but it’s unlikely to blow out to $40 billion, meaning he’ll be withdrawing at least a little stimulus in year-on-year terms. It also appears to preclude doing what a number of economists have urged him to do — to take advantage of record low interest rates and borrow to fund infrastructure investment that will provide additional stimulus.
Why is revenue (still) falling? The iron ore price, obviously, the collapse of which is going to continue to hit tax revenue for some time to come as higher-cost miners shut up shop. But Hockey also complains about weak wages growth undermining income tax revenue, which is odd, because the Coalition is all for weak wages growth — it wants to abolish or reduce penalty rates for the 4.6 million Australians who receive them, and its Industrial Relations Minister has warned of “wages explosions“.
But bear in mind that, for all of Hockey’s complaints about falling revenue, MYEFO shows the government forecasting it will collect 24% of GDP as revenue next year, up from 23.6% this year. Even assuming revenue doesn’t increase as forecast, that compares to the average actual level of 22.5% during the Labor years. And that’s despite Hockey planning to give business a corporate tax cut next year — a peculiar thing to do for a Treasurer complaining about revenue (same way as dumping the carbon price and mining tax were peculiar actions to take for a cash-strapped government). So Hockey is both taxing and spending more than Labor did, and running similar-sized deficits, despite the “surpluses are in our DNA” line from the Coalition.
One other thing in Hockey’s comments to Fairfax: he is disinclined to end dividend imputation, which might be fair enough — opinions are divided on the issue — but the reason he advances is intriguing: its cultural benefits. “There have been in my lifetime,” he said, “a number of events that have helped to change the culture of the nation. Apart from industrial relations reform, there was employee share schemes, there was privatisation and demutualisation, and also dividend imputation. It basically gave people an incentive.”
It’s good to see the now-forgotten ideal of the Howard government — to transform Australia into a kind of shareholder democracy (as Trotsky might have said, “the Australian average will rise to the level of a Bond, a Holmes a Court, a Brierley. Above these, other heights new peaks will arise”) — dragged from mothballs by Hockey. But if that’s the only reason for hanging on to dividend imputation, then we’re in trouble, to the tune of tens of billions of dollars. Well, even more than we currently are.