Like the 2014 budget, this year’s budget appears to be running somewhat behind schedule. Last year, the government had the excuse that it was its first budget, and that then assistant treasurer Arthur Sinodinos had been sidelined. This year, especially given the central importance of the budget to the survival of Tony Abbott and Joe Hockey, the excuses are less clear. Either way, judging by the coverage in friendly media outlets like The Australian, some key decisions about the budget are still being made a week out from the event.
That risks the same debacle as last year, when a last-minute rush for savings resulted in a number of politically catastrophic policies being shoehorned in almost on budget eve, without even the most basic analysis being done of their electoral viability. Indeed, looking at the coverage last year, when Abbott and his party cheerleaders boasted of his important role in crafting the budget, and Hockey actually appeared to think measures like the restoration of fuel excise indexation might prove winners, it’s clear a profound delusion gripped the government at the time.
The last 12 months has been one long reality check for Abbott and Hockey, and it’s not finished yet. The Medicare co-payment has been abandoned and (speaking of delusions) Education Minister Christopher Pyne’s higher education reforms were rejected by the Senate. Another politically painful saving, the lowering of indexation for the aged pension, is yet to be formally interred, but the funeral has been repeatedly advertised by Social Services Minister Scott Morrison. From a policy and fiscal point of view, this is a bad outcome: the indexation change, like the reintroduction of fuel excise indexation, was a sensible and brave decision. Nonetheless, RIP. High-income pensioners are instead likely to bear the burden of aged pension savings, in the sort of policy that, had Labor done it, would have produced a rage-gasm from News Corp tabloids at the combination of class warfare and assault on the elderly.
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Meanwhile the government — which, bear in mind, insists the mere fact of its election brought the deficit under control, as the arrival of the fire brigade automatically brings a fire under control* — has been engaged in shaping expectations about its failure to lower the deficit. Having once promised to immediately return the budget to surplus in its first budget, Joe Hockey now says he never set a date for return to surplus (shortly after Abbott said we would return to surplus in five years). And, in recent weeks, both Hockey and Abbott have worked hard to let everyone know that they are being hammered by the collapse in the iron ore price and weak wages growth, which has added billions to the budget deficit. That’s despite Hockey repeatedly saying the days of over-optimistic revenue forecasts from Treasury were over — a Labor aberration that would never happen under the prudent and watchful eyes of the Coalition.
In the independent Pre-election Economic and Fiscal Outlook prepared by Treasury and Finance during the 2013 election campaign, the deficits for 2014-15 and 2015-16 were forecast to be $24 billion and $4.7 billion respectively. In last year’s budget, the deficits had increased to $29.8 billion and $17.1 billion. In the Mid-Year Economic and Fiscal Outlook released by Hockey and Finance Minister Mathias Cormann in December, the deficits had increased to $40.4 billion and $31.2 billion. When forecasts for the out-years and 2013-14 are added in, the forecast deficit under Joe Hockey has blown out massively:
Those MYEFO figures have been the basis of the government’s efforts to manage expectations around the budget. Despite current figures suggesting this year’s deficit might come in a little lower than forecast, it’s been hinted that the $40.4 billion figure will go up, as will the $31.2 billion figure for 2015-16. Various economic firms have had their say about the likely deficits, with most suggesting both this year’s and next year’s deficits will go up by $6-10 billion on the back of revenue write-downs from the iron ore price and weak wages growth. In the face of a rising deficit, the government has shifted to other indicators — talking of the deficit “trajectory” over the forward estimates, or trying to emphasise the deficit:GDP ratio — although even that is likely to remain at over 2% of GDP.
But don’t assume, necessarily, that next Tuesday will reveal a further big blowout: one of the most basic of expectations management practices is to suggest things are absolutely diabolical, before producing a better-than-expected result. And Hockey is on the record as saying — albeit several weeks ago now, which is an age in the budget preparation process — that the budget would be “mildly contractionary”, meaning next year’s deficit will be a little smaller than this year’s deficit. Of course, that depends on whether this year’s deficit remains at $40-odd billion, or goes up.
And remember, the deficit should be considered in the context that Hockey forecasts he is going to tax us at a considerably higher rate in terms of tax:GDP than Labor treasurer Wayne Swan did. The average tax receipts:GDP ratio for the Labor years was 21.9% of GDP. Hockey forecasts 22% this year, rising to 23.1% in 2017-18. In an amusing story yesterday, The Australian reported that Abbott was preparing a “shrewd” trap for Labor by ruling out further tax rises while Labor was proposing higher taxes on multinational tax dodgers and millionaire superannuants. The minor problem with the argument is that it is Abbott who proposes to increase, and increase significantly, the share of GDP the Commonwealth is taking in tax receipts, rather than lowering it back to Labor-era levels.
And the whole budget is in the context of sluggish economic growth. The 2014 budget helped wreck the surging growth that began in the last quarter of 2013 and the first of 2014. After warnings of a deficit crisis, a savage National Commission of Audit and then the budget itself, consumers and business spent the rest of the year in a funk, with only new dwelling construction, prompted by low interest rates, the one bright spot. We’ll learn on Tuesday whether Treasury is still clinging to its growth forecasts of a return to trend and above-trend growth over the next three years, or whether, like the Reserve Bank, it has downgraded its expectations and delayed the return to growth of around 3%. If that’s the case, which is likely, Hockey’s persistence with substantial deficits will have been justified.
As the 2014 budget demonstrated, at least part of the answer to that is whether Abbott and Hockey can produce a budget that doesn’t smash consumer and business confidence again.
*yes, Tony Abbott actually said this (several times) and no, I have no idea what it means.