All budgets are, inevitably, political — only the most unrealistic observer would expect them to be documents of policy purity. Most budgets include both good and bad policies, but this is a budget that ignores policy more than perhaps any other in recent memory.
It is a budget that is almost entirely focused on the political short term, with the single goal of the government getting through the budget process without upsetting voters and, as a hoped-for bonus, perhaps getting them to look again at the Abbott government.
Fortunately, the economic imperative at the core of the budget happens to coincide with the government’s short-term political agenda. Not merely would sharp spending cuts and tax rises to get us on a real path back to surplus be politically unpalatable, they would be economically disastrous. The budget forecasts that the economy will grow at just 2.5% next year, with falling business investment, weak nominal GDP and a big drop in terms of trade. This is a picture consistent with the Reserve Bank’s gloomy view of the economy, and one on which only a lunatic Teutonic austerista would impose big cuts.
But move forward a year into 2016-17, and the picture changes. Joe Hockey was almost defiantly upbeat about the economy in his media conference in the lockup — “green shoots”, “Australia’s best days are ahead of it”, etc — and the 2016-17 numbers reflect that: a return to trend growth, stronger household consumption, much stronger non-mining investment, even wages growth picking up (normally a big no-no for the Coalition, but much-needed at the moment for revenue growth).
Despite this, Hockey is still planning on a big deficit in 2016-17, $25 billion, based on continued high spending:GDP levels. The return to surplus is as far away as ever, with a $7 billion deficit in 2018-19 — and that’s based on the government collecting a remarkable 25.2% of GDP in taxes, a figure we haven’t seen since the mid-noughties.
In short, forget about fixing the deficit any time soon.
The only other sound policy component of the document is the childcare package, which we already know about: it’s a strong package, and the government should be applauded for investing in lifting workforce participation rather than just talking about it, and for investing in pre-schooling for kids from low-income backgrounds — policy that isn’t merely socially equitable, but economically and fiscally smart. As Crikey has already explained, the problem with the package is its funding, which is likely to prove politically problematic.
But beyond that, it’s a thin document indeed. Much is made of the small business package of tax cuts and accelerated depreciation, but it’s just $5.5 billion altogether over the forward estimates. There’s a sense of desperation about the measures collected into the traditional “Major Initiatives” and “Major Savings” part of the Overview document.
A “Digital Transformation Office” (already announced) makes an appearance as a “major initiative” despite being worth only a quarter of a billion over four years. A saving of $86 million on employment services makes it in as a “major saving”. The much-anticipated stoush between the government and the pharmaceutical industry and retail pharmacy sectors, for all the talk of huge savings, will only bring in $1.8 billion over four years.
The idea behind the budget, of course, is that it is intended to be “boring”. But this appears to be the tedium of the policy-bereft, not just the politically motivated. With its signature fiscal approach of cut, cut, cut having being wrecked by the rank incompetence of the government throughout 2014, the Abbott government now appears clueless about what to do. It knows that it should do something about multinational tax avoidance, but doesn’t want to cause too much of a fuss. It talks a lot about infrastructure investment, but apart from a handout to WA and a development fund for northern Australia (one of the great developmental delusions of Australian politics), infrastructure is missing. Dud Labor ideas like e-health records — one of the most spectacular wastes of money of recent decades after War on Terror funding — are warmed over; dud ideas from the last budget, like the Medical Research Future Fund, are offered as vision.
If the budget won’t upset the voters, and thereby preserve Abbott’s hold on the top job, how much will it deliver the economic priority of stimulating business confidence and consumer optimism? Perhaps small business will start spending with more accelerated depreciation rebates; perhaps consumers, delighted their childcare problems have been fixed — or will be, in two years’ time — will start spending and, per Hockey, even borrowing, just like he is. But it’s not obvious that this slender, highly political fiscal set piece will deliver the necessary boost to confidence for a return to trend growth.
The 2014-15 budget harmed both the government’s fortunes and the economy itself. The 2015-16 budget might reverse some of the political damage, but it looks unlikely to repair the economic damage for a long time to come.