Under John Howard’s Charter of Budget Honesty, the secretaries of Treasury and Finance are required to publicly release a Pre-election Economic and Fiscal Outlook report (PEFO) within 10 days of the issuing of the writs for an election. The idea is that the publication of the outlook for the economy and the budget should be an objective and dispassionate exercise, independent of the government of the day.
This year, for the first time, the PEFO contains a political statement by the secretaries of Treasury and Finance. In one example, the secretaries tell us what has to be done “to achieve a surplus of one per cent of GDP”. The reader is immediately struck; where does this goal come from and why is it that the independent umpires should give us a goal for fiscal policy? Surely it is the job of elected politicians to interpret the wishes of the people and, from that, to distil the implications for the fiscal stance.
There is no objective reason why a government should aim for a 1% surplus. It is an arbitrary number for a start; why not zero or 2% of GDP?
More importantly, the aim of achieving a surplus is a form of austerity program that has been spectacularly harmful wherever it has been tried. There have been occasions where the budget papers themselves have set out the arguments for a fiscal stimulus and, arguably at all times, the objective of fiscal policy should be whatever is appropriate for the state of the economy.
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Despite the national and international arguments about the appropriateness of targeting fiscal balances, the secretaries have told us that we have this goal of a 1% of GDP surplus without any argument. It has become a goal without a rationale. But it gets worse.
The PEFO makes long-run projections to 2026-27 that fail to make a surplus of 1% of GDP because the secretaries assume:
“… that tax receipts as a proportion of GDP do not rise above 23.9 per cent over the medium term. This is the average after the introduction of the GST and before the Global Financial Crisis.”
This, again, is a completely arbitrary constraint. During the period in question, tax as a proportion of GDP peaked at 24.3%, but there is nothing magic about that figure either. Indeed, the share of the GDP going in tax or spending is something that should be decided democratically. Australia currently has the sixth-lowest tax take in the OECD. In the 2010 election, both sides promised to introduce the National Disability Insurance Scheme funded by a 0.5-percentage-point increase in the Medicare levy. Despite what the people of Australia decided, the secretaries think pre-GFC average tax-to-GDP should continue to rule.
More troubling, though, is that the combination of a surplus objective and a tax ceiling means that there is only one degree of freedom that the secretaries allow a government of either side. That is the fiscal straightjacket the secretaries would impose on Australia. As society’s living standard improves over time, it is natural that people want to see improvements in infrastructure, health, education, aged care, the environment and the other things that only the government can provide.
There are a host of things like this that people want to see expanded, rather than see private spending on the many other relatively less important goods and services provided by the private sector. Yet these are precisely the sorts of choices that should be part of the political arena — part of our democracy. It has never been the secretaries’ role to try to restrict or channel political decisions into the overall targets that make it impossible to achieve democratically chosen goals that involve public provision of goods and services. And they pretend this is an objective exercise.
We’ve already seen it in practice. Health Minister Sussan Ley blamed “Finance and Treasury” not “the Treasurer” saying she was “not allowed” to lift the Medicare freeze. It’s a big difference. Is Treasury telling a cabinet minister what to do, or is a minister blaming a department instead of her colleague?
There is an implied threat that the secretaries’ objectives (higher surplus and limits on tax) will not be met if there is a failure to implement the draconian Abbott/Hockey measures. Turnbull and Morrison have gone quiet on wanting to pass the legislation that would cut family tax benefits, impose a 6 month waiting time on Newstart and so on. Yet here we have unelected bureaucrats building the PEFO on measures that would hit the poor and the middle-income groups particularly hard.
When the secretaries say “it is prudent for Australia to run a relatively conservative fiscal stance”, we have to assume that’s what they have in mind. But imagine if the message from the secretaries said something to the effect that fiscal policy in Australia should be framed around the shared objectives of giving everyone a fair go, of addressing inequality as well as social and economic disadvantage; of achieving world-class health, education and disability support systems, not to mention innovation, environmental goals, infrastructure and the other things we care about. Instead, they have made a political statement and said “NO” to these things. Treasury and Finance are effectively, through PEFO, channelling Margaret Thatcher when she declared: “There is no alternative.”