From ‘debt and deficit disaster’ to ‘go out and spend’, is the government playing a reckless game with the national economy? By Sophie Morris.
Hockey’s changed song on budget
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He’s tireless, Joe Hockey, spruiking for Australia. When he paused for a coffee on Monday morning, he did not stop pitching his “have a go” budget. He spoke to the owner of the cafe, who told him that she would now purchase some extra outdoor furniture. “I thought, that’s music,” he said. “That’s great.”
Later that morning, he chatted with the make-up artist who prepped him for a TV interview, telling her she could use his new instant tax writeoff to buy herself an extra kit, or even a car. “She wasn’t fully aware of what we’re doing,” he told Channel Nine. “So, there’s still much work to be done.” Roll up, roll up, for Tony’s tradies budget bonanza.
In an extraordinary about-face, Hockey has gone from being the treasurer who helped destroy consumer and business confidence last year, with a tough budget and talk of “debt and deficit disaster”, to an enthusiastic hawker going all-out to try to rekindle it. He’s throwing himself into the task with all the gusto of a steak knife salesman on daytime television.
You can buy yourself a Harley-Davidson and claim you use it to round up sheep, or a ping-pong table for the creative types in your marketing agency, to mention just two of the wacky examples unearthed by The Australian Financial Review as possible uses of the new instant tax deduction.
“The fact is, in particular, we’re giving small business the opportunity to go out and have a go,” Hockey told Kyle and Jackie O on KIIS 1065 radio the day after the budget. “And they can buy anything up to $20,000 now and write it off against their tax on the first of July… We want them to go out and employ more people. Have a go! Have a go!”
Since then, he’s been on a whistlestop tour of the nation, from Launceston to Darwin and many places in-between, urging people to get on his express train to prosperity.
How times change.
Last year, on the morning of the 2014 budget, Hockey warned Australia was heading for an “eventual train crash on the budget” if not for the deep cuts he was about to unveil. In the weeks leading up, he had described extra spending in the years ahead as a “tsunami coming across the water”.
In the days after the 2014 budget, Minister for Agriculture Barnaby Joyce, a former accountant who had long led the Coalition’s war on deficit, argued the cuts were dealing with a debt problem that was like a “financial melanoma” that would otherwise prove fatal.
It was the climax of rhetoric that had built for years as the Coalition in opposition railed against Labor’s economic management, accusing it of “spending like a drunken sailor”. That was Tony Abbott’s catchphrase in late 2012.
Back then, the Labor government, having in earlier years splurged on fiscal stimulus programs to buffer the Australian economy against the global downturn, had reduced spending slightly, down to 24.1 per cent of gross domestic product. Hockey’s second budget, unveiled this month, ditched or modified some savings measures that had run aground in the senate, and offered new spending programs. The net effect is that government spending is forecast this financial year and next to be 25.9 per cent of GDP. Have another drink, sailor.
At any rate, the nation heeded Hockey’s warnings last year and applied it to their household budgets, choosing to save rather than spend.
“Last year the budget effectively saw confidence levels falling for six consecutive months,” explains CommSec economist Savanth Sebastian.
“There was really a lull in the economy, much more uncertainty for the business community, which saw a pullback in activity and spending overall. It was essentially a vicious cycle, a catch-22 where you had a lack of confidence, which curbed activity, which again hit the budget’s bottom line.”
Hockey always knew there was a risk to a tough budget. Right up until he delivered his first budget last year, he was insisting it would not be a “slash and burn” affair. Perhaps he just hadn’t grasped that the cuts to pensions, universities, family tax benefits, schools and hospitals, would be seen that way. He preferred to think of it as a clarion call to the nation to “contribute and build” and put Australia’s interests ahead of their own.
“If I went on a massive slash and burn exercise on budget night, for the next 12 months it would unquestionably cause higher unemployment and it would have a very significant impact on the economy,” Hockey told broadcaster Alan Jones on April 24 last year, just weeks before releasing a document that economists argue did just that.
The Westpac consumer confidence index, which surveys 1200 adults each month to gauge their attitude to the economy and their own household finances, had already dropped significantly ahead of last year’s budget, as the government talked of doom and gloom.
Westpac chief economist Bill Evans says the index then plunged another 6.8 per cent when the 2014 budget revealed deep spending cuts. The index stayed in negative territory all year, in a sign more people were pessimistic than optimistic.
“I think a lot of it was related to, firstly, the warnings that occurred before the budget. Secondly, to the contents of the budget. And thirdly, to the political fiasco that followed after the budget with the senate, et cetera,” says Evans. These factors were compounded by sluggish income growth.
Evans believes last year’s rhetoric took a toll.
“It undermined confidence,” he says. “I think there’s no doubt the sentiments are well-intended, in that, if we allowed the deficit to blow out too much further, we lose the flexibility to use fiscal policy should a crisis emerge. There’s no doubt there’s an element of that. But you can also improve the deficit by growing faster, so I think the right policies chosen to generate growth are the way to go.”
As for missed opportunities in this latest budget, Evans wishes there had been more spending on infrastructure and laments that the debt phobia is a “naive” way to think of investment in long-term productivity-enhancing assets.
Sebastian, of CommSec, says there were several factors influencing the economy, but last year’s budget was significant.
“Yes, there was a pullback in iron ore prices, and yes, there was a pullback in mining investment, but the budget did have a serious impact in holding back confidence and activity,” he says.
“It was that political story around how big the deficit is and how dire the situation is here in Australia. Yes, we do have a budget deficit, but there’s certainly a lot of advanced economies across the globe that are in a far worse state. We’re going to peak at 18 per cent net debt to GDP, which is a far cry from the US, UK and all of Europe and even parts of Asia. There’s only nine AAA countries in the world and we’re one of them.
“It’s important to put it in perspective, and we lost that last year.”
After Hockey delivered his second budget on May 12, veteran journalist Laurie Oakes asked him: “A year ago you were all about budget emergencies and the need to pay down debt and to produce a surplus. Your tone tonight is one of generosity, no nasties. What changed?”
Hockey replied: “Well, we made significant progress last year, Laurie, and that’s underestimated, but we actually have come a long way. Now we are on the next stage of our plan to build growth, and we’re investing.”
A cynic might also note that the government’s political fortunes had turned for the worse, with Abbott and Hockey forced earlier this year to fight for their political lives as colleagues grew impatient with sustained poor polling and questionable “captain’s calls” from the prime minister.
Of late, Hockey has been known to talk of “green shoots” in the economy and the need to “fertilise” them.
So far, it seems to be working.
Westpac’s consumer confidence index for May, published Wednesday, rose 6.4 per cent, climbing to 102.4, its highest level since January last year. When it rises above 100, it means more respondents see the glass half full, as Hockey urges them to, rather than half empty.
Evans is wary of predicting the rise in consumer confidence will be sustained, observing that some of last year’s cuts are still on the table and still need to be passed.
Post-budget polls published on Monday presented a mixed message, but there were positives for the government. The Fairfax Ipsos poll showed the Coalition and Labor tied at 50 per cent on a two-party-preferred basis, with Abbott’s popularity also rising. Newspoll, in The Australian, had Labor ahead 53 to 47, but Abbott’s approval rating rising to an eight-month high, putting him slightly ahead of Labor leader Bill Shorten as preferred prime minister.
The small business measures are also popular with Coalition MPs, who are delighted to finally have good news to share with constituents. Some, though, do concede that the retreat from fiscal repair is of growing concern to the Coalition’s voter base.
Judging by the plethora of advertisements that has proliferated, promoting products conveniently priced at $19,999 or less, the budget appeal to “Tony’s tradies” may unleash some of the “animal spirits” that Reserve Bank governor Glenn Stevens sometimes talks of fondly.
Yet there are some who are wary of Hockey’s new-found ebullience.
Alex Malley, the chief executive of CPA Australia, professes to be “conservative by training”, an attribute he may share with the 150,000 professional accountants he represents. Malley has a problem with the government’s current hyperbole about economic opportunities after so much downbeat rhetoric last year.
“I think there’s probably more an element of truth in that tone [from last year] than the tone we’ve now got leading into this budget and post this budget, when you could almost be forgiven for thinking we’re in the middle of a boom,” he says.
“I think all citizens need to think about the change in that tone, and think, no market economy in the world changes that dramatically. I think we need to call that out.”
For one thing, Malley is not sold on Hockey’s message that the Reserve Bank’s move to an all-time low cash rate of 2 per cent means Australians should rush to borrow and spend.
Immediately after that rate cut on May 5, Hockey said: “Whether you be a household or a small business, now is the time to have a go, to borrow some money and invest … We want households to go out and spend. We want businesses to go out and invest.”
As treasurer, Hockey may consider it his job now to talk up the economy, even to pump prime it, but the accountants see it differently.
“A 2 per cent interest rate is another way of saying there’s no pulse in the economy,” says Malley.
“I do think it’s irresponsible to tell people, as a blanket commentary, ‘go out and borrow’, when you have an interest rate at 2 per cent and a number of sectors of our economy on their knees. If you are in the right position, then by all means borrow and invest, but to have people of the seniority of ministers saying ‘go out and borrow’ in an economy as fragile as this one, I don’t think is helpful.”
In a speech on Monday, the deputy governor of the Reserve Bank, Philip Lowe, also sounded a note of caution about urging people to go deep into debt in this economic climate.
He said the interest rate cut should support household spending and contribute, in time, to a pick-up in business investment, but added: “It is, however, unlikely to be in Australia’s long-term interests to engineer a consumption boom by encouraging people to borrow large amounts against future income. This is especially so when debt levels are already high and prospects for future income growth are not as positive as they once were.”
Lowe said there was a fine line to tread, with the Reserve Bank seeking to encourage consumption growth and business investment but wanting to “avoid the type of imbalances that could cause problems later on”.
Westpac’s Evans, however, says the economy needs people to go out and spend, to get back on the “virtuous cycle” of rising employment feeding into confidence and business investment. “I think the economy is fragile. And what we could do with is more consumer spending, particularly considering people’s balance sheets are stronger now, so the capacity to spend is there,” he says.
The instant depreciation on assets worth up to $20,000 was the headline-grabbing surprise of a $5.5 billion small business package that had been drawn up over the past year by Small Business Minister Bruce Billson.
It exceeded even the wildest dreams of small business advocates, also dropping the sector’s company tax rate from 30 per cent to 28.5 per cent and extending an equivalent deduction to sole traders with an ABN who were not incorporated as companies.
When it was discussed within government before the budget, one senior adviser is said to have quipped: “Well, if we’re going to do this, I might just go and get myself an ABN.”
The measures apply to small businesses with annual turnover up to $2 million. That’s more than two million businesses, which Billson’s spokesperson says employ more than 4.5 million people. Given the generosity of this year’s budget, it is probable that applications for ABNs will rise, as even those who are employed elsewhere may consider opening up a small business on the side.
Of course, it does not mean a person gets $20,000 cash in hand. Instead, the taxable income of their small business is reduced by what they spend on an asset associated with their enterprise. They can claim for multiple assets, each up to $20,000, bringing forward the depreciation that would have otherwise occurred over a number of years. Some small businesses will make purchases to reduce their taxable income to zero.
The National Australia Bank’s head of international economics, Tom Taylor, says it’s a smart use of limited finances. “This is a part of the economy where a shot in the arm would definitely be beneficial,” he says. “Broad-ranging taxes are expensive, so the government has, I think, used its ammunition quite carefully here to try and get a good impact on confidence.”
The measure will pass parliament with Labor’s support, along with a handful of savings that shadow treasurer Chris Bowen says contribute $2.4 billion to the budget bottom line. But there are questions around whether the $1.8 billion budgeted for instant asset depreciation will suffice.
When the Coalition abolished a $6500 instant asset writeoff, introduced by the former Labor government as part of the mining tax package, it calculated savings of $3.55 billion over four years from reducing the threshold to $1000. This would suggest the Coalition may have underestimated the costing of its vastly more generous scheme, which runs from budget night to the end of June 2017.
Hockey concedes the scheme may end up costing more and says he would be delighted if it does, because it would mean it is working. But it could also further jeopardise a budget bottom line that already relies on some optimistic assumptions and interesting calculations. To mention just one, The Australian Financial Review revealed that the much-vaunted credible path to long-term surplus depends on the inclusion for the first time of earnings from the Future Fund in the budget bottom line from 2020.
Even if the cost does blow out, the bill may not be delivered until after the next election. And if people buy Hockey’s sales pitch, suspending disbelief at his abrupt change of rhetoric, that election could come sooner rather than later.
This article was first published in the print edition of The Saturday Paper on May 23, 2015 as "Magic pudding".
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