Talk about mixed messages on the economy. The government deliberately politicised the budget by moving it forward to March 29, so it could be delivered before a May election, and having set aside $16 billion in the most recent midyear economic statement for pre-election spending. Then, in a recent statement to The Australian Financial Review, Treasurer Josh Frydenberg attempted to shift the focus to budget repair, with the paper stating “the federal budget will usher in the post-pandemic shift towards debt reduction and portray an economy recovering so quickly that taxes may need to be cut within several years, in addition to the already legislated stage three tax cuts”.
It must be nice to have disciples. Nicer still to have them believe this. Wanting to spend and cut taxes under the cloak of being a “responsible economic manager” and a “fiscal conservative” is nonsense.
The Morrison government is intent on exploiting its standing as the “better economic managers”, hoping to capitalise on the recent run of stronger headline economic numbers, especially employment numbers, and to emphasise the “risks” of a switch to Anthony Albanese and Labor. That task has become somewhat more difficult with the increases in oil prices accentuated by the Putin invasion of Ukraine, which has focused voter attention on the costs of living, ensuring it is a major issue in the forthcoming election.
The task is also magnified by the rapid acceleration in global inflation and the United States Federal Reserve leading global central banks, including ours, in raising interest rates in response. The Fed, responding to the most rapid acceleration in US inflation in about four decades, recently raised rates for the first time since 2018, clearly at odds with its earlier view that the inflation was “ transitory” and reflected mostly supply chain disruptions driven by the pandemic. It signalled that six more rises were likely by year’s end.
The main question being asked in financial markets is whether it will be possible for the Fed to avoid precipitating a recession as a result, especially as other central banks follow and the Putin invasion works to slow global growth anyway.
It is important to cut through the government’s budget hubris of the past decade or so to appreciate the reality of the situation in our economy. The Morrison government still boasts that it had put our budget “back in black” (but never actually achieved this), and that allowed them to spend big to get us through the pandemic. The longer-term consequences of the magnitude and speed of this turnaround have not yet been fully recognised.
Here, the government likes to emphasise a difference from Kevin Rudd’s spending to avoid a recession from the global financial crisis. Scott Morrison has had to drop his rhetoric about a “debt and deficit disaster”. As Michael Pascoe pointed out recently, they are attempting to change the narrative and play down the debt challenge. The government now speaks in terms of debt as a proportion of gross domestic product, wanting to focus attention on its strategy of growing the denominator GDP, hoping to create the impression that it has a deliverable strategy to manage our debt problem by growing out of the problem.
The recent statement by Frydenberg, dangling the possibility of more personal tax cuts to drive this growth, undermines the integrity of this debt-reduction strategy. It should be recognised that pre-pandemic there was a strong view that government commitments would ultimately require an increase in the overall tax burden by a significant percentage of GDP. This reflected spending commitments made across most portfolios, in health and education, infrastructure, defence and the National Disability Insurance Scheme. Add to that the pandemic debt and the task is daunting, with total debt edging above $1 trillion, even with favourable near-term revenue increases owed to commodity prices.
The overriding fiscal policy question remains as to whether it is possible – indeed, sensible – to hope to achieve budget repair and debt management simply by growing our way out of these challenges rather than through expenditure cuts and tax increases, especially as the world economy grapples with an environment of stagflation – weakening growth with rising inflation.
The pressing tax issue is the need for overall reform of the tax system, and the related transfer system, when both major parties have taken reform off the agenda following the acrimonious, dishonest and divisive tax debate and scare campaigns of the 2019 election. The structural issues remain, of course, specifically the considerable inequities of the present system, its unsustainability in many respects, and the need to broaden the base and address the limitations and failings of certain taxes. There are also specific tax challenges. For example, the potential decline in petrol excise, Ukrainian impacts aside, with the inevitable transition to electric vehicles and the need to move levies onto road users and apply congestion charges. Then, dare I hope, there is the question of a price on carbon.
The government can be expected to boast of the bottom-line improvement achieved already from better-than-forecast iron ore and coal prices and lower welfare payments. This improvement has been estimated by PwC and Deloitte to be $20 billion to $30 billion. Labor’s shadow treasurer, Jim Chalmers, has estimated that even if all of this is injected into the bottom line, which he doubts it will be, it would still leave us with the “third-biggest deficit, in dollar terms, on record”.
Still, you can also expect that the government will boast of and take for granted their poll standing as better economic managers. At best this is an exaggerated claim, given that data can be quoted to demonstrate how they have been the highest spending and taxing government in our history and have been quite draconian when attempting to cut expenditure, as in the first Abbott–Hockey budget of 2014. Recall as well the Howard–Costello government’s squandering of the revenue windfall from the China-based resources boom and its promises of unaffordable personal tax cuts and excesses such as the baby bonuses earlier this century.
You could also emphasise their form in rorting public monies for potential electoral gain, not only in relation to sporting facilities, golf courses, regional community and car park grants, and land deals, but even on the issue of disaster payments.
Finally, it will be important that fiscal and monetary policy is co-ordinated in pursuit of growth. The Reserve Bank of Australia has admitted that it may need to raise interest rates this year, adding to very real cost-of-living pressures, perhaps beginning as early as late May, not long after the election. Some private-sector economists are predicting as many as three to four increases this year. There will certainly be a global trend to raise rates, led by the US Fed, as mentioned above. It will be a significant challenge for policymakers to work together.
Our RBA enjoys statutory independence from the government, with its activities targeted to controlling inflation. The Treasury will be focused on growth and employment within a stable inflationary environment. It may require the RBA to move on from inflation targeting, to perhaps focus more on growth and productivity targeting.
To summarise, there are some very challenging choices to be made in setting our economy on a sustainable forward pathway. It will then be a significant marketing challenge to present and explain these choices to a bruised and naturally sceptical electorate.
However, I doubt the government, whatever it attempts in the budget and irrespective of whatever scare campaign it runs against the Albanese opposition, will improve their electoral prospects. The significance of the loss of trust and belief in Morrison is just too great. (In a recent Roy Morgan survey, Morrison topped the list of our least trustworthy politicians.)
It will not be possible for the Coalition to bullshit or buy their way back into office, except perhaps as a minority in a hung parliament.
John Hewson is chair of the Tax and Transfer Policy Institute advisory committee at the Crawford School of Public Policy, Australian National University College of Asia and the Pacific.
This article was first published in the print edition of The Saturday Paper on March 26, 2022 as "Can I speak to the manager?".
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