This year's federal election was ultimately determined by economic credibility. The independents determined Labor had more credibility than did the Coalition.
A hole in a projected Coalition budget surplus was enough to return a minority Gillard government. The great irony, of course, is that a hole is now appearing in Gillard's budget projections. And this hole doesn't just reduce the size of the surplus, as may have been the case with the opposition's costings if Treasury's assumptions were correct. This hole will keep the government in deficit. Further, this hole appeared because Treasury's assumptions about exchange rates were incorrect.
Of course, the ultimate irony is that the Rudd-Gillard governments have been unable to balance a single budget. Both the Prime Minister and the Treasurer have been eager to say the budget is in surplus or will be returning to surplus. This is the basis of their economic credibility.
Yet it is becoming clear that the promised 2012-13 budget surplus is in some doubt. The resource super-profits tax and its substitute mineral resources rent tax were always pie-in-the-sky notions built on misinformation, dodgy assumptions and plain wishful thinking.
What we're seeing is an unravelling of government spin.
The story we're being told is that the high Aussie dollar is causing forecast revenue to decline. There is a grain of truth in that argument, but it is unconvincing on the whole. It beggars belief that Treasury does not undertake extensive sensitivity analysis around exchange rate assumptions. In any event, it is unlikely the Aussie will remain at present levels for an extended period. It is far likelier that government is simply unable to cover up the extent of its budgetary mismanagement.
The signs have been a long time coming. Initially the Rudd government was able to postpone all tough decisions by claiming the Henry review would answer all questions. When Henry reported, the government sat on the review for months before offering a very tepid response, the mining tax. Unfortunately neither the Henry review, nor government, had really investigated the issues much. It turned out that miners don't pay about 13 per cent tax, as a student working paper suggested. The tax was incomprehensible to most people, including the prime minister, who couldn't explain what a super-profit was.
When the tax was replaced by the resource rent tax it turned out Treasury had changed its pricing assumptions (but apparently not the exchange rate) to ensure the new tax raised almost as much as the old tax.
To be fair, forecasting is a difficult task. Treasury has a long and miserable history of poor forecasting. That fact alone should ensure that any claims of miraculous recoveries and pots of gold just over the horizon, or even in 2012-13, are heavily discounted. A new tax was never going to be the solution to poor budgetary management. Fiscal discipline and maintaining a budget surplus requires tight spending controls.
Ironically, Kevin Rudd was exactly correct in 2007 when he said "this reckless spending must stop". Right now we have fiscal policy still stimulating the economy at a reducing pace while monetary policy acts to slow the economy. The temporary, targeted and timely stimulus has gone on for too long and injected too much into the economy. That is why the government is so desperate for new sources of revenue.
Cutting spending is tough. The British coalition government has started down that path while the US has to move down that road, too. We are not in the dire predicaments of those two economies, yet we cannot be complacent.
Julia Gillard was claiming at the weekend that the present government has a record of savings, that $80 billion had been saved over their budgets. That is a very misleading statement.
Not spending money in the forward estimates isn't cutting spending. Spending less money this year than you did last year is a spending cut. Spending less next year than we did this year is a spending cut. Those are the kinds of spending cuts that will be necessary to bring the budget into surplus.
The ability to deliver that level of economic and fiscal discipline will make or break the Gillard government. If all the government does is plan to reduce the rate at which government spending increases then the budget most certainly will not be in surplus any time soon. Simply hiding behind dodgy assumptions and public servants will lead to ever-increasing levels of debt and deficit.
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