The Weakest Fix

It appears the Abbott Government has given up on cutting the budget deficit and slashing government debt.

It appears the Abbott Government has given up on cutting the budget deficit and slashing government debt. In retaining the leadership of the Liberal Party, Tony Abbott has dropped a range of his existing policies that were aimed at reducing government spending and lifting government revenue, and he has added a few extra spending items into the mix. Even before these policy reversals, the evidence was mounting that the budget deficits were getting bigger and the growth in the level of government debt was accelerating, in part driven by the Abbott Government’s own approach to fiscal policy. Almost halfway through their first term in office, the Abbott Government has failed in its commitment to reduce the budget deficit and cut government debt. In fact not only has he failed, but the reverse has happened. The budget deficit is getting bigger and the level of government debt is rising. According to data from the Australian Office of Financial Management, when the Coalition won the September 2013 election, the level of gross government debt was $273 billion. Net government debt at the end of August 2013, according to Department of Finance data, was $161 billion. The most recent data show that gross government debt has increased by $82 billion to $355 billion, while net government debt has jumped by $78 billion to $239 billion. Both are record highs. These are extraordinary increases under a government committed to fixing the ‘budget mess’ by returning to budget surplus and paying down debt. The rate of increase in both net and gross debt over this short time frame is proportionally faster than the increase in the period from 2010. The reasons for the debt blow-out is linked to a mix of issues, but included among them are decisions from the Abbott Government to lift spending at a faster pace than revenue. To be sure, a softer global economy and the sharp fall in Australia’s terms of trade are undermining national income and with it tax revenue for the government. But this does not explain policy decisions that have damaged the budget bottom line including the $8.8 billion cash payment to the RBA, the ramp up in spending on roads and border security, and the revenue foregone from abolishing the price on carbon and the mining tax. The second budget of the Coalition government will be delivered on Tuesday, May 12. It is being framed with the domestic economy stuck in the slow lane, the unemployment rate too high and inflation too low. Treasury started the hard work of framing the budget a few weeks ago, with the economic forecasting round dominating the early work. While there are still a lot of variables that will impact on the budget bottom line when it is handed down, the mix of policy impotence and on-going soft economic conditions mean the budget bottom-line deficit will almost certainly be larger than those estimated in December’s Mid Year Economic and Fiscal Outlook. This means that the budget deficit for 2014-15 will be close to $45 billion, roughly double the level estimated in the Pre Election Fiscal Outlook (PEFO) prepared independently by Treasury and Finance during the 2013 election campaign. For 2015-16, the deficit is set to be around $35 billion, more than seven times the $4.7 billion deficit forecast in (PEFO). The position is even more extreme for 2016-17, where the budget deficit is set to exceed $25 billion, which is in stark contrast to the PEFO estimates, which were for a $4 billion budget surplus. With the economy muddling along and the unemployment rate set to remain above six percent for several years, sound economic policy would be to deliver measures designed to support growth. Certainly the RBA is acting on this with its recent decision to cut official interest rates to record lows of 2.25 percent and signaling that more rate cuts are likely in the months ahead. There is a dilemma for the Coalition Government as it frames its budget. Does it follow through and do what it said it would and ‘fix’ the budget with a range of substantial spending cuts and tax hikes, which would work to further slow the rate of growth, or will it embrace the legacy of the previous government, and Treasurer Wayne Swan, and use budget policy setting to support economic and jobs growth when the economy is soft? The irony is exquisite. Policy stimulus will see the government deficit and debt increase and further damage the political credibility of the government. For the sake of the economy and jobs, it might be a price worth paying.

X