Wednesday, December 18, 2013

Budget deterioration is real, but Labor not to blame

How on earth did we convince ourselves this bunch would be miles better at fixing the budget than the last lot?

Joe Hockey claims his midyear budget update is an honest assessment of the state of fiscal affairs he inherited from Labor. It isn't.

Rather, it is an attempt to lower our expectations about the speed and ease with which the Coalition will be able to get the budget back on track. He won't be able to achieve it for many years - he's not saying when - and not without significant and painful, but as yet unidentified, cuts in government spending.

In short, he is unlikely to be able to do it much faster than Labor would have. What's likely to differ is who will bear most pain. Labor would have erred in the direction of higher taxes, particularly on the better-off. Hockey has ruled out higher taxes and is hinting at cuts in government spending on "welfare, education and health".

Contrast this grim slog with all the Coalition said in opposition about the budget deficit being purely the result of Labor mismanagement, which it could quickly put right if only it was in government.

This time last year Tony Abbott and Hockey were promising to deliver a budget surplus in each year of their first term. By the election campaign the return to surplus had been delayed until the first year after the next election. Now even that's in doubt.

Hockey claims the midyear review and the latest deficit estimates it contains draw "a line in the sand". From now on, he says, he will take responsibility for budget estimates. In truth, he is trying to shift the goalposts in his favour.

Although the pre-election budget statement, certified by the most senior econocrats, was specifically instigated by the Howard government to remove all doubt about the true state of the budget at election time, Hockey is claiming to have uncovered a budget black hole.

This financial year's budget deficit is now expected to be $17 billion bigger, while the cumulative deficits for the next four years are expected to be $68 billion bigger. Little of this can be fairly attributed to the previous government.

More than 60 per cent of the expected worsening in this year's deficit is attributed to decisions made by the Abbott government, most particularly the capital grant of almost $9 billion to the Reserve Bank, which the Reserve didn't ask for and Treasury recommended against.

It represents a piece of creative accounting, loading up the deficit in the year for which Labor can be blamed so as to improve the deficit in the years for which the Coalition will be responsible.

When you look at the expected deterioration over four years, however, 80 per cent of it is attributable to the worsening in the outlook for the economy just since the election. Hockey is trying to shift the blame for this deterioration on to Labor but, in truth, if it comes to pass it will be caused by factors largely beyond the control of any government.

Hockey is right in his claim that government spending grew a lot faster under Labor than it tried to have us believe. He is right, too, in saying the present prospect of another decade of deficits cannot be accepted.

We are being softened up for a tough budget in May. What remains to be seen, however, is whether Hockey and Abbott have the toughness needed to get the budget back on track and do so without damaging the economy in the short term or sharing the pain unfairly.