'All options on the table': Hockey unveils MYEFO, experts react

Federal Treasurer Joe Hockey’s first budget update has revealed a massive blowout to the bottom line and a warning of a decade of deficits ahead.

The government’s Mid-Year Economic and Fiscal Outlook (MYEFO) reveals a deficit for 2013/14 of A$47 billion, with deficits in subsequent years adding up to A$122.7 billion.

With a A$37 billion reduction in tax receipts expected over the next four years, Mr Hockey said immediate action was required to avoid a decade of deficits and that “all options are on the table” to address the problem.

The government has revised up expectations for unemployment in 2016/17 to 6.25%, and real GDP forecast has been downgraded half a per cent to 2.5% in 2014/15. Inflation is forecast to be 2.75% in 2013/14, before falling to 2% in 2014/15.

“Budget prudence is as much about resisting new spending as it is about the quality of existing spending,” Mr Hockey said.

“Australians will now have to adjust their expectations of what government can sustainably provide, otherwise our nation’s prosperity and our people’s quality of life will be at risk.”

Zareh Ghazarian, Lecturer, School of Political and Social Inquiry at Monash University

Today’s budget update marks an important point for the Abbott government. Fresh from celebrating its first 100 days in power, the Coalition has today outlined its plan on tackling what it says are unexpectedly large deficits. In a political sense, this is not necessarily bad news for the government.

Today’s MYEFO can serve as a circuit breaker for the Coalition which has appeared to be on the back foot after winning the September poll. Community concerns about politician’s travel expenses, revelations of spying on Indonesia and an ill-fated attempt at scrapping the Gonski education funding reforms have taken the shine off the new government. This has been reflected by a quick turnaround in opinion polling data that shows the government now trailing Labor on a two-party preferred basis.

In presenting the MYEFO, Treasurer Joe Hockey prepared the electorate for significant cuts in the May budget. While the government will be forced to reduce spending in some sectors, it needs to also be weary of the response voters will have to such cuts. Being the government’s first budget, it can afford to make some unpopular decisions now and try to claw back support in coming budgets. But such a strategy will be complicated if Abbott wants to go to a double dissolution election and reduce the time available to attract potentially lost electoral support.

The MYEFO gives the government an opportunity to lead the political debate again.

Managing the economy, especially by promising to “end the waste” was a core pillar of the Coalition’s electoral strategy while in opposition. It now has to demonstrate that it can make the transition to government and provide sound economic policies.

Sinclair Davidson, Professor of Institutional Economics at RMIT University

To my mind the most important information in the MYEFO is in table 3.4 (on page 29). This is the table that provides a reconciliation between the numbers we saw in the Pre-election Economic and Fiscal Outlook and the state of the books now.

Since the election the underlying cash balance (the deficit) has deteriorated from A$30 billion to some A$47 billion. Table 3.4 explains that A$17 billion difference. Broadly speaking there are two sources of variation - policy decisions taken by the Abbott government and so-called parameter variations.

The bulk of the variation is explained by spending decisions taken by the Abbott government - just over A$10 billion net. Of that $10 billion, A$8.8 billion is a transfer to the RBA. The remaining variation (some A$6.6 billion) is due to changes in forecasts of the economy over the budget period.

Here things become very interesting. Looking over the period 2013-14 to 2016-17 the government is revising revenue estimates down, but not so much spending estimates. This is consitent with slower growth in the economy, but it does also mean that the government are yet to reveal their actual strategy to balance the budget. To be fair, they are probably waiting for the Audit Commission to report and for the 2014 budget before revealing their strategy. This is a reasonable approach to adopt.

It does, however, raise expectations going into the 2014 budget process.

Neville Norman, Associate Professor at University of Melbourne

The onus now goes back to Mr Hockey, and unless he is prepared to raise the GST rate to at least 15 or 18% he will not close the deficit.

He can blame the Labor party now, and he’s right to blame them, but as time goes on this becomes Mr Hockey’s problem, not the Labor Party’s mess.

I trust the numbers on their assumptions, whereas I didn’t trust Mr Swan’s numbers on their assumptions.

Mr Hockey has two choices down the track - let the deficit ride or do something about it, and he has two choices within “doing something about it”.

He could slash government expenditure, which is inequitable and politically disastrous, or he could raise direct taxes - company tax and personal tax, which has a disincentive effect and promotes tax evasion. So the preferable way is the GST. The one tax that’s ultimately a fair and a good revenue raiser is the GST.

Increasing it was in the Fightback! package of John Hewson in 1991, so it’s not a new idea. It’s sensible but politically hard. “All options are on the table” is a very big statement - it means he may revisit the GST.

These announcements are quite monumental but why everyone’s shocked I don’t know. The deficit has been trending this way for a long time.

The biggest event for the decade will be the May budget of next year, and this is the prelude to that.

Colm Harmon, Professor of Economics at University of Sydney

The MYEFO discussion will focus on the deficit and the rather odd portrayal of the deficit accumulating over four years to A$122.7 billion rather then the much more sensible perspective of the deficit this year against the likely steps to reduce it appropriately and sensibly while growing the income side of the sheet. So for a start the whole language of “blowout” is pretty unhelpful.

The first thing is Hockey needs to do immediately is kill off the return to surplus language. It is pointless, tied to a political cycle, and completely conducive to bad decision making.

The deficit is ultimately modest by international standards - controlling it is appropriate, not allowing further expansion is critical, but equally calm heads are needed about the issue. The second thing to recognise in these figures is that the problem is one of income. While indeed “no country has ever taxed itself to prosperity”, equally few countries have allowed inflation to run so far ahead of tax bracket changes, nor faced problems on revenue when there are open goals around tax treatment of pensions or housing investors (such as negative gearing), while tinkering about with populist issues like GST on overseas spending or on salary-sacrificing the company car (ultimately a pittance in comparison to other taxes).

Speaking of GST, no country serious about their deficits would have such a low rate and so many product exemptions. And certainly no country would be contemplating a policy around parental leave that while couched in terms of being something to help the labour market is actually just pork-barrel spending. If you are serious about the labour market you would be implementing consistent policy on early education and childcare markets instead of generous parental leave policies. There is lots that can be done without having negative impacts on industries, consumers, or investors planning new companies and start-ups (as opposed to just buying Sydney housing). Cuts are inevitable, but not all cuts save you money.

Cutting waste is one thing. Cutting key programs in health or education, or institutionalising policy incoherence (such as we like school reforms, but don’t really value science or higher education so lets cut there as it is easy) is another. To me, ultimately the issue is one of income growth.

Sharp corrections on the spending side will have a negative impact in a period of fragile growth, so that is hard to do. Despite the unpopularity, closing off some tax loopholes or allowing inflation to erode some of the bracket creep in income taxes are far less damaging ways to gain momentum on the income side of the equation. I would also hope the government would learn lessons from the European debate - political rhetoric and spin on the economy is a dead end street. Outline a plan and give it straight up - the people will understand and get the message.

Sinclair Davidson is Professor of Institutional Economics at RMIT University and a senior fellow at the Institute of Public Affairs. He has previously been funded by the Australian Research Council.

Colm Harmon, Neville Norman, and Zareh Ghazarian do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.