The 2017 Budget in history
Sunday, May 21, 2017, 03:52 AM | Source: Pursuit
By Ross Garnaut
The 2017 Budget has been described as marking the capitulation of Coalition policy to a "progressive", "social democratic", "Labor" or "populist" agenda.
Yes, it will be remembered for the cutting down from the Senate scaffold of many corpses from the Budget that was outsourced to the Business Council of Australia in 2014. But this is simply recognition of a reality revealed long ago. A simple Hayekian agenda of cutting expenditure and taxation has never been viable in Australia.
The 2017 Budget is nevertheless historic.
It is the Budget in which the Coalition recognises the reality, that budget consolidation requires contributions from increases in taxation as well as reductions in expenditure.
It is the year in which borrowing for investment is recognised as having a legitimate place in public finance. The debate now shifts to where to draw the line.
We need to be rigorous in drawing the line. The Government's capacity to borrow on reasonable terms is essential to protecting an open commodity economy from external instability. We are currently enjoying benign external and domestic cyclical circumstances. This is a time when we should be avoiding substantial additions to external public debt. The slings and arrows of outrageous fortune will come our way again.
The 2017 Budget takes an unrealistic and misleading approach to presenting forward estimates into a reductio ad absurdum. For nine years, the assumption that growth in output, wages, prices and employment would return to "trend" in the third and fourth years ahead has provided the revenue to eventually balance the budget. The gap between assumption and reality is even greater this year and will have larger consequences.
The flawed approach to estimating revenue has persisted because it has suited both Government and Opposition to avoid facing up to Budget realities. The reductio ad absurdum will end the pretense.
The 2017 Budget will be remembered for opening new debates over corporate taxation and energy policy.
Corporate capture of taxation policy has been a feature of the Great Australian Complacency of the early twenty first century. Corrosion of the corporate taxation base has contributed to two weaknesses of the contemporary Australian economy: persistent public deficits; and growing inequality in income distribution. Corporate capture has narrowed active discussion of corporate tax reform to cutting the corporate tax rate.
While the new bank levy lacks an explicit and consistent rationale, its introduction marks a turning point in discussion of corporate taxation in Australia. It has been demonstrated that it is politically possible to raise additional revenue from the corporate sector. That opens the way to evaluation of alternative taxation instruments, that raise additional revenue without negative effects on investment and economic efficiency. The new bank levy is far from an ideal means of taxing regulatory rents. Analysis of its weaknesses can lead to more general discussion of the value of shifting the corporate taxation base from competitive income to rents.
The Budget has immense implications for energy policy. The Commonwealth's commitment to major investment in the Snowy River hydro-electric scheme represents a fundamental departure from the competitive neutrality principles upon which the National Electricity Market (NEM) was built a quarter of a century ago.
The competition principles require separation of the competitive parts of the electricity system—generation and retailing—from the natural monopoly of the network. The ideal specified at the time was that the competitive parts of the system should be privatised, or, if retained in public ownership, operate without government assistance.
The Commonwealth Government's prominent role in future investment in the Snowy fundamentally changes the character of the National Electricity Market. Snowy Hydro, current owner of the Snowy Mountains hydro-electricity generation and other generation assets, is also a major retailer of power. As a result, the introduction of competitive distortions into generation will distort the retailing market as well.
The NEM will have to be transformed, or the operations of Snowy Hydro changed.
While the NEM has had some large problems, the ideal of competitive generation of power is not one of them. There are prospects for the correction of problems in response to the current ACCC and Finkel Reviews. It would be better to retain a competitive generation system, and to change the way Snowy Hydro operates.
Alongside the Commonwealth's proposed takeover of the New South Wales and Victorian Governments' majority ownership of Snowy Hydro, the company's generation assets outside the Snowy Mountains Scheme and its retail business could be sold into the private sector. That would leave the Commonwealth-owned Snowy Hydro with its hydro-electric generation and storage to focus on grid and wholesale market stability. It would avoid the Commonwealth assisting one player more broadly in the generation and retail markets.
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