Failing to find a path to credibility
PRIME Minister Robert Menzies was never pilloried for running 17 successive deficits and risking burdening my generation with onerous amounts of debt.
Times, however, changed and deficits became taboo.
The latest Federal Budget shows deficits are here to stay — even the uncertain projections of later years reveal deficits.
The talk is now of having a creditable path to a surplus.
Arguably, the more pressing need is to find a credible path to credibility.
Never has there been such a radical shift from one budget to the next, from fixing a debt and deficit disaster to living with a wing and a prayer 12 months later.
The Budget is predominantly a political reaction not an economic plan.
The centrepiece appeal was to the hearts, minds and pockets of small business owners with annual turnovers less than $2 million who can now get an immediate tax deduction, for the next two years, for the purchase of any business asset for less than $20,000.
It hasn’t been obvious that the lack of investment in small assets by small business owners has been a stumbling block. The world is awash with unused capacity. Lack of demand is the problem.
The slowing down of investment following the end of the capital investment stage of the mining boom is more likely due to the lack of aggregate demand in the economy, not because tradies and other small businesses have worn out gear that needs
John Lawrence
replacing. There will be a lot of sales done at $19,999. And no doubt computer sellers like Apple who currently, ironically, book much of their income offshore will also benefit. While obviously welcome by small businesses, the economic case for the measure is not overwhelming.
Tasmania received good news in March that general purpose grants via its GST share for 2015-2016 will be $140 million more than expected a year ago.
Future relativities between states are dependent on numerous factors, particularly iron ore royalties received by Western Australia.
The Budget contains estimated future GST relativities and entitlements incorporating forecast iron ore royalties. The news is still good for Tasmania. Over the next three years GST receipts could be up to $533 million more than expected a year ago.
However extreme care needs to be taken with the estimated relativities. These can change rapidly. So too can the size of the GST pool.
Not so lucky were the specific purpose grants, including national partnership payments which Treasurer Hockey last year slashed by $80 billion over a 10 year period, mainly in later years. No further word in this year’s Budget. When asked at Tuesday’s Budget lock up the Treasurer reportedly said: “Some of the states are running surpluses, we are not running a surplus. Don’t shed a tear for the states.”
States are much more constrained with revenue raising and have little ability to run surpluses. Their borrowings are at an uncomfortably high level if one includes governmentowned businesses. Not so the Federal Government. Different levels of government have different capacities.
The Federal Government’s balance sheet reveals negative assets — net liabilities in excess of assets — due to accumulated cash deficits. It will always be that way and is not of concern.
Next year’s cash deficit is projected to be $35 billion of which $8 billion is for the NBN and $18 billion to states for capital spending on roads and rail. Much of the accumulated federal deficit has resulted from capital-expenditure grants to states.
Borrowing a little more each year to fund infrastructure is hardly reckless behaviour. The key is getting the states to spend sensibly and get them to claw back a little each year via low, broadbased land taxes from those who benefit from increased property values.
Prime Minister Tony Abbott, our self anointed infrastructure king, did little to retain his regal title.
Apart from some spending in Northern Australia, nothing new of substance was earmarked for the other 98 per cent of the population.
By June, 2015, gross government debt will be $430 billion but net debt $250 billion after assets such as Future Fund investments are deducted.
By 2018-2019 gross debt will increase by $154 billion but net debt by only $75 billion to $325 billion.
The Government will be spending, as a percentage of GDP, as much as Kevin Rudd did when he propped up aggregate demand after the global financial crisis hoping to forestall a recession.
It will therefore be difficult for the Government to continue to taunt the Opposition about it being addicted to spending and borrowing — perhaps a truce will be called and economic policy discussion can move to a more sensible level.
Interest on net debt will be $13 billion for 2015-2016 and $14 billion three years later. This is only 3 per cent of budget outlays and less than 1 per cent of Gross Domestic Product. It’s the least of our problems.
The Government has been
The Government will be spending, as a percentage of GDP, as much as Kevin Rudd did when he propped up aggregate demand after the global financial crisis hoping to forestall a recession.
forced to move a little quicker, or at least appear to do so, against tax avoidance by multinationals — not only Google and Apple but Rio and BHP who, while campaigning against the mining tax were diverting income via a hub in Singapore to Mauritius.
A more equitable plan requires giving a haircut to the superannuation concessions enjoyed by those fortunate to have been born or grew up through the Menzies years.
Also needed is a revision of
housing tax arrangements — negative gearing and concessional capital gains tax — which increase private borrowings and don’t add to GDP as existing houses are simply swapped at ever- increasing prices using more debt. The effect has also been to force homeowners with young children back into the workforce earlier than optimal for children, which in turn has necessitated government-- subsided child care so that mortgages can be paid.
Budgets should primarily be about ensuring the nation’s available resources are fully used. On that score the Budget is a conspicuous failure.
It may be fairer than last year, but it has little economic merit.