Failing to find path to credibility

Prime Minister Menzies was never pilloried for running seventeen successive deficits and risking burdening my generation with onerous amounts of debt.

Times changed and deficits became taboo.

The latest 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 twelve 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 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 off shore will also benefit. There’s plenty of evidence to suggest, the MIS disaster for instance, that up front tax deductions don’t necessarily lead to optimal resource allocation. Whilst 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 2015/16 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 WA. 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 as high as $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 ten 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 deficits. Their borrowings are at an uncomfortably high level if one includes government owned 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 capex 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 broad based land taxes from those who benefit from increased property values.

PM 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% 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 2018/19 gross debt will increase by $154 billion but net debt by only $75 billion to $325 billion.

The government will be spending, as a % of GDP, as much as Kevin Rudd did when he propped up aggregate demand after the GFC 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 so perhaps a truce will be called and economic policy discussion can hopefully move to a more sensible level.

Interest on net debt will be $13 billion for 2015/16 and $14 billion three years later. This is only 3% of budget outlays and less than 1% of GDP. It’s the least of our problems.

The government has been 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, whilst 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 is optimal for children so that mortgages can be paid which in turn has necessitated  government subsided child care.

Private debt is almost ten times the size of Federal government debt yet the government’s strategy as enunciated by the Treasurer just after the RBA dropped interest rates to record lows and repeated relentlessly since is to urge the private sector to borrow more.

Budgets should primarily be about ensuring the nations’ available resources are fully utilised.

On that score the budget is a conspicuous failure.

It may be fairer than last year but it has little economic merit.

 

(Published in The Mercury 14th May 2015)