For a more comprehensive round up of the week, listen to Stephen’s full report here
On the eve of the 2014 Federal Budget the key messages are at last starting to be articulated starting to counter the confidence-sapping collection of leaks of what may apparently be in the budget. At the weekend, Treasurer, Joe Hockey, at last started to highlight the key themes likely to run through Tuesday’s budget – arresting a long-term gap in growth of government spending over government revenues and a nearer term big boost to building infrastructure spending to grow employment as a sharp decline in mining investment works to crimp growth and potentially push the unemployment rate up. If the budget looks like achieving both of these themes it may be grudgingly applauded in sharp contrast to the almost universal criticism of the leaked measures to date.
Part of the problem has been one of the Government’s own making, allowing a series of possible tax change and spending savings proposals to run in the public arena as “leaks” of what might be in the budget without adequately indicating how the changes fit in to the overall strategy of the budget. It was too easy for the media to present the approaching budget as a slash and burn affair and little else sometimes with entirely misleading and unchallenged supporting images such as showing pictures of forlorn current age pensioners highlighting the impact of lifting the pension qualifying age to 70 by 2033, a measure that will have no impact on any current age pensioner. The Government should have provided its guidance on possible budget measures in much better form, but the media has also been at its disingenuous worst in the way it has reported the budget leaks. The net result is that business and consumer confidence may have taken a bigger hit than was necessary.
If, as the recent Audit Commission Report highlights, government spending is on a trajectory that is faster than government revenue over the next decade on any reasonable set of economic growth assumptions, there can be no reasonable doubt that the position needs to be addressed. If the position is addressed while the budget and borrowing positions of the government are not in crisis (as is the case at present) the outcomes, in terms of future average economic growth and unemployment rates, are likely to be significantly better than would be the case if change is forced on some future government by a crisis. In a nutshell, that is what the “tough” 2014 budget should be about, avoiding a legacy of severe austerity for Australians in the not too distant future.
The best way to go about budget cutting is fairly and equitably. A temporary income tax levy certainly meets that requirement if only levied on higher income earners. Changing means test thresholds on government benefits and tax concessions may also meet this requirement. It is of course the case that nobody likes being taken off a benefit or tax break that they currently receive, but where benefits are provided to people well able to care for themselves, clearly that should be a priority area for making change. Most of the leaked changes seem to fit into this category.
Turning to what looks like being the biggest spending initiative in the budget, a sharp lift in new spending on government infrastructure spending, this may well help to offset the negative impact on near-term growth prospects from declining mining investment spending. Two provisos, however, are that it will be very difficult to match off with any precision rising government infrastructure spending and falling mining investment. Growth may be subject to greater-than-usual lumps and bumps as a result creating difficulty assessing just how well or otherwise the economy is growing. And secondly, that there is always the risk that big swags of infrastructure funding are directed to greatest electoral rather than economic advantage. Big infrastructure spending projects should really be ranked according to the size of their net benefit to the economy. A published cost-benefit analysis of each major project would be the best way of showing that government money is being spent to best economic advantage.
All told, the most damaging, confidence-sapping, “shock-horror” phase of Budget 2014 may already be over. It is unlikely that any new, big spending cuts or tax hikes will be revealed tomorrow night. Instead, rather as the Treasurer started to do at the weekend, the budget will be placed more firmly in the context of a strategy to offset the negative impact of the mining investment spending downturn near-to-medium term and of avoiding the need longer-term for true, European-style austerity budgeting. In time, Budget 2014 could even be viewed as an opportunity well-taken.