MYEFO Confirms Hockey Is Lost As The Economic Fog Sets In
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Although it has been over-shadowed by the dramatic events in central Sydney, yesterday's release of the Mid-Year Economic and Fiscal Outlook is important news in its own right.
The MYEFO, as everyone abbreviates it, is the half-yearly scorecard
that lets Australian citizens know how the government's budgetary policy
is progressing. It sets out the state of the nation's finances,
allowing us to assess how Treasurer Joe Hockey has been performing.
How has Hockey been performing? On yesterday's figures, poorly.
The government has been giving broad hints in recent weeks that the
budget's bottom line has deteriorated markedly. Falling revenues linked
to collapsing commodity prices have hit the budget hard.
The headline figure sees the budget deficit balloon to $40.4 billion
in underlying cash terms. That's 2.5 per cent of GDP. The deficit is
$10.6 billion worse than the $29.8 billion forecast in Hockey's May
budget.
The rivers of red ink flow on and on. The MYEFO updates the fiscal
outlook to project budget deficits all the way through the forward
estimates. To add to the $10 billion this fiscal year, the deficit also
blows out by an extra $13.5 billion, $10.2 billion and $8.7 billion in
2015-16, 2016-17 and 2017-18. The budget has been written down a
cumulative $43 billion over the forward estimates.
By 2018, the budget deficit will still be around $11 billion. It
seems unlikely Australia will return to the black until the first year
of the government elected in 2019. Joe Hockey's pre-election bluster
about the Coalition's superior fiscal management skills is looking
decidedly short-sighted.
The reason for the deficit is plain enough: the Australian government
spends more money than it raises in tax revenue. Receipts this fiscal
year are estimated to be $379 billion. But payments are $417 billion.
With spending at 25.9 per cent of GDP, the Abbott government is indeed
spending more than Julia Gillard's government – more, in fact, than
every year of the Rudd-Gillard era, except the stimulus year of 2009-10.
These figures show two things.
Firstly, the Abbott government is not truly pursuing austerity. It
has not cut spending in any appreciable terms. Spending is up in both
real and nominal terms. Since taking office, the government has
increased outlays across several different measures, such as fighting
another foreign war and giving the Reserve Bank an unnecessary $8.8
billion. Back in 2013, Wayne Swan's final budget forecast government
payments this year to be around 24.4 per cent of GDP. Instead, they will
be 25.9 per cent.
That's not to say the government hasn't made cuts, of course.
Overseas aid has yet again been slashed – to its lowest level on
record. More cuts have been made to health and education. Meanwhile
wealthy superannuants, carbon polluters and big mining companies have
been rewarded.
The truth of the Abbott government's fiscal policies is not so much a
cut in spending, as a redistribution of it – away from the world’s poor
and from low- and middle-income families, and towards big business, big
polluters and the top end of town.
Secondly, the cause of this fiscal woe is weak revenue. As happened
to Wayne Swan, Joe Hockey has found that the revenue arriving in ATO
coffers has been much less than forecast. Thus there have been revenue
downgrades worth tens of billions of dolars.
The MYEFO papers say that the two main reasons for the revenue
shortfall are falling commodity prices and the government’s inability to
pass savings measures in the Senate.
Iron ore is a chief culprit. The May budget factored in iron ore
prices at $90 a tonne. They're now well south of that, wiping billions
from company tax receipts. According to the Treasury, falling iron ore
prices will cost $14.4 billion over the forward estimates. The Treasury
is now setting its iron ore benchmark at $60, suggesting just how weak
it thinks global iron ore demand will remain.
The fall in global commodity prices and the tail-off of Australia's
mining boom are impacting the budget in other ways. Family Tax Benefit
payments are up, in large part because wages across the economy are
down.
“Family Tax Benefits are expected to increase by $3.2 billion over
the forward estimates, largely reflecting the impact of lower than
expected wage growth which is driving up average payment rates and
recipient numbers,” the MYEFO confirms.
All up, the MYEFO is more evidence of the “income recession” that economists like Ross Garnaut have been warning about.
As Australia's terms of trade fall, the weakness in our exports is
flowing through to slow wages growth and lower company profits. With
iron ore, coal and gas prices all falling, the MYEFO states bluntly that
the coming fall in our terms of trade will be “the largest fall in the
terms of trade in a financial year since the Australian Bureau of
Statistic's Annual National Accounts started in 1959-60.” Ouch.
What can Joe Hockey do? In the short-term, not much.
The economy is too weak to sustain a major cut in government
spending, as even Hockey himself has acknowledged. Raising taxes would
also hurt growth. The other levers that could really help, such as
interest rates and the exchange rate of the dollar, are out of the
Treasurer's hands.
Even if economic growth were to improve, Australia still has a structural budget deficit.
While neoliberal radicals still argue for a sustained drop in
government spending, in the long-term, we will need to raise more taxes
if we are to live within our means. Tax reform could help, of course, by
broadening the tax base and eliminating costly tax concessions and
perks. But tax reform is difficult, as the government found when it made
a minor adjustment to fuel excise.
As a result, the Abbott government finds itself in a difficult political position.
After campaigning so strongly on economic management in 2012 and
2013, the Coalition is discovering that a change of government in
Canberra can't magically improve the global factors that increasingly
determine Australia's economic wellbeing.
Many will wonder if the MYEFO is being rather optimistic when it
forecasts economic growth of 2.5 per cent next year. It could easily be
lower than that. If so, unemployment could rise above 7 per cent. And
all of this is assuming we don't see any “black swan” events, like a
European financial meltdown or political turmoil in China.
At the end of a bruising political year in which the Coalition has
spent nearly all of its political capital on a deeply unpopular budget,
the government can't claim much in the way of economic success. The
economic outlook is flat, or even negative, while the budget itself is
even worse than when Joe Hockey took office.
A weak economy means weak revenues, and that's a political as well as
an economic problem for Tony Abbott's government. The Coalition will
not have the money to fund extravagant election promises in 2016, and it
won't be credibly able to claim it can deliver a surplus either.
And that's the real message of yesterday's report. As in so many
other policy spaces, the MYEFO shows that the Coalition's economic
policy is hopelessly confused.
The MYEFO, as everyone abbreviates it, is the half-yearly scorecard
that lets Australian citizens know how the government's budgetary policy
is progressing. It sets out the state of the nation's finances,
allowing us to assess how Treasurer Joe Hockey has been performing.
How has Hockey been performing? On yesterday's figures, poorly.
The government has been giving broad hints in recent weeks that the
budget's bottom line has deteriorated markedly. Falling revenues linked
to collapsing commodity prices have hit the budget hard.
The headline figure sees the budget deficit balloon to $40.4 billion
in underlying cash terms. That's 2.5 per cent of GDP. The deficit is
$10.6 billion worse than the $29.8 billion forecast in Hockey's May
budget.
The rivers of red ink flow on and on. The MYEFO updates the fiscal
outlook to project budget deficits all the way through the forward
estimates. To add to the $10 billion this fiscal year, the deficit also
blows out by an extra $13.5 billion, $10.2 billion and $8.7 billion in
2015-16, 2016-17 and 2017-18. The budget has been written down a
cumulative $43 billion over the forward estimates.
By 2018, the budget deficit will still be around $11 billion. It
seems unlikely Australia will return to the black until the first year
of the government elected in 2019. Joe Hockey's pre-election bluster
about the Coalition's superior fiscal management skills is looking
decidedly short-sighted.
The reason for the deficit is plain enough: the Australian government
spends more money than it raises in tax revenue. Receipts this fiscal
year are estimated to be $379 billion. But payments are $417 billion.
With spending at 25.9 per cent of GDP, the Abbott government is indeed
spending more than Julia Gillard's government – more, in fact, than
every year of the Rudd-Gillard era, except the stimulus year of 2009-10.
ABC carried split coverage of MYEFO as the Lindt siege continued in Sydney
These figures show two things.
Firstly, the Abbott government is not truly pursuing austerity. It
has not cut spending in any appreciable terms. Spending is up in both
real and nominal terms. Since taking office, the government has
increased outlays across several different measures, such as fighting
another foreign war and giving the Reserve Bank an unnecessary $8.8
billion. Back in 2013, Wayne Swan's final budget forecast government
payments this year to be around 24.4 per cent of GDP. Instead, they will
be 25.9 per cent.
That's not to say the government hasn't made cuts, of course.
Overseas aid has yet again been slashed – to its lowest level on
record. More cuts have been made to health and education. Meanwhile
wealthy superannuants, carbon polluters and big mining companies have
been rewarded.
The truth of the Abbott government's fiscal policies is not so much a
cut in spending, as a redistribution of it – away from the world’s poor
and from low- and middle-income families, and towards big business, big
polluters and the top end of town.
Secondly, the cause of this fiscal woe is weak revenue. As happened
to Wayne Swan, Joe Hockey has found that the revenue arriving in ATO
coffers has been much less than forecast. Thus there have been revenue
downgrades worth tens of billions of dolars.
The MYEFO papers say that the two main reasons for the revenue
shortfall are falling commodity prices and the government’s inability to
pass savings measures in the Senate.
Iron ore is a chief culprit. The May budget factored in iron ore
prices at $90 a tonne. They're now well south of that, wiping billions
from company tax receipts. According to the Treasury, falling iron ore
prices will cost $14.4 billion over the forward estimates. The Treasury
is now setting its iron ore benchmark at $60, suggesting just how weak
it thinks global iron ore demand will remain.
The fall in global commodity prices and the tail-off of Australia's
mining boom are impacting the budget in other ways. Family Tax Benefit
payments are up, in large part because wages across the economy are
down.
“Family Tax Benefits are expected to increase by $3.2 billion over
the forward estimates, largely reflecting the impact of lower than
expected wage growth which is driving up average payment rates and
recipient numbers,” the MYEFO confirms.
All up, the MYEFO is more evidence of the “income recession” that economists like Ross Garnaut have been warning about.
As Australia's terms of trade fall, the weakness in our exports is
flowing through to slow wages growth and lower company profits. With
iron ore, coal and gas prices all falling, the MYEFO states bluntly that
the coming fall in our terms of trade will be “the largest fall in the
terms of trade in a financial year since the Australian Bureau of
Statistic's Annual National Accounts started in 1959-60.” Ouch.
What can Joe Hockey do? In the short-term, not much.
The economy is too weak to sustain a major cut in government
spending, as even Hockey himself has acknowledged. Raising taxes would
also hurt growth. The other levers that could really help, such as
interest rates and the exchange rate of the dollar, are out of the
Treasurer's hands.
Even if economic growth were to improve, Australia still has a structural budget deficit.
While neoliberal radicals still argue for a sustained drop in
government spending, in the long-term, we will need to raise more taxes
if we are to live within our means. Tax reform could help, of course, by
broadening the tax base and eliminating costly tax concessions and
perks. But tax reform is difficult, as the government found when it made
a minor adjustment to fuel excise.
As a result, the Abbott government finds itself in a difficult political position.
After campaigning so strongly on economic management in 2012 and
2013, the Coalition is discovering that a change of government in
Canberra can't magically improve the global factors that increasingly
determine Australia's economic wellbeing.
Many will wonder if the MYEFO is being rather optimistic when it
forecasts economic growth of 2.5 per cent next year. It could easily be
lower than that. If so, unemployment could rise above 7 per cent. And
all of this is assuming we don't see any “black swan” events, like a
European financial meltdown or political turmoil in China.
At the end of a bruising political year in which the Coalition has
spent nearly all of its political capital on a deeply unpopular budget,
the government can't claim much in the way of economic success. The
economic outlook is flat, or even negative, while the budget itself is
even worse than when Joe Hockey took office.
A weak economy means weak revenues, and that's a political as well as
an economic problem for Tony Abbott's government. The Coalition will
not have the money to fund extravagant election promises in 2016, and it
won't be credibly able to claim it can deliver a surplus either.
And that's the real message of yesterday's report. As in so many
other policy spaces, the MYEFO shows that the Coalition's economic
policy is hopelessly confused.
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