Last night, Tony Abbot gave a speech at the Sydney Institute which was all about softening the electorate up for some budget pain. He made the comment, not unreasonably, that the budget was a time to think about how fiscal policy changes affect not just you, but the country as a whole. Not exactly JFK, but the sentiment was there.
But it was a hollow remark. It’s a message the government would do well to heed itself. Instead of making some ballsy attempts at tax reform, the government will simply aim to target savings in the most politically palatable way. It’s pretty standard stuff from weak leaders.
Middle class welfare in the form of Family Tax Benefit B looks like the first victim, followed by the Disability Pension and the Carers Payment. And in three years’ time, changes to pension eligibility and indexation will come into force.
Rorts like negative gearing, which sees taxpayers subsidising property speculators in the billions, look too hot to handle from a political perspective. And the costly and extravagant paid parental leave scheme looks like remaining in place.
But this budget just looks like it will be more tinkering at the edges. The problem facing the Australian government is that its projected revenues could well fall short of expectations in the next few years. Treasury has forecast a mild decline in the terms of trade (which have a big bearing on the tax take) but the risk is that China’s economy slows quicker than expected, pushing down bulk commodity prices and lowering the government’s revenues.
And then there’s the drop off in mining investment (set to have its full impact on the Australian economy in 2015) which will also crimp government revenues. Meanwhile, spending promises (including some still left over from the Labour years) continue unabated.
The bottom line is that governments find it all but impossible to make deep spending cuts. Come next week, they will put in place a ‘plan’ to get back into surplus, but it will be so far into the future as to make it meaningless.
We’ll continue churning out deficits as long as foreigners keep lending to us. And while the big central banks keep printing money, it will provide the liquidity to lend to ‘less bad’ government credits like Australia.
The problem with this happy state of affairs though is that at some point the market will pull the pin on us. Due to some problem back home, or a loss of confidence in the system somewhere, our overseas creditors will demand a higher return in order to keep the funds flowing.
That’s pretty much what happened in 2008. The higher return came in the form of a lower dollar and higher interest rates. The Reserve Bank of Australia and the government had to step in with guarantees to lower the perceived risk and get the foreign flow of money to continue.
for The Markets and Money Australia