You have to look hard, but there are two logical sleights of hand in Joe
Hockey's fiscal policy, as dutifully expounded by his Treasury
secretary, Dr Martin Parkinson, in his speech this week.
Parkinson
makes three important points that have tended to be lost in all the
furore over Hockey's choice of victims in his efforts to get the budget
back on track. I'll take issue with the last two.
The first is the
"measured pace of fiscal consolidation". ("Fiscal" is a fancy word for
the budget and "fiscal consolidation" is a euphemism for the spending
cuts and tax increases needed to get the budget back into surplus.)
Parko's
point is that, though Hockey has announced a host of decisions to
improve the budget balance, many of them don't start for a year or three
and the rest don't have much effect for a few years.
Relative to
the estimates we were given in the mid-year budget review just before
Christmas, the effect of the measures announced in the budget, plus any
revisions to the economic forecasts, is expected to reduce the deficit
for next financial year by just $4 billion (relative to nominal gross
domestic product of $1630 billion).
The expected improvement in
the second year, 2015-16, is just $7 billion, with the same improvement
the year after. Not until the fourth year, 2017-18, is a big improvement
of $26 billion expected to bring the budget back almost to balance.
See
how gentle it is? Why so "measured"? Because the economy is still
relatively weak - "below trend", in the jargon - and is expected to stay
relatively weak for another year or two as spending on the construction
of new mines and gas facilities falls much further.
So Hockey
delayed the effect of most of his measures until he was confident the
economy could absorb the shock without falling in a heap. This is
exactly what the Brits and others didn't do - which is why it's both
wrong and ignorant to refer to Hockey's measures as a policy of
"austerity".
Parko's second point is that the budget measures
involve a "compositional switch" in government spending. Hockey's cuts
are aimed at "transfer payments" (transfers of money) that flow into
consumer spending.
At the same time, however, he's actually
increasing investment spending on new infrastructure by almost $12
billion over five or six years. Five billion of that is his "asset
recycling initiative", which offers the state governments a 15 per cent
incentive to sell off some of their existing businesses and use the
proceeds to build new infrastructure.
So the incentive should lead
to a lot more infrastructure spending than would otherwise have
occurred. And, on top of that, we know investment spending has a higher
"Keynesian multiplier" than consumption spending.
This change in
the mix of government spending is happening by design, intended to help
fill the vacuum left in the engineering construction sector by the sharp
fall in mining construction. More proof Hockey is no economic wrecker.
But
this year's budget papers include a new section giving the split-up of
total government spending between "recurrent" spending (cost of keeping
the show going for another year) and spending on investment, something
forced on Hockey as part of a deal with the Greens to remove Labor's
(silly) cap on total government borrowing.
What past governments
haven't wanted to tell us is that about 9 per cent of their annual
spending is capital, not recurrent. For the coming financial year this
is $36 billion. More than half of this is capital grants to the states,
20 per cent is defence equipment and 14 per cent is building the
national broadband network, leaving 11 per cent on the feds' own capital
purchases.
The budget papers confirm the new government's
commitment to the "medium-term fiscal strategy" first set down by the
Howard government to "achieve budget surpluses, on average over the
course of the economic cycle".
This is a good formulation, with
one, now-more-salient weakness: its failure to distinguish between
recurrent and capital spending. Hockey and his boss keep saying the
budget has to be returned to surplus because we're "living beyond our
means" and leaving the bill for our children.
That's true only to
the extent we continue borrowing to cover recurrent deficits. To the
extent we borrow to help cover the cost of infrastructure - which will
deliver a flow of services extending over 30, 40 even 50 years - we're
not living beyond our means (any more than a family that borrows to buy
its home is) and not treating the next generation unfairly.
So
setting yourself the goal of paying for all your infrastructure
investment and having the government end the cycle with an ever-rising
bank balance is fiscal conservatism gone crazy.
The second of the
government's fiscal sleights of hand comes with Parkinson's third point:
Hockey's plan involves creating "headroom for tax cuts".
In
projecting government spending and revenue over the coming decade, the
government has resolved to impose a cap on the growth in tax collections
at 23.9 per cent of GDP. And government spending has been cut hard
enough to accommodate that cap while still producing ever-growing
surpluses.
Why? Because, we're told, "fiscal drag" (bracket creep)
can't be allowed to run on forever. It would push low- and
middle-income-earners into much higher tax brackets ("marginal tax
rates") which would be both economically damaging and politically
infeasible.
Fine. We've had to rely on years of bracket creep to
correct the irresponsibility of Peter Costello's eight tax cuts in a
row, but this can't go on for ever.
Did you see the sleight of
hand? You don't need to cap tax collections just to counter bracket
creep in income tax. Hockey is making room for much bigger tax cuts than
that. And there's zero guarantee the chief beneficiaries of those cuts
will be the low- and middle-income-earners who suffered most under the
creep.
