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Monday, November 7, 2016

Turnbull and Morrison to fix the budget without really trying

There are a lot of -isms in economics – Keynesianism​, monetarism and many more – but it's now clear the Turnbull government is an adherent to Micawberism.

Mr Micawber, you recall, was the Dickens character who summarised his philosophy of life as: "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Micawber's life was miserable because he often found his finances in deficit. A bit like an Australian government post-global financial crisis.

His solution to the problem never changed. He was always waiting and hoping for "something to turn up".

We've now seen enough of the Turnbull government to realise it, too, is doing little more than hoping something eventually turns up to get the budget back to surplus.

To be fairer to the government than it deserves, the main reason repair of the budget's taking so much longer than expected is not because of any great laxness in the control of government spending, but because tax collections have grown so much more slowly than could have been expected, for reasons beyond its control.

Its revenue forecasts have repeatedly fallen short because export prices have fallen much further than expected and because the rates of price and, more particularly, wage inflation have slowed to rates unseen in decades.

Even so, successive treasurers have insisted the budget has a "spending problem, not a revenue problem". They say this; they haven't acted on it.

They've used this false claim to resist pressure to increase taxes (apart from allowing bracket creep, which the weak growth in wages has made far less potent than usual) but, after the public's resounding rejection of the Coalition's first budget, they've made no real attempt to repair the budget by making net cuts in government spending.

If that assertion surprises you it's because you've been bamboozled by the government's actual spending policy: to ensure all new spending programs are offset by cuts to existing programs.

So the unending stream of fights to get these and those spending cuts through the Senate are merely an attempt to hold the line on spending growth, not to slow it down.

That there are so many new spending programs needing to be offset is a demonstration of how utterly unrealistic is the government's professed goal of "smaller government".

The government's lack of enthusiasm for net spending cuts is shown by the increasingly piddling, penny-pinching nature of the cuts it wants to get through Parliament.

Raise the departure tax by $5; tax backpackers for the few months they're here; cut the dole by $4.40 a week; think of further ways to deny benefits to single parents and the disabled.

If you've been a budget-watcher for a few years, you can tell such measures come straight out of the bureaucrats' bottom drawer, where they've been kept for the day when the government was desperate enough to need then.

Their piddling nature is a sign that, in the search for spending cuts affecting only politically weak interest groups, the government is close to the bottom of the barrel.

Actually, what it shows is that even the policy of making departments come up with offsetting savings to cover new measures is running out of puff.

Now, be clear on this: in drawing all this to your attention, my purpose is not to criticise the government for failing to slash spending and the deficit, merely to highlight the yawning gap between what it says about budget repair and what it's actually doing.

So if its true strategy is merely to wait for something to turn up that gets us back to surplus, what could turn up?

This is where its prospects are brighter than Mr Micawber's. Coal and iron ore prices are a lot higher today than they were at the time of the budget in May. If this lasts it will do a lot to restore the growth in tax collections.

Nor is it wildly optimistic to expect that price and wage inflation will recover over the next year or two, putting some bite back into bracket creep.

But much help could come from the recalcitrant Senate. This year's budget included big tax increases – in tobacco excise, superannuation and multinational tax avoidance – intended to partially cover the ever-growing cost of cutting the rate of company tax by 5 percentage points.

If, as seems likely, the Senate accepts the tax increases but declines to pass the company tax cut on to big business, in time the budget should be well ahead on the deal.