It’s a safe bet that, once we’ve seen the mid-year budget update on Thursday, we’ll hear lots of economists and others saying the government should be getting on with budget repair: spending cuts and tax increases.
That’s despite the update being likely to show that the outlook for the budget deficit in the present financial year and the following three years is much better than expected in the budget last May.
It’s also true even though the case for “repairing the budget by repairing the economy” is sound and sensible. The federal public debt may be huge and getting huger, but, measured as a proportion of gross domestic product, the present record low-interest rates on government bonds mean the interest burden on the debt is likely to be lower than we’ve carried in earlier decades.
It’s true, too, that recent extensive stress-testing by the independent Parliamentary Budget Office has confirmed that the present and prospective public debt is sustainable.
It remains the case, however, that both this year’s Intergenerational report and the budget office project no return to budget surplus in the coming decade, or even the next 40 years – “on present policies”.
So, it’s not hard to agree with former Treasury secretary Dr Ken Henry that doing nothing to improve the budget balance is more risky than it should be, too complacent. It leaves us too little room to move when the next recession threatens.
And, indeed, the Morrison government’s revised “medium-term fiscal strategy” requires it to engage in budget repair as soon as the economy’s fully recovered.
But there’s no way Scott Morrison wants to talk about spending cuts and tax increases this side of a close federal election. Nor any way Anthony Albanese wants to say he should be.
Of course, that won’t stop Morrison & Co waxing on about how “economically responsible” the government is – especially compared to that terrible spendthrift Labor rabble. Nor stop Labor pointing to all the taxpayers’ money Morrison has squandered on pork barrelling, and promising an Albanese government would be more “economically responsible”.
But here’s my point. There’s a simple and obvious way both sides could, with one stroke, significantly improve prospective budget balances, and because it would be front-end loaded, disproportionately reduce our prospective public debt over years and decades to come.
There’s no way such a heavily indebted government should go ahead with the already-legislated third stage of tax cuts from July 2024, with a cost to the budget of more than $16 billion a year.
Those tax cuts were announced in the budget of May 2018 and justified on the basis of a mere projection that, in six years’ time, tax collections would exceed the government’s self-imposed ceiling of 23.9 per cent of GDP. That is, the government would be rolling in it.
It was said at the time that it was reckless for the government to commit itself to such an expensive measure so far ahead of time. It was holding the budget a hostage to fortune.
But so certain were Morrison and Josh Frydenberg that the budget was Back in Black that, soon after winning the 2019 election, they doubled down on their bet and insisted the third-stage tax cuts be legislated. Desperately afraid of being “wedged”, Labor went weak-kneed and supported the legislation.
If, at the time, a sceptic had warned that anything could happen between now and 2024 – a once-in-a-century pandemic, even – they’d have been laughed at. But they’d have been right.
Just last week, Finance minister Simon Birmingham righteously attacked his opponents for making election promises that were “wasteful and unfunded” – by which he meant that they would add to the budget deficit.
But the tax cut both sides support is now also “unfunded”. We’ll be borrowing money to give ourselves a tax cut. That’s economically responsible?
It might be different if you could argue that the tax cut would do much to support the recovery, but it wasn’t designed to do that, and it won’t. Stage three is about redistribution, not stimulus and not (genuinely) improved incentives.
The budget office has found that about two-thirds of the money will go to the top 10 per cent of taxpayers, on $150,000 or more. Only a third will go to women. So, the lion’s share will go to those most likely to save it rather than spend it. Higher saving is the last thing we need.
Now, I know what you’re thinking. Get real. There’s no way either side would want to repeal a tax cut, especially just before an election.
Regrettably, that’s true. But, this being so, let’s tolerate no hypocrisy from politicians – or economist urgers on the sidelines – making speeches about “economic responsibility” without being willing to call out this irresponsible tax cut.
