Promises, promises/I'm all through with promises, promises now/I don't know how I got the nerve to walk out/If I shout, remember I feel free/Now I can look at myself and be proud/I'm laughing out loud.
I think these lyrics sum up the likely reaction of the public to the multitude of promises all the political parties are likely to make in the forthcoming election campaign, which in all probability will commence some time after July.
After all, we have just lived through a period of historically high terms of trade that have lasted much longer than in the past.
There has been the mother of all booms in mining investment and economic growth has been strong, with unemployment staying at about the 5 per cent mark.
And what is there to show for all this in terms of the budget position of the federal government?
We have had four years of very large negative cash balances - the dreaded D-word, deficits - amounting to $172 billion, or more than 12 per cent of GDP. And now we are told that there is likely to be another deficit in 2012-13 - of the order of $5bn, but probably higher.
The point will be made (again) that the onset of the global financial crisis required a significant loosening of budgetary policy.
But the real issue is why the government kept on spending like drunken sailors well after it was clear that the Australian economy would escape the full impact of what was, in effect, a North Atlantic economic calamity.
So, yes, a budget deficit in 2008-09, and possibly a small one in 2009-10.
Instead, we have had years of overspending, a range of wasteful programs and a budget in very poor shape to accommodate the social and economic aspirations of both major political parties.
We were well into the silly season when the Treasurer executed his triple-back somersault with pike to announce that it is now unlikely that there will be a budget surplus for 2012-13.
Sympathetic commentators, aware of the political damage to the government caused by the dumping of this unalterable pledge, immediately and enthusiastically picked up the lame economic rationale that this is not a good time to have a budget surplus. The economy is slowing. And who really cares about a small deficit?
The principal problem with this analysis is that it is completely at odds with the government's own line, which held pride of place on the government's budget website until it was mysteriously scrubbed on the day of Swan's concession.
"The budget is returning to surplus as promised, with surpluses growing over the forward estimates. A surplus is appropriate given our strong economic fundamentals and economy returning to trend growth."
So one minute it was appropriate to have a budget surplus and the next minute it was not. In fact, the government was quite right to have this medium-term fiscal target. It is the failure to deliver that is damning.
To suggest that it is now OK to have a budget deficit, as long as it is in the context of a medium-term strategy for the budget to return to surplus, overlooks the fact that this is what we thought we had. In other words, the fiscal credibility of this government is completely shot.
Melbourne Business School economist Sam Wylie has neatly summed up the fork in the road we have reached. According to him, there are "full-Keynesians" and "half-Keynesians", with the present government now seemingly in the latter camp.
Full-Keynesians prescribe increased government spending during severe downturns in the economy. Full-Keynesians then insist that governments pay down the debt accrued during recessions by running surpluses when normal growth, or faster-than-normal growth, returns. The budget must balance "over the cycle".
Half-Keynesians want big deficits during recessions and small deficits the rest of the time. For half-Keynesians fiscal policy is all about stimulating the economy - balancing the budget over the cycle is good in theory but not a first-order concern. Debt can be paid down later. High levels of government debt are not really a problem.
The importance of Wylie's analysis is that the half-Keynesian policy approach is one of the chief reasons that so many European countries now find themselves in such dire fiscal and economic straits. It just never seemed like a good time to rein in government spending and to run budget surpluses. It is a disease that Australia needs to avoid, although there are worrying symptoms.
Swan's explanation for the likely budget deficit this year is the "dramatically lower tax receipts". This account is not credible. The four months of tax receipts are dramatically lower only relative to the completely fanciful forecasts contained in the budget and repeated in Mid-Year Economic and Fiscal Outlook.
The idea that tax receipts would increase by 9.4 per cent over the course of this year was a fairytale, with government receipts, as a proportion of GDP, predicted to rise from 22.5 per cent in 2011-12 to 24 per cent in 2012-13. There is not one instance since the beginning of the 1970s when the share of government receipts increased to this extent, or more, from one year to the next.
While it is easy to focus on the shambolic management of public finances by the Labor government, the broader context of this mismanagement needs to be taken into account. Many of the poor expenditure decisions of this government have been either extensions or continuations of programs instituted in the latter years of John Howard's government.
With the benefit of hindsight, the Howard government was spending the receipts of the early stages of the mining boom, where companies were achieving windfall revenues without additional investment, as if the boom would not last. Electorally attractive handouts took a variety of forms, including ramping up family tax benefits, the childcare rebate and the baby bonus.
Rather than simply return the additional government revenue in the form of across-the-board tax cuts or create a robust sovereign wealth fund, monies were directed to favoured groups, most particularly families with dependent children. To be sure, Howard's treasurer, Peter Costello, attempted to hold the line to some degree by setting up the Future Fund and a number of smaller funds, although these latter have since been raided.
When Kevin Rudd's Labor government was elected and the GFC provided a convenient rationale for a huge expansion in government spending, it was "game on".
Government payments rose from 23.1 per cent of GDP to 25.2 per cent in just one year. Rudd and his ministers chose to use a number of Howard programs to rush the cash out the door - increasing the generosity of family tax benefits and the childcare rebate were examples. It was a case of economic imperative colliding with political inclination.
The real problem is that many of these entitlement programs instituted by the Howard government are low-quality and provide very poor social returns for the tax revenue that must (ultimately) be collected to pay for them.
The government will argue that it has instituted a number of responsible budgetary measures that have limited expenditure on a number of programs, by imposing means-testing and freezing the indexation of a range of benefits. Examples include the means-testing of the private health insurance rebate and limiting the baby bonus.
But do these measures really add up to a hill of beans, even though they will be praised by elements of the commentariat as examples of cutting back on middle-class welfare?
There are two important points to make. The first is that these programs were never set up as middle-class welfare, but as means of doling out government largesse to families with children. Rather than run them through the tax system and avoid the churn, the regular payments are there to remind voters of the generosity of the government in power.
The second related point is that the creation of a complex and confusing array of means-testing arrangements means families now face very high effective marginal tax rates (higher income taxes and the withdrawal of benefits) at certain income points. This creates significant adverse incentives for work effort, particularly for the secondary wage earner in the family. It is interesting to observe that the rate of female labour-force participation has completely stalled since the Labor government was first elected to office.
The real way forward - and one that would create some real space within the budget - is to ditch a number of these low-quality entitlement programs. Examples include the baby bonus, Family Tax Benefit Part B and the Schoolkids Bonus (a woeful new program dreamt up by the Gillard government).
So what does the future of the budget look like? Even on the government's now junked MYEFO figures, over the next four financial years accumulated cash balances were expected to amount to less than 1 per cent of GDP.
There is no intention that the government debt accumulated over the past several years will be repaid within this time frame.
Additionally, the forward estimates do not include the full costs of implementing the National Disability Insurance Scheme or the bill for the Gonksi reforms. It is all very well for Julia Gillard to say that "people ask where the money will come from and it's a reasonable question. My reply is that 'Australia is a prosperous country, as well as fair country. So with some sensible budget decisions, we'll deliver this important change (the NDIS)'."
But why should the public think the government is capable of making sensible budget decisions? It has failed to meet its pledge to return the budget to surplus this financial year. And there is no way that a nip here and a tuck there will make room financially for the NDIS. The real questions that need to be asked are:
- What large-scale spending commitments will be ditched?
- What new tax initiatives will be introduced that raise significant revenue?
Without answers to these questions, the likely response of the public will be to sing along to Promises, Promises.
They really don't mean a thing unless there is a credible means to fund new initiatives and to outline how state governments, which are also finding their fiscal positions strained, will be expected to contribute.
Canberra will be bringing down a budget in May with new forward estimates. And this will be supplemented by the release of the PEFO - the Pre-Election Fiscal Outlook - when the election is called.
By this stage, we should have a clearer view of the real budget position as opposed to the smoke-and-mirrors version the government has tried to run with.
The Coalition leadership team seems to be aware of the constraints on new spending and is legitimately wary of committing to expensive new programs without knowing where the funds will come from. But come an election campaign, all political parties have a habit of promising what cannot be delivered.
But making unachievable promises to the community, particularly when the promises involve extra services and choice for a very disadvantaged segment of the population, is surely an act of dishonesty.
Let's hope our politicians lift their game and come clean on what governments should and should not do and what governments can and cannot do.
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