Swan and Hockey's fiscal furphies

Tony Abbott's first big push to win the hearts and minds of voters has been upstaged by nature – the devastation of flood and fire currently filling the news cycle is more important to most people than a bunch of existing Coalition policies pasted into a glossy brochure, and launched alongside a 'positive' TV commercial.

Both sides of politics know that the floods clean-up will put further strain on the federal budget, forcing any future Labor government to borrow just that little bit more or a Coalition government to cut public spending more.

The Coalition's mini-campaign centres on the policy outline document Our Plan – Real Solutions for all Australians (available here) which, without a hint of tongue in cheek, discusses in adjacent sections: "Living within our means and getting the budget back under control" and "Lowering taxes to unleash our real economic potential".

That is yet more conformation that the Coalition's cost cutting plans will be so aggressive as to be very difficult to sell at election time.

The mini-campaign doesn't actually say where the cost slashing will be – only that a commission of audit will be set up to review all areas of government spending. But will voters really sign up for huge cut-backs in public services without knowing which one the audit will identify as most wasteful?

I notice yesterday that commentator Henry Ergas referred to Labor's "spending still at record levels" being a reason for continuing budget deficits, and growing public debt. That statement is far from problematic, however.

Labor keeps large projects such as the NBN off-budget, based on the assumption that they'll make money for their owners (yes, you and I). And since they are funded by selling government bonds to investors keen to stash their money in our AAA-rated securities, the government doesn't see a problem. With relatively cheap money, it's borrowing and investing on behalf of taxpayers – how could we lose!!

So minus the off-budget projects, the spending to GDP ratio is in the range of 22 to 23 per cent, though after Swan's surplus backflip in December, that will now be allowed to edge up to 24 per cent.

So while Ergas is right about "record levels" if you include off-budget spending and if a raw nominal figure is of most interest (which it is hardly ever is), as a proportion of GDP, things are actually very tight by global standards.

And it will just get tighter. Treasurer Swan has already said that post-flood federal aid will stretch things further, though he is yet to make a statement on whether or not another flood levy might be needed. Expect that argument to rage right through the first sitting week of parliament – MPs shuffle back into the chambers next Tuesday.

All of that said, there is one reason to treat the spending-to-GDP ratio with some scepticism – namely the possibility of GDP itself taking a tumble. Deloitte Access Economics has released a study suggesting the high dollar will persist until at least mid-2014, meaning the current gnawing attrition of the SME sector, and major trade-exposed corporate players, is likely to continue.

By that time, Commonwealth Government Securities may start to look less attractive as real returns begin to catch up in North America and Europe. As I have warned in previous columns, a trickle of money heading home can quickly become a torrent, putting downward pressure on the dollar.

And while a lower dollar in late 2014 would be welcome, the big question is how many SMEs will still be standing to take advantage of the opportunities that creates – particularly if thousands of jobs have been lost via the Abbott cost-cutting program.

Taxpayers like to think of public-service job cuts as being a hounding out of lazy bureaucrats who spend all day dipping cream biscuits in publicly-funded cups of tea. In reality, many SMEs servicing government contracts have to cut staff too.

Revised GDP forecasts for 2014 could be quite different even by budget time this year. So by the middle of next year, nominal spending figures for whoever is governing could look pretty worrying.

Going into the first sitting week of the year, then, we are already in semi-election mode. With the most likely election date being in October, that leaves around eight months for both sides of politics to try and maintain the giant furphy that somehow they can afford their election promises. It ain't so. Labor will have to borrow more, and the Coalition will have to cut more deeply than anyone wants. It's going to be a long eight months.

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Anonymous,

What do you think about banks keeping things off book? I suspect not very much after the GFC (Swan and Hockey's fiscal furphies, January 29).

Anonymous,

Yes all these non core promises aimed at winning votes on the one day event called the Federal Elections and then the winner becomes an elected dictator if it has an outright majority in seats can then do what it pleases during the next term (Swan and Hockey's fiscal furphies, January 29).
The NBN saga will be very interesting because presumably the spending could be turning into an asset which could be sold off just as Telsta was privatised not so many years ago, so the Libs might need to reconsider their plans to trash the $billions already spent on a potential saleable asset or continue with the ALP plan and then sell it off on completion?
Has anyone ever asked Malcolm Turnbull or his party my question?

Anonymous,

Has anybody else noticed the Labor MPs suggesting spending initiatives now that Swan has given up all hope of a surplus (Swan and Hockey's fiscal furphies, January 29). At least while Labor was promoting a surplus there was some hope for fiscal restraint. Now it wouldn't surprise me if the budget deficit blows out even further, especially when you consider the amount of spending that was pulled forward into last financial year or deferred into the future.

Anonymous,

Well done on talking about the GDP potentially falling and talking about an Abbott hatchet job at the same time. It will be interesting to see how much the GST take has fallen in Qld since Newman swung away with his axe. Lower aggregate demand is bad for the economy not good for it (Swan and Hockey's fiscal furphies, January 29).

Anonymous,

Lower GDP also as another follow on effect, because a significant part of GDP is consumption, the amount of GST declines (Swan and Hockey's fiscal furphies, January 29). So more wining from States, more cuts of Public Servants. Increase pressure on Federal Budget as it as to fund the miserable Unemployment benefit. More cuts and around and around we go. Do any of our Politicians read History or Macroeconomics or are they all dumbed down Lawyers?

Anonymous,

Rob, spending cuts are staring Labor in the face, it's just that Labors socialist policies and union demands don't allow them to happen (Swan and Hockey's fiscal furphies, January 29).
The NBN for example, all "off budget",as they call it, items have to be paid for out of tax payer funds. Recouping these costs are long term and reliant on fees and charges leved on us for the service. Their early predictions indicate that the cost will not be much more than what we pay for the internet now, making the assumption that it is going to be a very long time before the network is in the black. My problem is the dictorial approach taken by this government. It's the NBN or nothing, forcing many Australians already facing economic hardship into more debt as they struggle to retain a facility that is part of the 21st century. The coalition policy basically retains fibre optic technology but offers an option of retaining copper wiring from node to home. All this at a fraction of the cost. Sure the speed won't be supersonic, as some have said, but will still be 10 times faster than what we already have.
Both the carbon tax and MRRT are costing tax payers, not generating revenue, as we were told. Changes to the "Fair Work" act and removal of union workplace dominance will free up business creating employment and productivity. Who knows Australia may once again become competitive.
As for those that are still complaining about our public service, it's time you woke up. Successive state Labor governments and our current commonwealth Labor government used the public service to keep unemployment figures down. These jobs didn't exist in the first place, consequently costing the Australian tax payer billions of dollars, as they bloated the service. We had to pay for these jobs, that were invented by a government that saw it's own vanity as more important than the welfare of Australians.