The “Budget Crisis”: How Critical Is It?

Is the Treasurer Joe Hockey and the Coalition to be believed? That if the government doesn’t cut public spending as planned in its Budget 2014 announcement, we’re in for a disaster in our economic future?

Well, today, I’ve come across the latest country report by the International Monetary Fund (IMF) (IMF Country Report 14/51, February 2014), which seems to tell a different story. It gives an overall positive assessment of Australia’s economic standing and outlook. Granted, it highlights some risks, but these are related to decreasing revenues – i.e. less demand for commodities (i.e. mining), the high value of our dollar (damping down export income) and impact of external factors in the global market — not so much on government expenditures, although there is need to pare it down.

As for the budget deficit, the report comments that it went down during the period 2012-2013 (in other words, under Labor’s watch, see below:

5. Fiscal policy. The budget deficit was reduced from 3 percent of GDP to 1½ percent in 2012/13. The previous government’s goal of returning the budget to surplus last year was held back by slower-than-projected output growth and weaker commodity prices. Revenue fell short of projections as the lower terms of trade together with the persistently strong Australian dollar reduced nominal GDP and dented corporate profitability, with company tax revenue coming in around ½ percent of GDP lower than expected. Capital gains and resource rent taxes were also weak. Spending was somewhat higher than anticipated, exceeding plans by 1¼ percent of GDP. 

It wasn’t the “spending like a drunken sailor” that Hockey tells us about Labor. In fact,  note the comment that the surplus predicted by then Treasurer Wayne Swan was thwarted by unexpected external factors that affected the projected gains from trade and exports. It wasn’t a Labor lie or ‘broken promise’

The fiscal situation can improve, and we can reach a surplus without the drastic cuts that the Abbott Government is set on implementing. This chart by the IMF shows how Australia can achieve a slow but steady pace towards fiscal consistency and stability (in other words, get rid of the deficit and gain surplus), without harming the poor, the sick, the aged and other vulnerable sections of society. In fact, the IMF Report suggested:

10. Policy space to manage risks. The floating exchange rate provides a key cushion against such shocks. The RBA has some room to respond, and the rapid and effective monetary transmission mechanism in Australia would allow for a nimble policy response should these risks emerge. But with the policy rate currently low at 2½ percent, the scope for monetary policy to offset shocks is limited and a sharp deterioration in the economic outlook would call for additional policy responses.As discussed below, Australia’s modest public debt level gives the authorities the scope to allow automatic stabilizers to operate in full and to temper the pace of budget deficit reduction when needed.

Note the last phrase “Australia’ modest public debt level” (i.e. we don’t have an overblown budget), “temper the pace of budget deficit reduction when needed” (it does not signify we have a current ‘emergency’, does it?).

Of course, we need to be prudent in public spending. Joe Hockey is correct when he claims Australia cannot carry on spending and the budget deficit has to be addressed. But there is an alternative to drastically cutting social welfare services and allowances in order to balance the budget. What Hockey  refers to as excessive costs in health, education, disability, aged care and pensions (‘social expendituress’ ) in fact only comprises 10.5% of GDP. Compare that to ‘non-social’ spending (e.g. government services, & salaries, defence — I guess, you could also  throw in parliamentary salaries and privileges in there)., which takes the bigger slice of the pie, 14.5% of GDP. There is room to pare down such ‘non-social’ government expenditures (abolishing the purchase of JSFs, for one, and cutting down business subsidies), while maintaining slight increase in  ‘social’ funding, and still achieve a surplus,  as the IMF fiscal consistency chart shows below:

That’s right, readers — there is absolutely no need for panic at this time. And a slow but steady trajectory towards surplus can be managed without the drastic cuts to social welfare benefits, health, education and aged care/pensions.

The other side of the coin has been ignored so far by this government: how to increase productivity and government revenue. How the government can hope to increase tax revenue  by axing 3,000 ATO staff  — the biggest slash among PS departments — confounds all reason. And what about those subsidies and tax breaks business?

This Coalition government simply ‘protesteth too much’ — in Shakespearean lingo — saying something over and over again, to make people believe, but a smart person knows it’s a lie. The hidden agenda is to impose their right-wing, neoliberal approach on our social and economic life: one that is individualistic and geared to the idea of ‘survival of the fittest’.  It gives rise to the notion that if you’re poor, it’s your own bloody fault, so cop it.  But what tends to happen in this free-market scenario  is that it’s the economic and social elite (yes,  including daughters of politicians in power) who ‘survive’ and prosper because they tend to have the advantages of  wealth, good health, better education and opportunities; those less fortunate find it harder, if not impossible, to break out of their poor circumstances and get ahead in life.

Is this the image of a good, a fair Australia?

Reference: International Monetary Fund, 2014. Australia. 2013 Article IV Consultation—Staff Report; Press Release; And Statement by the Executive Director of Australia. IMF Country Report No. 14/51. Washington, DC: IMF. [available online: http://www.imf.org/external/pubs/ft/scr/2014/cr1451.pdf.]

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