This budget looks set not only to be replete with spending commitments and tax cuts, but also to be the final nail in the coffin of the Liberal party’s scare mongering about the evils of debt and deficit.
A few weeks ago, I suggested that because of unexpected increases in taxation revenue and with an election due in the next 12 months, the budget would see the treasurer “doling out the pork”. Two days later, the leader of the National party rather confirmed this by referring to the treasurer in an interview with the Daily Telegraph as “Scott Santa Claus Morrison”.
Morrison quickly tried to dampen these expectations but the cat was well and truly out of the bag, and since then all the pre-budget drops have been about new spending or tax cuts with little sense of the need for restraint.
This has actually brought with it some problems for the government as they discard what they once told us were sacredly held beliefs.
Last year, Morrison for example, was adamant that the NDIS needed to be fully funded, and could only be done so by raising the Medicare levy a half a per cent. He did this, he told the nation, because “it’s time ... we give disabled Australians and their families the guarantee they deserve”.
But now? Guarantees? Pfft. That’s so 2017, we have a strong economy, don’t you know!
Morrison told the Today Show’s Karl Stefanovic this week that, “I’m pleased as punch for people with disabilities that we can guarantee them those funds from a stronger economy”.
You would have to be as dumb as Punch to believe a strong economy is guaranteed.
The point of the Medicare levy increase was that the NDIS is not some one-off project. It is ongoing – when the economy is doing well and when it is not. Now Morrison would have us believe the economy will always be doing well.
The only reason the government has dumped the Medicare levy increase is because back in 2016 it had imposed a dopey cap on tax revenue of 23.9% of GDP. So great is the influx of revenue coming via improved export prices and employment growth that it looked set to break through this cap in the next few years – and thus they needed to reduce the tax take.
But why not just bank that money and reduce the deficit and government debt?After all, that was what Morrison said he would do in last year’s budget. Now, instead, extra revenue will be spent – or foregone as is the case with the rescinding Medicare levy increase.
This is what happens when your budget policy is framed more by politics than economics.
There is not one iota of evidence that the economy suffers if tax revenue goes above 23.9% of GDP. When tax revenue rises it does so for pretty much one reason only – the economy is doing well. That is why in 2004-05 and 2005-06 at the height of the mining boom, tax revenue was equivalent to 24.3% of GDP.
And that is why when you do get an unexpected influx of revenue, blowing it on tax cuts is about the dumbest thing you can do, because while you might be able to afford it while things are unexpectedly doing well, you cannot when things are unexpectedly doing poorly.
And no one ever expects the economy to do poorly.
In Peter Costello’s last budget in 2007, the Treasury predicted that “the world economy is expected to continue to expand at a strong rate” and that “growth in the United States is expected to ease in 2007, before strengthening in 2008”. Instead it went backwards into the deepest recession since the second world war.
Morrison’s position also highlights just how hollow is the Liberal party’s talk on debt and deficit.
During the Rudd-Gillard years the cries about rising government debt were unending. And yet government net debt is now higher than it has ever been and five years into government, the Liberal party are yet to deliver a budget deficit smaller than it was in 2012-13.
Now that isn’t to say the government should have been reducing the deficit or debt faster than they have – it just highlights how stupid it is to make debt and deficits your key measures. The reality is both are important but are subject to the requirements of the economy.
When the economy is weak and tax revenue is low, cutting spending to get back to surplus is a fool’s errand that is only good if you believe the country should experience a recession.
Morrison, like Joe Hockey (and Costello) before him, has discovered that the path to a budget surplus is paved with revenue growth, not spending cuts. But now that he has the revenue of which Wayne Swan could have only dreamed, the desire for a surplus, or to reduce debt, has become less important.
In the 2014-15 budget, the government planned for a budget surplus of “at least 1% of GDP by 2023‑24”. That was a bit too specific for Morrison, who last year watered-down the commitment to “as soon as possible”. Now that “as soon as possible” is, as Morrison told reporters this week, “conditioned by ensuring taxes do not rise more than 23.9% of the economy.”
You could argue given the current low inflation and income growth that the economy is not actually strong enough for a faster return to surplus than previously planned.
But Morrison is not making that case. For him the economy is strong – and will ever be so. He is just using the 23.9% line as an excuse for dolling out tax cuts because an election is coming.
It’s about politics, not economics.
And it reveals just how disingenuous the Liberal party’s decade-long preaching on the evil of debt and deficit has been. And that should never be forgotten.
- Greg Jericho is a Guardian Australia columnist
