The Abbott government is obviously planning a 2016 election campaign based on tax cuts, since the 2014 budget explicitly and painfully makes room for tax cuts that are implied but not announced.
The flaw in the plan is that it doesn’t have a majority in the Senate, largely because the spending cuts are not balanced by the tax cuts that are obviously planned, and therefore spending cuts can't actually be made.
Where that leaves the strategy is anyone’s guess, but we’ll find out in the long, tortuous months ahead, as the negotiations with the various grandstanders who control the balance in Australia’s upper house -- including the ALP -- drag on.
The essential problem for the government (and the nation) is that we have now started budgeting ten years out, but only specifically on one side of the ledger -- expenditure.
Long term spending cuts were announced -- much longer term than usual -- but while the revenue and deficit/surplus projections assume tax cuts that hand back bracket creep, they were not announced. Presumably the cunning plan was to withstand the storm of protest over the spending cuts and unveil -- ta da! -- the tax cuts in 2016.
Yes, well, nice in theory, as long as you can get the spending cuts away, and the slump in popularity doesn’t embolden your opponents to be even less reasonable than they would have been or, indeed, the caucus to sack you.
Two speeches from Treasury officials last week have now spelt out the fiscal strategy, which is to have a slow pace of ‘fiscal consolidation’ (spending cuts) in the early years because the economy is weak, building to large cuts later; to “provide for future tax relief “ by handing back the effect of bracket creep (to quote Nigel Ray, executive director of Treasury’s Fiscal Group); and to redirect government spending to infrastructure investment and away from consumption.
In broad terms, providing for ten years of tax cuts and infrastructure investment produces a double whammy on spending, which is why there is such a storm of protest now.
Over the period covered by this year’s budget (the forward estimates) there is almost no change to anything, and certainly nothing to complain about. The fiscal consolidation, including the deficit levy, is 0.6 per cent of GDP, compared with 0.5 per cent in last year’s Mid Year Economic and Fiscal Outlook statement published in December.
All the pain -- social, political and economic -- is beyond the budget period.
It was, in short, a ‘steady as she goes’ budget attached to a series of spending intentions in later years plus implied tax relief, as yet unannounced.
It’s an interesting strategy, to say the least. It should ensure a feverish political environment for most of this year, and perhaps beyond, which is the last thing the economy needs.
Will Tony Abbott be able to hold off announcing the tax cuts? Or will he have to bring them forward to keep his job?
He really should just announce them so everyone knows what they are dealing with and we don’t get another year or two of suppressed consumer and business confidence caused by febrile politics, as we’ve endured for the past four years.