One might have thought, for a brief moment, the seriousness of Australia’s fiscal position finally started to sink in to the opposition.
Its refusal to countenance corporate tax cuts associated with the MRRT might reflect its slavish adherence to the interests of the miners, but it might also reflect an awareness that the whole MRRT package will – assuming commodity prices don’t reach new highs and stay there for several years – end up having a substantial cost to the budget, primarily due to the cost of the shift to 12 per cent compulsory superannuation.
Following Treasury secretary Martin Parkinson’s speech on March 7, in which he said "with muted growth in tax receipts projected for much of the next decade, Australia will need significantly greater expenditure restraint in the decade ahead than was seen in the first half of the 2000s" the penny has started to drop that the massive structural adjustment inflicted on us by the Chinese Communist Party will have profound fiscal consequences as well, and nowhere near as positive as we expected.
We noted in January that the higher dollar would have a substantial impact on federal and state revenues.
That impact will be exacerbated by the extent to which over the past decade we have made the budget ever more reliant on corporate tax, and in particular banking and mining profits, which two years ago provided over 50 per cent of corporate tax revenue.
The government is already dealing with the impacts of a high dollar on revenue as it searches for savings to keep next year’s budget in surplus. So are state governments, which are facing falls in property tax-based revenue and flat or falling GST revenues.
Oppositions, collectively, have yet to get the message that the fiscal world has changed and they need, if only for their own long-term good, to be a lot more honest with voters about what they can deliver. Those at the pointy end of the electoral cycle, like the LNP right now in Queensland, are having to accept that the easy calls of 'no new taxes' can no longer safely be made.
Tony Abbott and Joe Hockey have been pretending that once they’re back in government, it’ll be like stepping into a time machine that will whisk Australia back to 2006, when John Howard was set to rule forever and Treasury couldn’t keep up with the rivers of revenue flowing in from the mining boom and ultra-low unemployment.
That that period was accompanied by fiscal profligacy and high interest rates is left unsaid, of course, but never mind.
Has the opposition’s refusal to countenance Labor’s corporate tax cut heralded a new era of fiscal responsibility in the Coalition? Alas, the opposition isn’t opposed to a corporate tax cut – it’s just opposed to the government’s corporate tax cut. Tony Abbott promises a "modest" corporate tax cut of his own. Given the government’s tax cut is modest enough already – 1 per cent – the opposition’s tax cut is likely to be downright self-effacing.
Thrown into this mix is the problem that too aggressive an approach on savings is going to further undermine growth in the non-mining sector of the economy. State governments are already tightening their belts. An accelerated reduction in Commonwealth spending – beyond even the rapid drawdown currently budgeted for by Labor – will subtract further from growth.
Joe Hockey said recently that he wants monetary policy to do more of the heavy lifting if there’s a need for economic stimulus.
He’s not the only one. Monetary stimulus is back in fashion after our brief global flirtation with Keynesianism during the GFC. But it’s problematic in Australia, because so few of us lower our mortgage repayments when interest rates fall. RBA cuts deliver perhaps only a quarter to a third of the apparent effect. And now there’s the growing tendency of the banking oligopoly, exploiting its market dominance, to ignore the RBA anyway and jack up rates, or lower them by less than the RBA, under the pretence that they are obliged to by higher funding costs.
Quite where this leaves the 'heavy lifting' that monetary policy can achieve isn’t clear, but it’s not certainly not the magic bullet some would have us believe.
In a speech in Hong Kong yesterday, Glenn Stevens touched on this point in making a broader observation about monetary policy.
"Monetary policy can play a role in supporting demand, to the extent that inflation performance provides scope to do so. But monetary policy cannot raise the economy's trend rate of growth. That lies in the realm of productivity-increasing behaviour at the enterprise, governmental and inter-governmental levels. Improving productivity growth is just about the sole source of improving living standards, once the terms of trade gain has been absorbed. This is increasingly being recognised in public discussion, but it is important we do more than just debate it.
"Nor can monetary policy obviate the pressure for the production side of the economy to change in response to altered relative prices. These changes in relative prices are essentially given to us by the world economy; they are not driven by any policy in Australia."
Essentially given to us by the world economy; they are not driven by any policy in Australia. This is a key point missing in economic debate. Our politicians, and particularly those without the responsibility of office, insist that we have far more control over our circumstances than we do. It’s time for more honesty from politicians, especially those without the responsibility of office, to acknowledge this.
The only workable strategy to resolve the dilemma is to put in place long-term cuts to big-ticket budget items such as middle-class welfare and corporate tax expenditures that will phase in over forward estimates, sparing an immediate economic (and political) impact but delivering real savings over the longer term.
But that requires a little responsibility and honesty on the part of the opposition.
This story first appeared on www.crikey.com.au on March 20. Republished with permission.