An added sting in Hockey's cuts

Joe Hockey's latest comments seem to foreshadow a range of cuts that prioritise election promises over sound economic policy.

Treasurer Joe Hockey wants to share the budget pain but cuts to essential services, and the absence of tax reform, will place the greatest burden on those least able to bear it. A fixation with meeting the government’s election promise to achieve a budget surplus could potentially result in a range of unnecessary and ill-conceived cuts at the May budget.

In a speech in Sydney yesterday, Hockey provided the clearest indication yet of what to expect in the May budget. Tough times are coming for Australians and everyone is going to feel the burden of spending cuts whether they deserve to or not.

The speech comes a week before the Commission of Audit is set to release its four-volume assessment of government spending. The report will feature 86 recommendations for the federal government, but a vast majority are unlikely to be given serious consideration. Hockey acknowledged as much yesterday.

“There will be difficult decisions, but all Australians must help to do the heavy lifting,” Hockey said. “It will not be acceptable for a few to make the major sacrifices on behalf of the rest of us.”

But one recommendation, if achieved, is set to hurt a lot more than any other. The Commission of Audit has recommended a cap on annual spending growth of 1.75 per cent above the rate of inflation for the next decade.

It is unclear whether this will be a hard cap – not subject to discussion – or a fuzzy cap that can be ignored during times of inconvenience. I’d presume the later since subscribing to a hard cap would be political and economic suicide.

The recommended spending cap could fail to keep up with the rate of population growth and exists not because of any sound economic principles but to pursue an ideological agenda: smaller government.

Successfully containing real spending growth to 1.75 per cent would require the Coalition to abandon a range of election commitments. Education and health spending would need to be gutted; aged pensions would not be far behind and necessary infrastructure investment would need to be postponed or simply ignored.

Forget the National Disability Insurance Scheme and the National Broadband Network – but luckily we will still have paid parental leave and 58 fighter jets we don’t really need.

In the case of a downturn or a recession, a hard spending cap would actually weaken the economy further. Faced with a fragile economy, a hard cap would require the government to cut spending to offset the impact of automatic stabilisers. Even a fuzzy spending cap could prove problematic if there is sufficient political pressure.

Imagine the state of the Australian economy during the global financial crisis had the Rudd government decided not to stimulate it but instead impose austerity measures. It is not a pretty picture.

Hockey’s comments suggest that the Coalition will tinker around the edges, cutting a little bit from this program and a little from that, in an attempt to spread the pain among as many taxpayers as possible. But cutting important services, many of which are on sustainable footing, is not the answer.

Fixing the budget isn’t terribly hard and over the last few months I have written on a range of options available to the government that don’t involve compromising our future. The budget is full of programs that don’t work (such as negative gearing), programs that are not targeted well (such as the aged pension), and a range of programs that redistribute government funds towards those who don’t need it (such as our national housing policies and superannuation concessions).

The Coalition appears fixated on achieving an election promise rather than pursuing sound economic policy. Based on Hockey’s comments last night there is going to be a range of budget cuts that are simply unnecessary or place too high a burden on those least able to bear it.

Instead the focus should be on how to create a sustainable long-term budget while limiting the pain. That doesn’t necessary require sacrifice from everyone, merely sacrifice from those who can most afford it – which luckily are also the same people who currently benefit most from government policy.