Don't go slow Joe - cut now

The key recommendations from the Abbott government’s commission of audit will inevitably be focused on reducing growth in government spending.

While the level of government spending as a percentage of GDP is currently close to the long run average, every government has an obligation to ensure that spending is well targeted and is as fair as possible. Let’s hope the commission can identify some areas that can and should be cut (Hurry up Hockey, and hold the riesling, October 24).

The previous government did this with each budget and economic update. In the last four years, the average growth in real government spending was 1.3 per cent, well below the long run average growth rate of 3 per cent. But even with this restraint, it failed on the political game as it failed to bring home a surplus in 2012-13 because of unexpectedly soft economic growth, a surprisingly low inflation rate and unanticipated resilience in the Australian dollar, which undermined the revenue side of the budget.

Spending was also hard to wind back given the sense of entitlement that is increasingly entrenched for many middle and high income earners. Joe Hockey has been a strong voice in breaking this wasteful, unfair and unnecessary spending and he now has his chance to put words into action. I hope he cuts some of these unfair payments and cuts hard.

There is an important lesson in the previous government’s fiscal policy and economic outcomes for the Abbott government as it looks to impose its thumb-print on the budget. The ability and willingness of the Abbott government to implement the recommendations from the audit commission will be strongly influenced, if not driven, by the state of the business cycle in 2014 and beyond.

If the economic outlook is favourable, as the 2014-15 budget is framed, the government should take an aggressive approach to decent and fair spending cuts. As things stand, the outlook for 2014 is favourable, so it appears there will be a heavy-handed approach to cuts in government spending in the budget in May.

Of course, there are risks ahead. The US may not sustain its recovery and as always there are concerns that China has a potentially toxic cocktail of bad debts, a property bubble and an investment overhang.

Locally, the housing market may be susceptible to a hit if the monetary policy cycle turns towards tightening.

If any of these or some other negative shock were to rear its ugly head over the next six months and the economy hit an air pocket, there is no doubt Treasury would be cautioning Hockey to tread very carefully with the speed and aggressiveness with which the spending cuts are implemented. Indeed, it would be bad economics to aggressively cut spending if the economy were muddling along below trend.

This is much the manner of the new Labor government in 2007 when Treasurer Wayne Swan had a tally of unnecessary government spending measures focused on middle- or upper-income level welfare that were ready for the chop. He and the then Labor government were poised to swing the axe when the banking crisis emerged to scuttle those plans.

And not only were the bulk of those spending cuts abandoned, but within 18 months the government embarked on a fiscal stimulus package the likes of which Australia had never seen before. So too late last year, when Swan abandoned the surplus commitment for 2012-13 as the Chinese economy weakened to a 20 year low and Europe floundered in recession.

It is unlikely that there is a 2008-type global economic event ahead. Let’s hope not and for now pin expectations on the positive outlook painted by the likes of the International Monetary Fund, the World Bank and the OECD, all of whom are looking for solid global economic growth next year.

But even before May, Hockey can make a start on his quest to trim spending. It is to be hoped that when he reveals the Mid-Year Economic and Fiscal Outlook update sometime in December that there will be some meaningful nips and tucks to spending. This would put some money in the government coffers sooner and to some extent smooth the potential shock of a big-bang, post-audit commission report range of spending cuts.

Spending cuts of just 1 per cent on total outlays would yield savings of $4 billion a year. That looks doable if the economy is firm to strong and it should be the starting point bottom line for Treasurer Hockey to aim at.