Time heals, it is said, but when it comes to Australia’s view of what we called the ‘global financial crisis’ it also hurts.
In the past week, which saw the final budget outcomes for 2013-14 released by Treasury, the Abbott government chose to remember the economic pain of 2008 and 2009 as little more than a mozzie bite on the rump of the economy.
As the Coalition argued in its booklet, ‘Labor’s mess’, the GFC was a six week commotion in North Atlantic markets. Nothing to see there.
As such, the gaping fiscal wound known as federal ‘debt and deficit’ must have been self-inflicted by Labor -- specifically, by former treasurer Wayne Swan.
Hence Treasurer Hockey could barely hold back a smirk at his joint media conference with Finance Minister Mathias Cormann as he announced that Swan’s forecast deficit of $18 billion on budget day 2013 was more than $30 billion larger in the final analysis -- an actual deficit of $48.5 billion.
Hockey said: “This comes down to the fact that Labor continually overestimated the amount of tax they would collect -- they continually got it wrong.”
Some of that critique is entirely correct. When Prime Minister Gillard negotiated the quick-fix mineral resources rent tax in June 2010, she bypassed cabinet and any notion of policy-making propriety, and handed the miners a package they not only loved, but designed.
It would ensure enough scope to front-end their large investment writedowns against the large profits they were still making, ensuring that virtually no tax was paid.
The intentionally flawed provisions of the MRRT have been made worse in the past year, with commodity prices falling much faster than analysts predicted. So a measly $700 million in revenue becomes just $100 million.
But what about the other revenue writedowns? Even Treasurer Hockey admitted at his media conference that 60 per cent of this year’s deficit comes from revenue writedowns. So what made up the lion’s share?
Tax receipts have fallen by $3.2 billion from the figures forecast just four months ago. That is made up of $1.8 billion of indirect taxes, and $1.4 billion on direct taxes.
The biggest writedowns were $727 million less company tax, much of it lost in the resources sector; super funds tax payments down $429 million on what was expected four months ago; and personal income taxes down $208.
There was also a large writedown of $2.8 billion in carbon pricing revenue, as carbon emissions were lower than expected -- however, “certain emitters ... may base their interim report on previous years’ emissions” and we won’t know the actual emissions figures until October.
So putting carbon revenue writedowns aside, the past four months have seen some pretty large swings in revenue, and these are likely to get even larger in the year ahead due to three factors:
– Falling commodity prices and the falling AUD. While a lower dollar is good news in the longer term, Treasury has so far not done well at incorporating commodity price and dollar fluctuations into its modelling.
– The likelihood of reduced superannuation returns if money shifts back to the US as it tightens monetary policy and;
– The likelihood of chronic underemployment hitting income tax and GST receipts. GDP growth is running ahead of forecasts, but it is not creating jobs -- a large part is simply the higher volumes of minerals exports.
The point is that one of Treasurer Hockey’s favourite themes in opposition was how hopeless Labor, and Swan in particular, were at forecasting future revenues -- or rather he accused them of willfully distorting the forward estimates.
Now, however, volatility in currency and commodity markets, and the fragile state of domestic growth, are almost certain to whack Hockey’s own revenue forecasts in the year ahead.
This is where GFC revisionism comes in. While that ‘six-week’ commotion in the North Atlantic was going on, the Coalition voted for a $10 billion stimulus package just after the collapse of Lehman Bros.
It then opposed a $42 billion package in early 2009.
Labor believed, in contrast to the Coalition, that that enormous injection of public spending was needed to keep hundreds of thousands of employees and contractors in jobs -- the ‘school halls’ and ‘pink batts’ schemes, plus the cheques sent to households to boost consumption were primarily jobs programs.
The criticism of those schemes on ‘value for money’ grounds (and I am not talking here about the tragic deaths that occurred in the insulation scheme) ignored the fact that their primary focus was keeping people in jobs.
Labor’s calculation was not unlike a household having to put $5000 on its credit card to fix the family car to continue to get to work. The financing cost of the $42 billion, at prevailing bond rates, was about $1.5 billion a year.
However, Labor’s gamble was that if it did not cover those financing costs, the loss of revenue and increased welfare payments would have been far more costly to the nation (and the budget).
When the matter was being argued over in parliament -- day after day in early 2013, when the federal election loomed on the horizon -- Swan explained the gamble when he was being accused of over-spending, rather than suffering very large revenue writedowns.
On February 6 last year, he said: “The proposition at the heart of all of the questions asked here today and put forward by the Leader of the Opposition is this: they would have cut $160 billion worth of revenue writedowns from the Australian budget over the last five years -- and I can tell you what the consequence of that would have been. That would have been a sledgehammer to the Australian economy and would have resulted in massive unemployment. It also would have resulted in higher deficits and higher debt.”
At the risk of repetition, the 2013-14 budget outcomes show a deficit $30 billion larger than expected in May last year, with two thirds being revenue writedowns.
Kevin Rudd and Chris Bowen took responsibility for some of the ‘optimistic’ revenue forecasts when, in the independently prepared pre-election economic statement, Swan’s $18 billion deficit widened to $30 billion.
But when, just three months later, Treasurer Hockey announced at MYEFO that the deficit would be $49.5 billion, Labor cried foul.
Hockey had -- and admits he had -- added $11 billion to the deficit through policy decisions. There was an $8.8 billion recapitalisation of the RBA, and the overturning of some of Labor’s clamp-down on fringe-benefits tax, and small increases to superannuation tax.
If the PEFO document forecast a $30 billion deficit, and if Hockey added $11 billion, then about $7 billion is continuing revenue writedowns across the year.
The danger of looking back at the extraordinary period of financial and economic history known as the GFC, and basically saying it never happened, is that it distorts our view of what is happening today.
There will be ‘surprises’ ahead in currency and commodity prices, but nothing (it is to be hoped) compared to the ruptures of 2008, 2009 and beyond.
And yet, revenue writedowns of a few billion here, a few billion there, are very likely. It suits the current government to re-write the history of the past few years to make the current state of the budget one giant bungle by Wayne Swan.
It is not that. If we can’t remember what has just happened, how are we to assess Treasurer Hockey’s success or failure as he steers the economy through calmer waters?