Joe Hockey will reveal a “growth dividend” in tomorrow’s budget to assure voters that painful cuts will one day boost the economy and expand revenue.
The Treasurer will cite official modelling to counter fears that savage cuts will erode consumer confidence and curb growth.
The Australian has learned the Treasury analysis will outline long-term gains from a “growth package” that includes heavy spending on roads and the repeal of the carbon and mining taxes.
Mr Hockey said the growth boost would not be seen in the short term but would lead to lasting gains.
“We are rebuilding the economy, we all have to contribute and the dividend will flow over the next few years,” he said.
A political and economic fight is certain as the modelling mirrors an approach taken by Labor four years ago, claiming a “dividend” from reforms that were later derailed. Economists including Tony Makin from Griffith University and Sinclair Davidson from RMIT have hotly disputed previous Treasury claims of a “multiplier” effect from government policies.
While the Treasury analysis is closely guarded, Mr Hockey said it would show “identifiable benefits” in the medium and long term.
“We will put in place immediately the mechanisms that will help to start to build a stronger and more prosperous economy,” he said.
“Treasury have modelled an improvement in GDP as a result.”
Key components of the analysis are the cuts to business costs from the repeal of the mining tax and carbon tax and a big shift in spending away from consumption and into “productive investments” such as roads.
Treasury allowed Labor to claim a $600 million “growth dividend” in 2010 on the grounds that the proposed reduction of company tax from 30 per cent to 28 per cent would deliver a 0.4 per cent lift in economic growth while the proposed resource super-profits tax would lift growth an additional 0.3 per cent.
The analysis led former treasurer Wayne Swan to claim that the “reform dividend” was “equivalent to an extra $450 a year in the pocket” of a full-time worker on average weekly earnings.
While the benefits were supposed to start flowing in 2012-13, neither the company tax cut nor the original resources tax were implemented and economic growth fell far short of the Treasury projections.
Mr Hockey has been under fire over his economic claims in recent weeks as consumer confidence falls in the wake of reports of a “deficit tax” in the budget.
Labor Treasury spokesman Chris Bowen accused the Treasurer of “talking down the economy” for political gain.
“As we have been saying over the last year now, there’s a delicate transition under way, from mining investment to growth in the non-mining sectors,’’ Mr Bowen said.
“Tuesday’s budget has the capacity to hit growth hard.
“A budget that increases taxes, hits low and middle-income earners through cuts to payments and services, and hits pensioners, can hardly be declared ‘pro-growth’.
“Consumption is a key contributor to the economy and economic growth and cuts to payments and higher taxes will only hinder that.”
The government will claim there will be a boost to growth when it cuts spending on government consumption, such as cutting public servants or welfare benefits, and channels the money into infrastructure instead.
Treasury modelling has been used before to claim a growth boost from a federal budget but the Coalition attacked previous projections as too optimistic. In preparing the controversial stimulus package in 2008-09 in the wake of the global financial crisis, Treasury used modelling suggesting that every dollar spent on transfer payments generated 60c of spill-over benefit in the broader economy while a dollar on government consumption produced 85c of economic gain.
Treasury cited OECD and IMF figures showing infrastructure spending generated between $1.30 and $1.80 in gains to the broader economy for every dollar spent. On this basis, shifting $10 billion in spending from consumption to investment might generate gains of about 0.5 per cent of GDP.
Although Treasury’s analysis is consistent with the IMF and the OECD, it remains contested.
Several prominent economists, including the Professor Makin from the University of Griffith, Professor Davidson from RMIT and The Australian contributing economist Professor Henry Ergas, have argued there are no “multiplier” benefits from government spending because any impact is entirely offset by adverse moves in the exchange rate.
But Treasury secretary Martin Parkinson has defended his department’s use of “multiplier” effects against critics, most recently following the 2012 budget.
Deloitte Access Economics partner Chris Richardson said there could be a short-term effect resulting from a dollar of spending on infrastructure having a different impact on the broader economy than a dollar spent on welfare, while there would also be a longer term gain from infrastructure spending because of the productivity gains it could deliver.
“It is true that in the long years of watching out for the budget balance, politicians have been too tough on investment, and not tough enough on public servant wages and pensions and benefits,” Mr Richardson said.
“But the short-term boost to growth from any reordering is likely to be pretty small.”
“In the grand scheme of a $400 billion budget, it would be something at the very margins,” Mr Richardson said.