What kind of Treasurer has Joe Hockey shown himself to be after his multiple appearances this week? After campaigning as a deficit hawk, he announced an increase in the debt limit and boosted the RBA coffers to the tune of $8.8 billion. The increase to the debt limit in particular offers some insight into the Coalition’s expectations for the years ahead.
The decision on Tuesday to raise the debt ceiling was both necessary and prudent, particularly given the theatrics and uncertainty surrounding the US debt ceiling. A higher debt limit provides more fiscal flexibility, important in an uncertain economic environment. But many may have found it surprising that a government pitching itself as fiscally conservative decided to increase the debt ceiling by as much as $200 billion.
The Coalition campaigned on the basis of reducing government debt, but they confounded expectations on Wednesday by boosting the RBA’s reserves to the tune of $8.8 billion. As with the debt ceiling, it was debatable whether such a large increase was required, but a replenishment of the RBA’s reserves was necessary to offset the damage done by the high Australian dollar over the past few years.
On Wednesday, Hockey championed another cornerstone Coalition policy, removing the carbon tax. Hockey stated that the carbon tax was a key driver of the uptick in inflation. Unfortunately, the Treasurer's view is inconsistent with the data.
Despite the theatrics of our politicians, the carbon tax has had a relatively minor effect on inflation. The policy had mostly a one-off effect on inflation, which flowed through during the September quarter 2012 when the policy was implemented.
According to RBA estimates, the carbon tax increased the headline CPI by around 0.25 percentage points in the September quarter 2012, accounting for around 18 per cent of the total rise in inflation (headline CPI rose by 1.4 per cent in that quarter). A similar sized fall in inflation will likely be observed when the carbon tax is repealed; those expecting widespread relief for cost of living pressures may find themselves disappointed.
The 7.6 per cent rise in petrol in the September quarter? Due to the depreciation of the Australian dollar; petrol is not even subject to the carbon tax.
How about the rise in electricity prices? Turns out electricity and other energy prices always rise sharply in the September quarter, reflecting the beginning of new contracts.
Yesterday Hockey was focused on campaign promises, moving to scrap the controversial mining tax which has struggled to generate sufficient revenue since being introduced on 1 July 2012. Net receipts from the minerals resources rent tax was expected to be $0.7 billion in 2013/14 and $1 billion in 2014/15.
The draft law also repeals a range of other policies including, among other things, the schoolkids bonus, accelerated depreciation on motor vehicles, the low income superannuation contribution and the income support bonus.
The government also announced they will delay the rise in the compulsory superannuation contribution until the 2016/17 financial year, leaving it at 9.25 per cent. On net, the Treasurer expects these policies to save more than $13 billion over the budget’s forward estimates.
The Treasurer was both Santa and Scrooge this week, announcing policies that, on net, appear likely to reduce debt by $4 billion over the forward estimates. The most important announcement however, involved no change to government spending. At least not yet.
The decision to increase the debt limit provided the clearest indication yet of the Coalition’s intentions and their expectation for government debt over the next few years. Quite simply, a government would not increase the debt ceiling by $200 billion unless they plan on utilising it, particularly when they can frame it as the last government’s fault.
For the most part, the decisions made by the Coalition this week were sound. Faced with an uncertain economic environment, the government should be prepared to run up a little more government debt now rather than consolidate and bring the economy to a grinding halt.