While there will be a lot of finger-pointing going on as the politicians try to assign blame for the $123 billion hole in the nation’s finances over the forward estimates the critical question is what the Abbott Government will do, indeed can do, to fill it in. The only certainty is that its attempts to prevent the deficits from continuing to spiral out of control will involve some difficult and painful decisions.
The most disturbing aspects of the Mid-Year Economic and Fiscal Outlook (MYEFO) are the extent and rate at which the budget position has been deteriorating.
Between this year’s budget and today’s statement the forecast deficit has exploded, from $18 billion to $47 billion. Over the course of the four years of the forward estimates the cumulative deficits have grown from $23 billion to the $123 billion Joe Hockey unveiled today.
That’s of course occurring against the backdrop of the best terms of trade and biggest investment boom in our history, both of which are now deteriorating.
While the decisions the Coalition has itself made (most notably the $8.8 billion injected into the Reserve Bank to restore the reserves depleted by Wayne Swan) the vast majority of the deterioration in the forecasts over the forward estimates – about $54.4 billion of the $68.1 billion – relates to matters outside its direct control.
At its simplest, at a time when government spending is at historically high levels – 26.1 per cent of GDP – its revenues are falling as a proportion of GDP (23.7 per cent).
With the resources investment boom expected to tail off even more sharply than had been anticipated and the non-resources side of the economy not only failing to show any signs of improving to absorb some of the slack but, as recent developments in the car industry highlighted, weakening further, the position is still deteriorating and the projected rates of growth in the economy are being lowered.
Doing nothing in the face of deficits that would otherwise stretch out for at least the next decade and government debt on issue that would rise from 20.9 per cent of GDP, or about $430 billion, this year to nearly 26 per cent in 2016-17, or about $667 billion, is self-evidently not an option.
In next year’s budget Hockey is going to have to take an axe to spending, but that in itself isn’t going to arrest a trend which is being driven by the weakening economy and the twin impacts that has on revenues and outlays.
Nevertheless, confronted with structural deficits stretching way out into the distance, the role of government and the extent to which it is able to maintain spending programs will have to be radically redefined.
Hockey could also raise taxes, but that could be counter-productive if it undermines an already softening and fragile economy.
Ultimately, the only way to reverse the trend created by the profligacy of the past decade – and not all of it (although much of it) by the Rudd and Gillard governments – is to pursue the stronger economic growth that would both lift the government’s revenues and lower its spending.
That’s a conclusion that Hockey and the business community came to quite some time ago. While shrinking government spending as a share of the economy is part of the pathway to more stable public finances, ultimately the government has to create the framework for a more productive post-resources investment boom economy.
That necessarily will involve winding back the mountain of unproductive regulation added over the past decade while targeting government spending and investment and incentives to boosting productivity and growth.
Hockey’s Audit Commission will create something of a blue-print for determining the size and scope of government and improving its efficiency and Hockey’s first budget next year will be the start of the long-term attempt to restore stability to the fiscal position and outlook.
Ultimately, however, the Abbott government needs to convince consumers and business that there is stronger economic growth in prospect and that they should have the confidence to spend and invest.
The ugly negatives in the MYEFO statement and their near-term implications for the way the Abbott Government will be forced to respond were well-foreshadowed.
The government will, however, also need to develop a more positive narrative in the not-too-distant future and demonstrate its ability to execute it if wants to regain the confidence in the government’s ability to manage the economy, lost by Labor that is the key pre-requisite for stronger growth.