Mind the gap, Mr Abbott

The Opposition leader's budget reply revealed a credibility gap between apocalyptic fiscal rhetoric and the proposed response to said apocalypse. But it's a comforting gap.

Crikey

How far has our understanding of the Coalition’s fiscal policy advanced as a result of Opposition Leader Tony Abbott’s budget reply last night?

Answer: not particularly far, and what detail we got tends to confirm what already seemed to be the case. That is, assuming Abbott is being honest, the Coalition will not run a significantly tighter fiscal policy than Labor. This is despite what Abbott claims is a "budget emergency" of sufficient magnitude that he will reluctantly support Labor’s $30 billion-worth of tax rises and savings.

If there was a true fiscal emergency, the Coalition would be girding its loins for a serious assault on the budget. However, nearly all of the savings measures announced by Abbott last night (which were additional to Labor's earlier savings, and most of which were re-announcements) will be directed to funding the $4 billion in carbon price tax cuts and handouts that the Coalition says aren’t necessary.

This is shadow treasurer Joe Hockey, just a few weeks ago:

''Let me be very clear, if there is no carbon tax, there is no need for compensation because if you don't have a carbon tax, you don't have injury, and by its very design, the carbon tax is meant to cause injury, it's meant to change behaviour, and that's why the government compensates."

Hockey was exactly right, of course, but his logic has been rejected as politically inconvenient by Abbott. The result: a "budget emergency" so bad you can throw $4 billion at taxpayers for no reason.

That decision inevitably makes the overall savings task for the Coalition more difficult. For example, in 2010, Abbott said in his budget reply that his plan to slash 12,000 public servants would "pay for the Coalition’s direct action on climate change policy, the Green Army and the retention of the current private health insurance rebate".

But last night, Abbott said the 12,000 cut was among his "specific savings" that would "cover keeping tax thresholds and pension rates without a carbon tax to fund them".

So opposition climate spokesman Greg Hunt’s risible Soil Magic / Direct Action scheme now has to be funded from other savings ("it will be costed, capped and fully funded from savings," a Hockey spokesman said). In a perfect world, this will be a prelude to the Coalition abandoning it altogether, since simply sitting and ignoring climate change would be better than blowing billions on winner-picking nonsense.

The actual new cut identified by Abbott consists of delaying the increase in compulsory super to 12 per cent -- at least, unlike former PM John Howard and then-treasurer Peter Costello in 1996, Abbott hasn’t lied about supporting the increase before the election as a prelude to dumping it afterward. This joins the previously announced 12,000 ex-bureaucrats, axing the low-income super contribution and the reduction in our humanitarian intake. Abbott also "confirmed" he would dump the mining tax-funded Family Tax Benefit supplementary allowance (which Hockey actually backed last year), although Abbott was careful not to use the phrase "Family Tax Benefit" when saying he'd dump it, merely referring vaguely to "people on benefits" which of course sounds much more like a war on dole bludgers than class warfare.

This reduction in Australia's humanitarian intake, which reverses the recommendation of the government's Houston panel, is both bad policy and morally reprehensible. The Coalition is proposing that one of the world’s richest countries cut its intake of bona fide refugees by over 30 per cent, while at the same time purporting to be serious about discouraging asylum seekers from trying to reach Australia by boat. Seriously reducing the intake of refugees who seek to be resettled in Australia through appropriate, internationally recognised processes sends a strong signal that you maximise your chances of being resettled here by coming by boat.

The net result in budget terms is a credibility gap between the opposition’s apocalyptic fiscal rhetoric and its proposed response to said apocalypse. But it’s a comforting gap. The last thing an economy forecast to grow below trend despite a 1 per cent of GDP deficit and record low interest rates needs is a new government ripping a huge amount of demand out of the economy.

Of course, an incoming Abbott government could have a mini-budget and unleash an unheralded round of massive cuts ("to the bone"!), just as Labor is predicting. Moreover, we’ve only heard one-half of the opposition’s budget reply; Hockey will offer his next week, and may detail further cuts. But on its face, Abbott’s reply is appropriate and sensible in terms of the level of fiscal stimulus the economy needs.

Abbott also appears to have left the door open to GST changes via a tax reform white paper. Yes, of course, there’s been umpteen tax reviews and we don’t need another one. But if Abbott is plotting a course toward fixing the holes in the GST (which would complete the tax reform work of Peter Costello that was ruined by former senator Meg Lees) or expanding it, that’s a welcome sign. Labor has already sought to create a GST bogeyman from it, but all power to Abbott if he’s prepared to use his political capital to improve it.

And even if it looks a bit like he’ll be hitting the ground reviewing, a COAG white paper is welcome as well. Abbott, as he outlined in his book Battlelines, is a strong centralist and wants to override state powers -- or at least he did when most states were controlled by Labor. A serious effort to make COAG work more effectively (or dump it as a waste of time?) is also sound policy.

We await Hockey’s response next week. But so far, there’s no evidence to suggest the Coalition is going to differ significantly from Labor on fiscal policy. And that’s pretty much what the economy needs for the next 18 months.

This article was first published on Crikey on May 17. Republished with permission.

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