Swan and Hockey's fiscal furphies

The Coalition looks set for cost-cutting plans so aggressive they'll be very difficult to sell at the polls. But Labor is also headed for trouble with the charade it can afford its election promises.

Tony Abbott's first big push to win the hearts and minds of voters has been upstaged by nature – the devastation of flood and fire currently filling the news cycle is more important to most people than a bunch of existing Coalition policies pasted into a glossy brochure, and launched alongside a 'positive' TV commercial.

Both sides of politics know that the floods clean-up will put further strain on the federal budget, forcing any future Labor government to borrow just that little bit more or a Coalition government to cut public spending more.

The Coalition's mini-campaign centres on the policy outline document Our Plan – Real Solutions for all Australians (available here) which, without a hint of tongue in cheek, discusses in adjacent sections: "Living within our means and getting the budget back under control" and "Lowering taxes to unleash our real economic potential".

That is yet more conformation that the Coalition's cost cutting plans will be so aggressive as to be very difficult to sell at election time.

The mini-campaign doesn't actually say where the cost slashing will be – only that a commission of audit will be set up to review all areas of government spending. But will voters really sign up for huge cut-backs in public services without knowing which one the audit will identify as most wasteful?

I notice yesterday that commentator Henry Ergas referred to Labor's "spending still at record levels" being a reason for continuing budget deficits, and growing public debt. That statement is far from problematic, however.

Labor keeps large projects such as the NBN off-budget, based on the assumption that they'll make money for their owners (yes, you and I). And since they are funded by selling government bonds to investors keen to stash their money in our AAA-rated securities, the government doesn't see a problem. With relatively cheap money, it's borrowing and investing on behalf of taxpayers – how could we lose!!

So minus the off-budget projects, the spending to GDP ratio is in the range of 22 to 23 per cent, though after Swan's surplus backflip in December, that will now be allowed to edge up to 24 per cent.

So while Ergas is right about "record levels" if you include off-budget spending and if a raw nominal figure is of most interest (which it is hardly ever is), as a proportion of GDP, things are actually very tight by global standards.

And it will just get tighter. Treasurer Swan has already said that post-flood federal aid will stretch things further, though he is yet to make a statement on whether or not another flood levy might be needed. Expect that argument to rage right through the first sitting week of parliament – MPs shuffle back into the chambers next Tuesday.

All of that said, there is one reason to treat the spending-to-GDP ratio with some scepticism – namely the possibility of GDP itself taking a tumble. Deloitte Access Economics has released a study suggesting the high dollar will persist until at least mid-2014, meaning the current gnawing attrition of the SME sector, and major trade-exposed corporate players, is likely to continue.

By that time, Commonwealth Government Securities may start to look less attractive as real returns begin to catch up in North America and Europe. As I have warned in previous columns, a trickle of money heading home can quickly become a torrent, putting downward pressure on the dollar.

And while a lower dollar in late 2014 would be welcome, the big question is how many SMEs will still be standing to take advantage of the opportunities that creates – particularly if thousands of jobs have been lost via the Abbott cost-cutting program.

Taxpayers like to think of public-service job cuts as being a hounding out of lazy bureaucrats who spend all day dipping cream biscuits in publicly-funded cups of tea. In reality, many SMEs servicing government contracts have to cut staff too.

Revised GDP forecasts for 2014 could be quite different even by budget time this year. So by the middle of next year, nominal spending figures for whoever is governing could look pretty worrying.

Going into the first sitting week of the year, then, we are already in semi-election mode. With the most likely election date being in October, that leaves around eight months for both sides of politics to try and maintain the giant furphy that somehow they can afford their election promises. It ain't so. Labor will have to borrow more, and the Coalition will have to cut more deeply than anyone wants. It's going to be a long eight months.

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