The Coalition's chicken feed savings don't add up

Joe Hockey's verbal rampage against debt doesn't match Coalition's costings, which could risk a true budget emergency in the long term if downside economic threats materialise.

An Abbott government will not deliver a budget surplus in any of the next three years. This is one of the extraordinary outcomes of the Coalition’s release of costings yesterday that will leave the budget deficit hawks bitterly disappointed given the paltry $6 billion in aggregate budget savings delivered over the full four years of the forward estimates.

In those four years, from 2013-14 to 2016-17, Australia’s GDP will be around $6.75 trillion. The net ‘benefit’ to the budget from the Coalition policies is therefore just 0.09 per cent of GDP. These are fiscal breadcrumbs at the best of times, but are laughable given the vitriolic rampage against debt and deficit the Coalition has been running with for the last few years. A two-tenths of a per cent unexpected rise in the unemployment rate or a cyclone in Queensland would wipe out the $6 billion in net savings.

If there is a budget deficit crisis, as the Coalition claims, why hasn’t the Coalition announced meaningful spending cuts or tax hikes to address it?

If there is a “budget emergency” as Shadow Treasurer Joe Hockey has claimed, why are they sticking to the same trajectory as the government and leaving the budget in deficit until 2015-16? And only in 2016-17 are they set to deliver a rice-paper thin budget surplus? (Tony piggybacks on Labor's piggyback, August 26)

What is even more disconcerting for those who do reckon the budget should be returned to surplus earlier and more aggressively than under the current timetable; the bulk of the $6 billion budget change was due to a cut of $4.5 billion in the foreign aid budget. This is hardly the stuff of fiscal prudence.

The details of the fudges and fiddles, the cooking of the books – as Hockey loved to taunt former treasurer Wayne Swan – includes a total saving of $1.3 billion in lower public debt interest costs, in part due to the changed funding profile of NBN Co. Then there is the $650 million saving from “re-phasing four years’ spending over six” with water buybacks. This is what Hockey said was a “fiddle” when the Labor Party did it with a few of its measures.

Then there is the $1.3 billion in savings assumed from cutting the humanitarian intake of refugees; but the biggest saving is the $5.6 billion in reduced outlays from the public service cuts, which are expected to come from natural attrition (The public service problem teeters at the topSeptember 6).

With the Coalition costings, Joe Hockey and Andrew Robb have failed to address the issue of a structural revenue problem in the budget that is being driven by the slide in the terms of trade, the weakness in nominal GDP and is related to that the ongoing low rate of inflation. If these trends continue or indeed, get more severe, the Coalition will not be able to deliver a surplus in 2016-17 or beyond (Wiggle room in Abbott's 'no surprises'September 4).

The deficit hawks, who were looking for the Coalition to deliver yet-smaller government, will be aghast that over the next four years at the sum of total government spending, with revenue still approximately $3.3 trillion. All the Coalition has trimmed is a lousy net $6 billion – or just 0.18 per cent.

While there seems to be a lot of upside at the moment to the Treasury economic parameters underpinning the budget – which if realised will deliver some welcome windfall revenue to the incoming government – global conditions are still fragile. There is some trepidation concerning the phasing out of quantitative easing in the US and there is a growth risk in China, while India and other major emerging countries are in some form of economic trouble. All of which means, there must be some downside risks too. 

If these downside risks materialise, the Coalition will face its own budget emergency which it is not addressing in the pre-election period.

Maybe it will break some promises and cut spending after the election. Maybe it was not all that concerned about the budget in the last three years and exaggerated the problems.

It will be another fascinating chapter in economic policy making to see what happens in the Commission of Audit and whether or not the Coalition does in fact cut hard in the first few months of its term in office. 

Stephen Koukoulas is managing director of Market Economics and was an economics advisor to the former Prime Minister Julia Gillard.