What's behind Hockey's fiscal nightmare?

Joe Hockey has pilloried the government for running a more expansive 'Australia Inc' than it admits. But tighter fiscal policy, like growing debt, could become a disaster-in-waiting.

Last night I had a refreshing conversation with a couple at a pub in small-town rural Victoria. Did they know, I asked, that their town was on Stephen Conroy's early roll-out list for the NBN?

"NB-what?" was their reply.

When I explained it meant high-speed internet, they agreed they'd like some of that, though they worried: "It'll cost more, won't it?"

Nice people. They went back to actually having a life, and I went back to thinking about infrastructure spending and fiscal policy, and sipping a local shiraz – a mistake, as it usually gives me troubled dreams.

But then I'm not the only one tossing and turning over fiscal multipliers and the like. Shadow treasurer Joe Hockey, presumably after pacing back and forth in a wee-willy-winky cap, has sat down and penned a piece for The Australian describing his fiscal fears.

It's an important piece, as it sets out the Coalition's argument as to why this Labor government is a high-taxing government, when Wayne Swan keeps saying it isn't.

Hockey writes today: "The government's call on present and future taxpayers in the year just finished was nearly 26 per cent of gross domestic product. That is higher than in any year of the previous Coalition government. The average for the Coalition years was 23.4 per cent. The average for the five years of this government will be 25.5 per cent."

Meanwhile, in the house of Labor, assistant treasurer David Bradbury has been burning the midnight oil and crunching numbers, while his boss Wayne Swan snores heavily and dreams of mining tax revenues and a budget surplus.

Bradbury issued at statement last week arguing that it's Hockey who's dreaming: "Mr Hockey is the one who is ignoring reality – when the Liberals were last in office the tax-to-GDP ratio was 23.7 per cent. Under the Gillard government the tax-to-GDP ratio is now 22.1 per cent in 2012-13. Tax as a proportion of GDP is now lower than it was at any time under the Howard government."

So which figure is right? Tax-to-GDP of 22.1 per cent or 26 per cent?

The answer hinges on what you believe is off-budget (or off-balance-sheet, as it were). Borrowing to invest in national infrastructure – like that NBN-thingy – doesn't count towards a budget deficit, because it's expected to make a financial return for the government.

Indeed, there are many assets that do this. Hockey conveniently lists them in his piece today: "In recent years the government has clawed $500 million in dividends from the Reserve Bank, $300 million across four years from the Australian Reinsurance Pool Commission and $850 million across three years from Medibank Private. In the latter case, just in the past year alone, policyholders who thought they were paying for their private health insurance cover have effectively contributed $250 each to the government's coffers."

The idea that the NBN won't make a financial return just doesn't stack up – it's a monopoly that specifically excludes competition in all areas of wholesale internet except for pure mobile network wireless, which can't provide real competition because of bandwidth constraints. So it too is certain to 'claw back' money.

That does raise a serious issue of whether the NBN will just make high-speed internet "cost more" as the couple at the pub worried, but it doesn't suggest the NBN should be 'on-balance-sheet'.

The Howard government didn't borrow and spend in this way. Indeed, its tax revenue bonanza during mining boom mark-I allowed it to pay off the $96 billion debt left to it by Paul Keating, and squirrel away around $20 billion to leave as a gift to Kevin Rudd.

And Hockey is promising not to borrow again. The Coalition, to date, has said it will cut spending and deliver tax cuts if it wins power in 2013, and stop issuing so many Commonwealth government securities – Malcolm Turnbull's 'cheaper, sooner' broadband plan is just one example of how this will be done.

That gives voters a clear choice at the next election – a government running a 'tight' fiscal policy that raises only 22.1 per cent of GDP in taxes, but manages a highly geared, and probably not very efficient Australia Inc on the side ... or one that shuts down quite a bit of Australia Inc, and runs an even tighter fiscal policy.

It sounds like a no-brainer – surely we don't need to keep borrowing to build inefficient state-owned enterprises? And if we sack a few thousand public servants and use the money for tax cuts, won't that money be spent by the private sector on investment/consumption?

That's all pretty good in theory. But Hockey's plan brings with it one enormous risk – that returning money to taxpayers will simply allow them to deleverage a bit faster. Robert Gottliebsen detailed yesterday how new home buyers are reluctant to load themselves up with debt (Young buyers tear up the housing plan, December 3), and shocking retail figures show that their parents are also lacking the confidence to spend money, and also wish just to pay down private debt.

We will know more about which path is best for the Australian economy next year – particularly after the pre-election fiscal outlook documents are prepared ahead of the election.

The risk is that stripping out huge amount of public demand from a weakening economy will plunge us into a downturn. On the other hand, Labor's propensity to rack up debts in relatively good times does, as Hockey argues today, expose future taxpayers to liabilities they won't want.

Both scenarios could turn into nightmares, depending on the economic data returned in early 2013. Until then, best get some sleep.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles