No budget emergency but also no genuine economic plan

| May 6, 2016

Federal Budgets are important statements of philosophical disposition, in particular for a vulnerable government two months before an election. Political scientist Dominic O’Sullivan says this year’s Budget gives away too many opportunities for opponents to argue that the ‘fairness’ test has been failed.

The Treasurer’s Budget speech was cautious and politically inoffensive. However, the fuller details set out in the Budget’s accompanying papers show political risks with limited real substance as an economic plan. They showed a philosophical position that gives away too much opportunity for the opposition parties to differentiate themselves in ways that are likely to be more popular than the Budget itself.

The Government can present clear and coherent philosophical arguments for selective tax cuts and will attract support for its youth unemployment measures, investment in transport infrastructure and for measures to bring fairness to the tax treatment of superannuation. Many voters will support the Government’s disagreement with the ALP’s wish to restrict negative gearing and increase capital gains taxes on investment properties.

For many voters, largely but not exclusively the better off, the ability to negatively gear an investment property is an important part of a plan for financial security. It reduces the likelihood of dependence on a state pension in retirement and helps people to compile significant, but not always extreme, wealth.

However, authoritative economic modelling shows that it also contributes to housing price inflation and the difficulties that first home buyers find in entering the property market. Negative gearing benefits older people using property as a means of wealth creation and disadvantages those seeking just one house as a home. The side one takes is one of ideological preference and the points of difference between Government and Opposition are clear and will be keenly prosecuted during the election campaign.

Arguments are also being made to suggest a relationship between reducing the company tax rate and economic growth; but this is incomplete as the defining contribution to a comprehensive economic plan. It shows space for the Budget’s savings measures to be re-spent elsewhere. It suggests, with the removal of the Budget repair levy, that the Government is no longer treating the deficit as a matter of great public urgency. Allowing the deficit to increase exposes spending cuts elsewhere as more the outcome of philosophical preferences than fiscal necessity. The revelation that the Treasury has not been asked to model the cost of the 10-year company tax reduction plan will see opposition allegations of reckless mismanagement. It is on these points that the Budget gives opposition parties space to appeal to more populist public sentiment.

If the Budget can sustain significant tax cuts for very high income earners, opposition parties might ask why it cannot sustain the additional money required for the full implementation of the Gonski school funding arrangements. Is it because schooling is simply not important enough to the Treasurer’s economic plan, or because the states and territories should fund it? The Coalition parties are traditionally vulnerable on education policy, and the Budget might have addressed that vulnerability, given just how unpopular the Prime Minister’s argument was last month that the Commonwealth ought to withdraw from funding public schools altogether.

Budgets are important statements of philosophical disposition. When governments are electorally strong they can use them to differentiate themselves. At the same time, they can take the occasional policy risk in the national interest. However, the Treasurer might find that there is just too much risk for a vulnerable government two months out from an election in underfunding schools, restoring just a proportion of Joe Hockey’s deeply unpopular cuts to hospitals and in maintaining Hockey’s reduced support to low and middle income families.

By its own admission, there is no Budget emergency, no need for a Budget ‘repair’ levy. A deficit can be sustained to cut tax for the highly paid, but not raise support for those who need it most. It is a Budget that gives away too many opportunities for opponents to argue that the ‘fairness’ test has been failed.

The Government needed to be cautious not just in the Treasurer’s speech to the Parliament, but also in the detailed policy explanations. Election year budgets need to avoid too much new spending, lest these are seen as bribes; as cynically adding to deficits for short term electoral advantage. However, governments have choices, and the choices they make need to balance very carefully a complex range of political and economic factors. The political cannot be avoided, but it needs to be subtle and considered. Setting aside tax cuts in favour of fully funding Gonski would have challenged prevailing Coalition ideology, but it might reasonably have been cast as part of a long term economic plan and removed a significant point of difference that the public is likely to see positively for Labor and the Greens.

A budget would, ideally, differentiate the Government from opposition parties in a way that is popularly attractive, fiscally prudent but not austere, and in ways that shut one’s opponents out of the debate. A genuine economic plan might have better helped the Government to achieve that objective.

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0 Comments

  1. Max Thomas

    Max Thomas

    May 9, 2016 at 5:36 am

    The plan is to have No Plan

    The really worrying thing about the present state of Australian democracy is that whoever forms the next government will have attained power without disclosing their intentions and therefore will not have a genuine mandate. With the level of private debt being so high and with so much invested in unproductive assets, the candidates want to stay well clear of offering anything like the leadership we need. Instead, we are already seeing all sorts of diversions, 'security' and 'trust' will most likely emerge as favourites. Democracy has to be constantly nourished, but it is weakened when a nation would prefer to be duped rather than shoulder a burden that will otherwise pass to its children. Like it or not, we will have the government we deserve.

    • Russell

      June 13, 2016 at 12:15 am

      appearance of manipulation
      it appears that no matter what side of the government you side with there is always going to be the appearance of a conspiracy between policy and finance. in this case I fear that policy guideline between getting rid of negative gearing and unions super fund CBUS is not to overlooked. You can manipulate the property markets with policy scare and then change it all to benefit one superfund who appears to be hiding bad results.