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Federal Budget 2014: Experts respond


ESSA Publications

By

June 1st, 2014


A commentary of the ESA Federal Budget Review featuring Judith Sloan, John Freebairn and Don Harding and topped up with our interviews with each of the guest speakers.


The Federal Budget Review event was hosted by the Economic Society of Australia (ESA), a founding partner of ESSA. We pick out the speakers’ opinions on five key topics: federation, structural recovery, infrastructure, welfare and unemployment and good old politics.

Words by Steph Gale, Anisha Kidd and Christine Li. Header image courtesy of ABC Radio Australia.

Federation

Don Harding specifically credited this year’s federal budget with providing a catalyst for discussion between both federal and state governments about what the latter provides in terms of services, namely health and education. Harding noted that the federation debate is one “we have been needing to have for some time”, openly advocating the idea of creating competition between the states. He argues that the continued push for national programs is not useful or efficient – Australia should instead move to the more ‘rational’ solution of the states effectively tendering for funding based on the creation of localised programs that will lead to the greatest benefit on the ground following implementation.

That’s something Judith Sloan called the “rationalisation of responsibilities” between states and the Commonwealth. In particular she’s in favour of changing the allocation of infrastructure spending – to let state governments better allocate resources on prioritised projects, such as urban transport. In response to public backlash to states being hard done by the budget Sloan commented, “people don’t understand federation, they’re wedded to the idea that everyone should be treated equally and have the same access to goods and services [when that’s] not the idea of federation. Because it is a popular misconception that’s why the federal government got so involved [in the past ten years]”.

The role of the states in GST reform also resurfaced. By slashing Commonwealth funding to schools and hospitals by $80 billion, the Prime Minister and Cabinet appears to be pushing the responsibility of asking for a GST increase, and the ownership of it, onto the states. This may be politically easier now, but ostensibly there will come a day when Abbott and Hockey need to show approval for the tax hike – which they currently do not. “I think the federal and the state just don’t want to talk,” John Freebairn concluded. One thing both Sloan and Freebairn agreed on is the fraught politics of allocating expenditure to the states. Freebairn thinks we should start by doing a cost-benefit analysis of this allocation. Without that, what’s politically expedient would happen – the lion’s share would go to NSW, Victoria and Western Australia. Rather than pushing this reform however, Harding advocated firstly for “fixing” some of the estimated $20 billion in current tax concessions.

Structural recovery

The single biggest problem John Freebairn saw here – a problem that has endured since the Howard years – is how much Australians expect their governments to do, and how much governments are willing to egg on these expectations. Though incomes have been steadily rising over the past twenty years, the composition of this growth tells a story of productivity stagnation. The microeconomic reforms and information technology revolution of the 1990s was replaced by the initial investment phase of the mining boom, and its attendant trebling of commodity prices, in the next decade. Now we’re facing a huge downturn in the commodity cycle and still have high incomes to support. Behind the scenes, both private and public consumption are up. In the private sector people are “drinking more coffees and going on more exotic holidays”. And as governments have delivered more in the years, there’s also the expectation for governments to keep doing more in technology, health, education, as well as building bigger and better roads. How should we decide between supporting public and private consumption when we want more of both? This is a broader definition of entitlement that we need to start discussing.

As for why neither the 2014-15 Budget nor the Commission of Audit touched tax expenditures such as generous superannuation tax breaks, Freebairn’s guess is as good as yours. However, he expects to see recommendations from the Henry Review and a reform agenda on the GST included in the Government’s White Paper on Tax Reform to be started on this year.

Harding openly argued the case for an increase in federal net debt while the government sorts out Australia’s “inefficient” taxation system. Whilst we can rely on an inefficient tax system to raise revenue by implementing the deficit levy and targeting social welfare, he instead noted that logically we would be better off to borrow over the short run, giving us time to sort out the tax system, before paying everything off when the system provides us with less of a burden. After being challenged with the prospect that ratings agencies such as Standard & Poor’s might move to downgrade Australia’s rating should net debt be allowed be increase, Harding flatly stated that S&P “don’t have a case” for doing so. There still exist junk-status economies such as Greece and Italy, which make Australia as safe as houses, so any decrease in our credit rating is not a realistic proposal.

Sloan would disagree. To her, what’s largely neglected in the public debate around debt and deficit is an issue of morality. The idea that you would run up deficit is basically imposing a liability on future generations, you either going to have to pay that down through inflation or imposing tax on future generations. It’s an issue of morality.”

Infrastructure

In line with her recent article, Sloan was critical of the proposed infrastructure spending in the budget, althoughin theory you can get investment in infrastructure that is enhancing in productivity … [but more] often they are motivated for political reasons as opposed to sound cost benefit and risk analysis.” The consequentialpeppering’ of spending amongst the states leads to only marginal benefits within the states and therefore to GDP. Sloan took a further strike at the left by condemning the“labour market regulations and union behaviour”that inflate production costs “well above the efficient price.” Thus the government is further engaging in inefficient public investment by failing to “control the costs of constructing“.

Flaws in added infrastructure spending notwithstanding, you may think: why spend more on new roads and not rail? Keeping in mind that road and rail are not interchangeable as they are two different kinds of connectivity – one gets workers into the city and the other gets workers from home to jobs in the suburbs, and also environmental positives  – to Freebairn the answer is simple: the cost-benefit analysis would never stack up. Is that a good reason not to spend on rail? No, but the cost-benefit analysis has to be done. The hard message of selling something that fails the CBA test, but is worth doing, is the job of politicians.

Welfare and unemployment

Harding was vehement about the new Medical Research Fund, arguing that it has produced “some of the silliest statements I’ve seen” – the argument that Australia should do more of something, simply because we are good at it “seems odd”. He contends that the policy should have been subjected to a much more rigorous cost-benefit analysis. Whilst a rational argument for the funding can be made, it should instead be targeted towards cost-reducing research (a subtle difference), such as revolutionising the delivery of services, palliative care, and generic medications.

Sloan commented that cuts to welfare are drawing government spending back to a sustainable model – but what’s problematic is how this was presented – in mixed messages arguing the need for cuts yet at the same time expanding certain aspects of government spending. You’re being told “the Age of Entitlement is coming to an end but then you have the paid parental leave scheme. Co-payment on GPs instead of going to repair the budget is going to the honey pot for medical research.” Sloan also flagged “child care subsidies and paid parental leave schemes as the strongest growing government program over the next 10 years which is amazing given we have an aging population.”

Here Freebairn returns to the fundamental rationale behind the purpose of government. We need to have a conversation about that – is the government there only to distribute property rights, to correct market failures, provide public goods, deliver redistribution and equity? Pressed about who should be having this conversation, presumably not the media, and presumably not the working classes, most of whom have vastly different expectations of the size of government from economists, Freebairn harks back to the Hawke-Keating duo: “they pummelled the press, pummelled the people to convince them that certain reforms were needed.” Whereas now, our leaders let technocrats and the Commission of Audit do the talking. But to this student, both ways still seem to involve politicians calling the shots and dictating the conversation for us.

Politics and selling the budget to the public

There’s an air of disappointment with the way the politicians have handled it this time round. Joe Hockey promised not to raise taxes or decrease spending – now facing the spectacle of what happens when election promises are broken – when according to John Freebairn, he should have learnt from Howard that “some promises are core promises, others are not.” Freebairn’s scorecard on the budget: a tick acknowledging there are structural problems, a cross for not doing much about it, and a cross for doing the opposite of what needs to be done, instead supporting higher expectations for government.

Overall, Judith Sloan thought the budget introduced only marginal changes over the first four years, and possibly didn’t go far enough. Again, it also sends too many mixed messages on addressing the budget deficit.

Finally, Don Harding criticised the difference between what the budget is actually setting out to achieve, and how it is presented to the public. This is complicated by how the negative pitch created around the more controversial policies “is about laziness” – he likened the media approach to being “like opening one of those packaged meals and putting it in the microwave; it’s easy, but not necessarily nutritious”. In his view, this is a budget that fails to address the structural issues facing the Australian economy, and its authors are too scared to take on increased national debt to achieve reform. However, he’s sure the budget would have been substantially the same regardless of which party took power last year. One of the positives is that it will finally start new conversations regarding the GST, superannuation, income tax and bracket creep – conversations that need to be had.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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