Crisis what crisis? The Commission of Audit & the Federal Budget 2014

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It’s been a super month for Government economic statements, in Australia with the long awaited “commission of audit’ report being released just ahead of the usual Federal Budget unveiling.

The content of commission of audit’s report was as interesting as its timing. Although, apart from a bit of unexpected policy freelancing on the minimum wage, the commission of audit mainly stuck to its brief of addressing expenditure cuts and didn’t touch the revenue side of the budget.

But what was the reason for the commission of audit and federal budget to be timed together? What’s the strategy behind it?

Ironically, the commission of audit’s approach reminded me of the old Builder Labourers Federation (BLF) trade union tactics of putting out a radical wish list of expenditure cuts, so the Federal Government could be seen to bring in a ‘moderate’ budget by comparison.

Almost a ‘bad cop-good cop’ routine or if you like a ‘rope a dope strategy’ – named after Muhammad Ali’s famous upset win over George Foreman for the heavy weight boxing title in Zaire in 1974.

The strategy goes like this: put out a radical commission of audit report to get the opponents and the media throwing punches and by the time you bring out the budget, the sting has come out of them and the budget looks meek and mild by comparison.

This is how Ali beat Foreman, getting his opponent to swing all his punched and the wear him down. Regardless of the individual merits of the commission of audit’s recommendations (that’s another story) it created a flurry of activity and had people talking of overall public sector ‘waste’, whether it was true or not on an individual agency basis.

The other part of the strategy was to float the idea of was the ‘debt levy’ to beat the ‘debt crisis.’ Again the federal government wanted to create an atmosphere of a budget emergency or ‘crisis’. And used it to justify a 1 per cent ‘debt’ levy on taxpayers (deemed to be high income earners) to help get through the ‘temporary’ emergency.

But the debt levy makes no economic sense and for several reasons.

Firstly, there is no ‘debt crisis’. Australia is not Europe (see my blog ‘My Big Fat Greek Debt’), we are not America or Argentina (see my blog ‘Don’t Buy from me Argentina’). The net debt to GDP ratio in Australia is only 11 per cent compared to OECD average of 50 per cent.

Secondly, it makes sense for Government’s to carry some debt. Governments provide the community ‘public goods’ – defence, border protection, hospitals, education, roads etc. that can’t be provided by individual firms and households alone.

That’s government’s job, and whatever politician’s might tell you, the federal budget is not like your family budget. There are social returns on public investment that the federal government provides and has done right back to the time of Lachlan Macquarie and even before that. Provided the government can service the debt, and get return on its investments in infrastructure with a growth strategy and sustainable and growing export income, it’s a rational and sensible thing to do.

Thirdly, you can’t call a debt levy ‘temporary’ – it’s not. As my UNSW colleague Richard Holden has pointed out you can have levies for temporary acts of nature like a flood or bushfire, but not an open ended one, especially like the one proposed that simply doesn’t raise enough revenue.

Of course apart from the shortcomings of the ‘debt levy’ and the commission of audit, there are ways in which governments can structurally change budget like taking away high income super concessions (Peter Costello’s Willy Wonka golden ticket to high income baby boomers) eliminating middle class welfare (private school subsidies, private health care rebate), eliminating some government agency duplication (there are some sensible parts of the commission of audit), and reform federal-state relations for the 21st century.

But is there an economic crisis? No, there’s not. Australia’s economic fundamentals are still in good shape. If you look at the most important indicator – the labour market – we are still receiving better than expected news on employment. The government’s own figures show that the total number of jobs in Australia rose by 14,200 to a seasonally adjusted 11.5 million in the month. Inflation is low, wage growth is moderate and even interest rates look like being on hold for a while, and there is now almost a concern they may have to trickle up a little later in the year to clamp down on growth.

Is there a budget crisis? No, there’s not and there’s certainly no debt crisis despite the atmosphere created by the commission of audit and talk of a debt levy in the lead up to the 2014 Federal Budget.

About the Author

Tim Harcourt is the J.W.Nevile Fellow in Economics at the Australian School of Business, UNSW, in Sydney and author-host of The Airport Economist www.theairporteconomist.com