Below is my letter published in today’s The Australian on the Coalition’s budgetary policy, accompanied by articles/interviews including comments/responses by Treasurer Hockey (The emphases have been made by me). Much more could be said, particularly in regard to those entitlements whose importance Hockey spoke about a year or so ago and which former Federal Reserve Chairman Alan Greenspan is reported as suggesting are the main problem facing the US.
Hockey’s reactions, however, give the impression that, during its time in opposition, the Coalition undertook very little examination of government spending or what might be done about reducing it. In his interview last week with Andrew Bolt (already circulated) Prime Minister Abbott gave the same impression and that, contrary to his pre-election assessment, there is no “budget emergency”. Following is an extract from the interview:
PM: We'll get back to surplus as quickly as we can.
AB: It actually says, a decade.
PM: Well, no … I wasn't just talking about any old surplus, I was talking about a surplus of 1 per cent of GDP. Now, that's a $15 billion plus surplus. And I was talking about sustained surpluses at that level.
Perhaps this is a deliberate ploy but if so it is one scarcely designed to restore confidence.
Following are some relevant budget figures (in $bn) from the Pre-election Treasury/Finance statement.
| 2007-08 | 2013-14 | 2016-17 | |
| Receipts | 294.9 | 369.5 | 450.8 |
| % GDP | 25.1 | 23.6 | 24.8 |
| Payments | 271.8 | 396.6 | 443.2 |
| % GDP | 23.1 | 25.3 | 24.4 |
| Cash Balance | 19.8 | -30.1 | 4.2 |
| % GDP | 1.7 | -1.9 | 0.2 |
Des Moore
Signs say budget repair could take many years
(Letter published in The Australian, 28 October 2013.)
[square bracketed omitted by Editor]
Adam Creighton says the commission of audit’s reporting date will “allow sweeping reforms in the government’s first budget in May” and that the Coalition’s response to the audit will be “the real test of its mettle” (“Hockey sets his agenda”, 26-27/10).
But signals emanating from the Coalition suggest budget repair will take many years.
That the Audit Commission is asked only to recommend savings sufficient to deliver a surplus of 1 per cent of GDP “prior to 2023-24” is disheartening to say the least.
[The Coalition should be reminded that,] in the last year for which it could be held (partly) responsible (2007-08), budget expenditure was 23 per cent of GDP whereas it is now more than two percentage points higher (equivalent to $34bn) . Surely most of that difference should be readily reducible in the first budget and, as such, make a considerable start towards achieving the 1 per cent surplus.
Des Moore
former deputy Treasury secretary, South Yarra Vic
Joe Hockey sets his agenda
(Article by Adam Creighton
published in The Australian, 26 October 2013.)
AN unusually sombre Joe Hockey returned from the US this week, the Treasurer newly conscious of the enormous economic challenges that he and his US counterparts face.
The federal government's taciturn approach to public affairs gave way to a flurry of major announcements. One of these, a Commission of Audit, could lay the groundwork for huge economic reforms that, if carried through, would guarantee Hockey's place among Australia's best treasurers.
Having lambasted Labor for repeatedly lifting the nation's debt ceiling and exacerbating the deficit, Hockey said he would lift the government's debt ceiling to $500 billion - about $100bn more than projections deemed necessary - and tap taxpayers for a cool $8.8bn to replenish the Reserve Bank's reserves, blowing out this year's deficit to near $40bn.
Australia's apparent immunity to the economic travails of Europe and the US rests mainly on China's powerhouse economy and its demand for our resources.
This conveniently papers over an economy beset by excessive regulation, public spending and federal dysfunction.
Resource revenues are tipped to recede, leaving Australian governments' growing structural deficits starkly exposed. The RBA is anticipating a slump in mining investment and early signs other sectors will take up the slack aren't promising.
Unemployment continues to edge towards 6 per cent and investment levels outside mining, as Reserve Bank deputy governor Phil Lowe pointed out this week, are at 50-year lows, despite rock-bottom official interest rates.
Meanwhile, the Australian dollar is once again skirting up near parity with the greenback. It appears likely to stay there as questions mount about the US government's commitment to repay its debts on time, while its central bank dithers over when to wind down a money-printing program financial markets have perversely come to rely on.
For these reasons, the announcement by Hockey and Finance Minister Mathias Cormann of a Commission of Audit this week with broad terms to scrutinise the government's expenses, and with a reporting date sufficient to allow sweeping reforms in the government's first budget in May, is so important.
The response to the audit early next year by the Coalition - so fond of reforming, small-government rhetoric in opposition - will be the real test of its mettle.
Bob Officer, who headed the Howard government's National Commission of Audit in 1996, praises the audit but worries its recommendations, like his, will be largely ignored.
"The terms could have been written by either side of politics and are rightly directed at efficiency," he says, anticipating Independent Pricing and Regulatory Tribunal chairman Peter Boxall will be "the outstanding economist" and do the guts of the work.
Warwick McKibbin, former Reserve Bank board member, says costly election promises such as Paid Parental Leave, Gonski and DisabilityCare - with a combined annual price tag around $20bn - have made a bad budget situation even worse.
Officer says he tried in 1996 to convince John Howard - "the consummate politician" - to fix middle-class welfare and commonwealth-state relations, but failed.
"The magnitude of their task is greater than mine because the situation is worse now," he says.
"Centrists overlook the capacity of state bureaucrats to rise to the challenge of greater responsibility; maybe some of them are hopeless but blame the system, not the personnel," he says, arguing that states should have greater tax powers and be encouraged to compete.
Cormann, the minister ultimately responsible for controlling spending, dismisses fears the announced Commission of Audit will end up a lame duck, reiterating the government's ambition to return the budget to a surplus of 1 per cent by 2023 and "hopefully more quickly than that".
"We will honour our election promises, but I envisage the commission will make a raft of recommendations that won't be inconsistent with them," he adds, noting a promise to maintain the "funding envelope" in health and education didn't rule out policies that would improve the effectiveness or efficiency of that spending.
Former treasurer Wayne Swan says Hockey failed to explain to the public why it had to increase the debt ceiling to $500bn, arguing it, and a surprise grant to the Reserve Bank, attempt to "create the impression of a crisis to gen-erate political cover for large spending cuts."
Swan argues that Tony Shepherd's "unwise" appointment to head the audit would undermine public confidence in it "because of his pre-determined economic outlook, focused on lifting the GST and cutting company tax".
Labor was too distracted by the emerging financial crisis in 2008 to institute an audit commission, Swan says, but stridently defends his fiscal record.
"We put a huge squeeze on spending after the GFC but we were hit by weak revenues; spending was never the problem, as the Coalition's false rhetoric claimed.
"They will be forced to admit this when they deign to release the mid-year budget update and explain why projected debt will now reach $400bn rather than $370bn," he says.
Cormann says the previous government saddled the economy with unnecessary regulation and spent too much, flouting even its own fiscal targets.
"They boosted real public spending by 25.5 per cent over six years, more than 4 per cent a year on average compared to their often repeated promise of no more than 2 per cent a year."
Swan is defiant: "I'm not disappointed that we relaxed our 2 per cent fiscal rule; on the contrary that was a practical and sensible response to volatile global economic conditions," he says, pointing to unexpectedly sluggish nominal gross domestic product growth and a resurgent dollar in the face of falling terms of trade.
"And crucially it protected jobs," Swan says.
The scale of the Abbott government's fiscal challenge is immense. For it to rein in public spending in real terms it must defy what economists call Wagner's law: the paradoxical tendency for governments to spend larger and larger shares of their nation's income, the richer their citizens become. It is a process well advanced in Europe and the US, with obviously disastrous outcomes.
Any commission recommendations that flag cuts will prompt a chorus of opposition from welfare activists and the army of economists convinced that cutting government spending harms growth, despite economic theory being far more ambiguous.
Visiting US professor William Poole appears to agree. He can't understand the fuss about surpluses and deficits.
"A government's budget position is one of the least informative measures of economic policy," he says, "because it says nothing about the quantity or quality of public spending".
Poole, a Cato Institute fellow, says "Keynes would be horrified at what policy is advocated in his name today," suggesting the impact of policies on GDP - which include wasteful government spending - is a poor guide.
In his final months as prime minister, Kevin Rudd routinely pointed to Britain as evidence for the damage cuts in public spending cause, but he appears to have ignored at least some of the evidence.
Speaking from London, Sajid Javid, George Osborne's junior Treasury minister in the British government, tells Inquirer such arguments are nonsense.
"The general proposition that cutting government spending harms economic prosperity is patently wrong," he says, carefully steering clear of Australian politics.
"On the contrary, when we came to power in 2010 left-wing economists and the British Labour Party were saying 'Don't cut too far too fast'; they paid lip service to fiscal rectitude but only at some unspecified future.
"But we have stuck to our plan of cutting real government spending each year, and far from unemployment doubling, as Labour were predicting, businesses have created over 1.4 million new private-sector jobs - more jobs in three years than under 13 years of Labour - and the unemployment rate is lower than when we came to office," Javid says.
"The British economy is now growing faster than France, Germany and the entire eurozone and total employment is at an all-time high, despite the fact we cut 400,000 public service jobs."
GETTING public spending under control and sorting out the federal-state mess is only one part of the Abbott government's challenge. Frank Lowy, chairman of Westfield, says we should focus on boosting other parts of the Australian economy.
"I'm optimistic about Australia's economic future, but we need to lessen our reliance on commodities and mining," he tells Inquirer, suggesting Australia's agricultural and hi-tech sectors should have potential to pick up the economic baton.
"Government ought to do less but encourage other industries more," he says.
"Excessive bureaucracy is the biggest problem for Australia's business community."
McKibbin advocates that Australian governments should take advantage of cheap interest rates and offer global investors special long-dated, say 50-year, bonds, spending the proceeds on infrastructure. "This assumes away the risk the government won't allocate the money properly, though," he warns.
The Australian dollar is bobbing up against parity, making life more difficult for exporters, even if it does boost Australian firms' buying power to expand overseas or upgrade their local capital equipment. For instance, Anthony Pratt, chairman and chief executive of Pratt Industries, says his business uses financial contracts to offset adverse changes, but capitalises on Australia's enhanced buying power. "Aided by the low US dollar, we're generating record profits in our US businesses," he says, "and three years ago we formed a business in Singapore to capitalise on the strong Australian dollar to acquire hundreds of millions of dollars of raw materials in Asia."
The commission's work gets under way as the global economic environment remains fraught. The simmering political standoff between Republicans and Democrats threatens to erupt again next year, potentially robbing the world's fragile financial system of the one asset - US government bonds - that has long been considered "risk-free".
The latest agreement between Republicans and Democrats funds the US government and accommodates its borrowing requirements only until the middle of next year.
A member of president Ronald Reagan's council of economic advisers, Poole says the US government is "effectively bankrupt", pointing to unfunded social security liabilities of about $US60 trillion - on top of current explicit debts of $US15 trillion - that the US government couldn't possibly levy taxes to pay. "And inflation won't help it either, because all these obligations are indexed," he adds.
Entwined with the US's fiscal mess is ongoing uncertainty about the Federal Reserve's "quantitative easing", which, by flooding global markets with US dollars, puts upward pressure on the value of other currencies and artificially lightens the US government's debt burden.
Poole says the Fed's confused rhetoric and failure to lay out a credible plan to "taper" its monthly $85bn purchases of US government bonds has financial markets on tenterhooks. "Simply talking about slowing the rate of money printing, let alone actually stopping it, has prompted a sizeable jump in bond yields, putting the Fed in an awkward position," he says, arguing it should have begun months ago.
William White, chairman of the OECD's economic review committee in Paris, says there's growing recognition in central banking circles that the risk that asset bubbles will burst and wreak havoc might outweigh the short-term benefits of money printing.
"Ultra-loose monetary policy seeps into every crack in the economy, corrupting asset prices and encouraging bad lending," he tells Inquirer. "Everything gets touched."
While Europe's debt crises have faded into the background for now, its banks and governments remains fragile, each beset by massive debts. European banks are very highly leveraged, with capital ratios typically lower than 5 per cent, implying they are leveraged more than 20 times.
For similar reasons, US banks are "probably not" equipped to withstand another financial shock, says Poole, a former head of the Federal Reserve Bank of St Louis.
"The European Central Bank's current stress tests on the region's banks have little credibility," says White, also former chief economist of the Bank for International Settlements in Switzerland. "But they will have to give them the tick of approval; so far there's no plan B to recapitalise them."
How the end of quantitative easing will affect global markets, and in particular the strung-out financial system, is the biggest "known unknown" hanging over the world economy today. But nor should the Rumsfeldian "unknown unknowns" be forgotten. White says financial conditions are eerily similar to early 2007, when the world's experts were cooing about the safety of the financial system. "House prices are rising, equity prices are veering far from what earnings would suggest reasonable and so-called volatility indices that measure risk are tracking near record lows," he says.
It’s tougher than the ’90s, says Hockey
(Article by Jacob Greber and Joanna Heath
published in the Australian Financial Review,
28 October 2013.)
Key Points
- Treasurer says economy is too fragile to withstand another round of Costello-era cuts.
- Dutton set to announce that 50 PBS recommendations will all get the green light.
Treasurer Joe Hockey has defended the government’s plans for a decade-long delay before it produces significant budget surpluses, saying the economy is in worse shape than the one inherited by Liberal predecessor Peter Costello in the 1990s.
In remarks that echo the former Labor government’s warnings about the economic risks of cutting budget spending too hard and fast, Mr Hockey signalled he would not emulate the Howard government’s aggressive return to surplus in the late 1990s.
In a further sign the government has no plans for a near-term spending strike, Health Minister Peter Dutton will on Monday announce all 50 medicines recommended for public subsidies by the Pharmaceutical Benefits Advisory Committee will be listed on the Pharmaceutical Benefits Scheme on December 1.
The approved medicines include expensive drugs such as Dabrafenib for late-stage melanoma, which on application was estimated at a cost of as much as $60 million to the government by the fifth year of listing.
Under previous health minister Tanya Plibersek, medicines estimated to cost more than $10 million a year were subject to cabinet approval.
Under pressure from the pharmaceutical industry, Mr Dutton made a pre-election commitment to remove the cabinet approval requirement for medicines which do not cost more than $20 million in any year over the first four years of listing.
Asked in an interview with Financial Review Sunday on Channel Nine whether he was being “too timid” and should adopt a more aggressive approach to the budget, similar to the one Mr Costello took, Mr Hockey indicated the economy was more fragile today.
“It’s a very different environment to that of 1996,” he said. “And I was there. We were going into a period of pretty good growth – sure we had the [1997] Asian financial crisis – but it was a period of pretty strong growth.
“What I’m inheriting is rising unemployment, not falling unemployment . . . falling economic growth, not rising economic growth.
“Having said that we will get the budget under control.”
Treasurer confident of ‘good Christmas’
Former prime minister John Howard and his then treasurer, Mr Costello, in 1996 launched an audit commission before slashing 20,000 federal bureaucrats.
While the cuts sent Canberra’s economy into a recession and property slump, a resurgent broader economy helped the budget balance swing sharply from a deficit in 1996-7 of $6.1 billion, or 1.1 per cent of gross domestic product, to a surplus of 2 per cent by the end of the decade.
So far the new government has only pledged to deliver what it describes as a “strong” surplus of 1 per cent of GDP by 2023-24, 10 years from now.
Economic growth, which has slowed sharply since January, is forecast by Treasury to remain below average at 2.5 per cent this financial year before recovering to a 3 per cent pace over the three years through 2016-17.
Growth averaged 4.3 per cent in the four years after Mr Howard won the March 1996 election, while unemployment fell from 8.6 per cent to 6.6 per cent. More recently, the jobless rate has been climbing steadily, hitting 5.8 per cent in August from 4.9 per cent in early 2011.
The Reserve Bank deputy governor Philip Lowe said last week that business investment outside the mining sector was running at its lowest level in at least half a century, implying the economy would be close to a recession were it not for the China-driven resources boom.
In his interview, Mr Hockey said he hoped the recent post-election consumer sentiment boost would not be short-lived and expressed confidence “we will have a good Christmas”.
“I hope it doesn’t lose momentum,” he said. “You can see it in property transactions and property prices that there’s confidence coming back.
“When people come up to me in the street and say, ‘It’s turned,’ I’m encouraged by that.”
Asked about the rebounding Australian dollar, the Treasurer said it emphasised the need for domestic reform to ensure the nation “can deal with whatever challenge is there”.
“The more domestic reform you can undertake . . . the more capacity you to have to deal with the exchange rate,” he said.
He pledged to lay down a “growth agenda” over the next few months that will “sustain momentum in the Australian economy, despite what happens overseas”.
Shadow treasurer Chris Bowen said Mr Hockey should stop complaining and “start dealing with the challenges Labor warned about as we move into the production phase of the mining boom”.
“Before the election Mr Hockey was trashing the Treasury for revenue writedowns, now he’s running from releasing [the mid-year economic and fiscal outlook] and revealing the deterioration that has occurred on his watch,’’ he said.
Mr Hockey said the Coalition would stick to its election promises as it rebuilds the budget surplus.
“We’re not going to break any promises. Let’s be clear about that,” he said in the interview.
“We will do what we have to do to repair the budget, but we will honour all our election commitments.”
Speaking about Australia’s push to sign bilateral trade deals with Asian countries, Mr Hockey predicted that it would be easier to get an agreement with Japan and South Korea than with China.
Joe Hockey blames 'Labor's legacy as debt ceiling rises
(ABC, 7.30 Report, 22/10/2013, Annabel Crabb)
Treasurer Joe Hockey says the Government has had to raise its debt limit due to Labor's legacy as he prepares for the audit of Commonwealth spending.
Transcript:
ANNABEL CRABB, PRESENTER: A short while ago I spoke to the Treasurer Joe Hockey in our Parliament House studio.
Treasurer, welcome back to 7:30.
JOE HOCKEY, TREASURER: Good to be with you.
ANNABEL CRABB: Now if there were such a thing as a Joe Hockey mantra of late it would be that governments need to live within their means. So why are you extended the national credit card limit by two thirds to $500 billion?
JOE HOCKEY: Well this is Labor's legacy. They were leaving us with a debt of $370 billion on their own projections. I've been advised that that will be significantly larger and we are not going to allow ourselves to get into the position that the US is in where there's tremendous uncertainty about the capacity of a country to live within its means. Now, this is a debt limit increase and it's the legacy of Labor. It is the fact that they said that debt would go to $370 billion but the debt limit is currently $300 billion.
ANNABEL CRABB: But the old Joe Hockey used to say if debt's the problem then more debt isn't the solution, what happened?
JOE HOCKEY: Well, I can't stop the debt that has accrued because of Labor policy. I'm going to have to have remedial action and that's going to come in the form of a commission of audit. And the commission of audit is going to deal with these issues which is what we announced today.
ANNABEL CRABB: Three months ago you said that the Federal budget was in free fall. If there's as much of a crisis as you say there is, and then why not get cracking straight away, have a mini budget and start chopping?
JOE HOCKEY: Well, we need to be careful, prudent; we need to have a proper process, that's what we're going through. Today we announced the commission of audit, the first time in nearly two decades that you've had a proper look, an independent look at all the nuts and bolts of Commonwealth Government expenditure. We're focused on getting it right.
ANNABEL CRABB: The audit that you've announced today is incredibly broad. It seems to cover every dollar of government spending, kind of looks a bit like a licence to break election promises?
JOE HOCKEY: It isn't. It isn't at all. We stick to our election promises. This is a way of making sure that we pay for our election promises.
ANNABEL CRABB: But the brief you've given to your auditors is that they should review government expenditure, keeping this in mind, that government should do for people what they cannot do or cannot do efficiently for themselves but no more and, of course, that government should live within its means. If those auditors come back to you and say Mr Hockey, your paid parental leave scheme doesn't really fulfil either of those criteria, are you tough enough to make that call and take away that policy?
JOE HOCKEY: Well this is about paying for our policies and ensuring at the same time that there is a proper path to growth. We've got to grow the Australian economy but we've got to have a government that does not waste money, that's what we're focused on.
ANNABEL CRABB: So your election promises are insulated from changes arising from this audit commission?
JOE HOCKEY: Yes, they are. We will deliver on our election promises.
ANNABEL CRABB: So when two days before the election you told this program that you wouldn't be cutting the health budget, the education budget, the defence budget and health and medical research, we've said that emphatically, those budget areas are quarantined also?
JOE HOCKEY: Yes, but it didn't mean that you can't identify waste in those areas and reallocate it to other priorities in the same portfolio. The suggestion that there isn't waste in budgets of tens of billions of dollars is absurd. So what we've got to do is prioritise the expenditure in those areas but overall the envelope have committed expenditure in those areas will continue.
ANNABEL CRABB: So if you come up with - I mean commissions of audit in the past have often recommended quite radical savings, they certainly did in 1996, will you take any changes, any cuts you didn't flag before the last election to another election as a mandate issue?
JOE HOCKEY: Well, we need to deal with the budget as it stands and quite frankly it has deteriorated since the election. This is the moment of truth for Labor. We are discovering all the things that they failed to reveal properly to the Australian people and over the next few weeks and months will explain that to the Australian people but most importantly we are going to have a road map to get the Budget back in good shape.
ANNABEL CRABB: I will take that as a no to my question, then Treasury. You have set a savagely tight deadline for this audit. First report by the end of January and the final by the end of March. Will you commit to releasing those reports, publicly and when?
JOE HOCKEY: We will release those report and we will do so within the Budget context. These will feed into the Budget and that's the appropriate place to go.
ANNABEL CRABB: Government should live within its means is what you've been telling Labor for years. It's been repeated by you over your recent travels and it's at the core of this audit, but how is it living within your means to hand out billions in compensation for a carbon tax that you're getting rid of? How is it living within your means to introduce a paid parental leave scheme to which Clive Palmer's wife would be entitled? How is any of that living within your means?
JOE HOCKEY: Well, the key fact here is that we went to the election with those commitments; we are going to deliver on those commitments. We think it's important to continue to ensure that you have a growth pattern in the Australian economy, part of that growth package is going to be getting rid of the carbon tax on one July next year, that's hugely important, and Australians will get a wind fall benefit which will be good for the economy. Getting rid of the carbon tax but keeping the compensation.
ANNABEL CRABB: But didn't you explain in Europe last year that the age of entitlement was over, that wind fall benefits were something that is to do with the past and not the future?
JOE HOCKEY: Well, these aren't wind fall benefits. These are prudent programs that have been properly paid for.
ANNABEL CRABB: You just called them wind fall benefits.
JOE HOCKEY: No, no, I'm sorry because I'm saying that the compensation that we're providing from one July next year, which is the compensation that was originally for the carbon tax, is about putting money in people's pockets which is helping to stimulate the Australian economy. That's why it is not an entitlement. Giving people back their tax is not an entitlement. It's about them having more control of their own money.
ANNABEL CRABB: In terms of government's own behaviour, how is it living within your means to claim as members of your government have, public funding to go to weddings and sporting events and to visit investment properties in Cairns to the tune of $5,000 to the taxpayer? How is that living within your means as members of a government?
JOE HOCKEY: Wherever people have acted inappropriately or wrongly they should be properly dealt with and they should deal with the Department of Finance on that.
ANNABEL CRABB: The Queensland Government has just introduced new rules to subject members of Parliament to the bog standard Australian Taxation Office requirements about claimable work expenses. Is it time for federal politicians to be subject to the same?
JOE HOCKEY: I will leave that to the Minister for State and I'm sure the Minister for State will consult with members of Parliament and others about that.
ANNABEL CRABB: Joe Hockey, we're right out of time but thanks for joining 7:30 tonight.