News & Current Affairs
07 April 2015
by Harold Levien
The coalition government’s bankrupt economic policies
This Government has demonstrated massive incompetence in formulating their economic policies and their budget. Such is this incompetence since coming to Office they appear to rely on deception as a principal means of gaining acceptance of their policies.
The Coalition Government seems to have been fighting the next elections since the day it won Office and using the same misleading tactics. Throughout the last election campaign, and for months before, the Coalition bitterly attacked both Labor's budget deficit and government debt. Yet when the Labor Government left Office Parliamentary Library statistics show government gross debt was 19% of GDP. The advanced economies' international organisation, the OECD, apparently calculates the figures differently showing Australia's debt as 33% of GDP in 2013. This is still much lower than all OECD economies except for tiny Estonia and Luxemburg. Government debt to GDP in 2013 shown for some leading economies was: Germany 86%, Canada 93%, UK 99%, USA 104%, France 112%, and Japan 224%. NZ was 40%. These figures place into context the Coalition's bellowing attack on the previous government for the size of our public debt.
Australia's annual budget deficit at 2.4% of GDP compared favourably with the Euro area at 2.5%, the UK at 5.3%, the US at 5.8% and Japan at 8.4%. Our deficit resulted from both the stimulus package to save Australia from the global recession and the decline in many export companies' income tax payments following the impact of the GFC on their taxable income.
The US Nobel Laureate economist, Joseph Stiglitz, who visited Australia in September 2013 complimented the Government on its uniquely successful economic policy in saving Australia from the GFC which spread recession throughout Europe, North America and Asia including China. Regarding the latter, Treasury published a statement in 2009 that refuted the Coalition's argument that the Chinese economy saved Australia from the recession. The GFC hit China hard after a great reduction in exports to Europe and the US.
Increasing the Deficit
Following the elections the Coalition Government quickly and substantially increased the deficit with the apparent aim of attributing to the previous Government "an immense deficit" in order to reinforce its accusation of economic irresponsibility. Here is the evidence.
First, the Government made an $8.8 billion grant to the Reserve Bank which the Bank had not requested. Second, it reinstated the Howard Government's fringe benefits tax concession for privately owned motor vehicles, which the Labor Government had cancelled on the grounds it had become a tax rort. This reinstatement reduced revenue by around $500 million a year. Third, it cancelled the previous Government's very modest 15% tax on superannuation income over $100,000 which reduced revenue by about $600 million a year. (This Labor Government tax was designed both to reduce the inequality of the Howard Government's abolition of tax on superannuation income and to modestly reduce the deficit.) These measures increased last year's estimated deficit of $49 billion by nearly $10 billion.
Additionally the Government's abolition of the carbon tax will cost annual tax revenue $7.6 billion. And overturning the mining tax will further reduce government revenue. (Although estimated at $750 million a year the decline in mineral prices is likely to reduce this amount.) These measures will increase this year's deficit by around $8 billion.
To develop support for its last budget it appears all Coalition Ministers were schooled to imprint on the public mind the Coalition's new mantra at each television and press interview: "the debt and deficit mess we inherited from the previous government". There's no mention of the Coalition's increase in the current deficit. And it recently intensified this message by repetitive recitation of the dollar amount of annual interest on this (increased) debt.
The Government's deception is greatly accentuated when no reference is made to the economic consequences (let alone the human impacts) if the Labor Government had failed to run these deficits.
For example, at the height of the GFC in 2008 if the Rudd Government had followed the European example of cutting government spending and leading to zero growth (instead of maintaining its growth trajectory of over 3% so the work force could absorb education leavers, new migrants seeking work and the impacts of increasing productivity) this would have caused well over an additional 300,000 unemployed and reduced GDP by more than $36 billion. A continuation of zero growth in 2009 would have similarly increased unemployment (totalling over 600,000) and reduced GDP further (totalling an estimated $72 billion). Budget tax figures indicate this would have led to a decline in tax revenue of least $24 billion and increased social service spending on the unemployed of over $11 billion by 2009. This $35 billion budget burden is many times the increased interest on public debt (part of the Government's refrain) generated by these deficits.
Labor's continued budget deficits after 2009 were designed to sustain the economic recovery following declining tax revenue-- confirmed in Treasury's last Budget Paper No.1 (Section 10-page 15). Yet on the ABC's Insiders program on May 18 last year, following the Coalition's first budget, the Prime Minister "explained" their budget cuts were necessary because "Labor spent like a drunken sailor".
The Coalition Government is perhaps at its most deceptive when it compares the Howard Governments' budget surpluses with Labor's deficits. While the Coalition was receiving billions of dollars in unexpected tax revenue during the mining boom, the recent Labor Governments had to cope with first, the GFC and later, the end of the mining boom.
How to reinstate the budget cuts
In the coming May budget the Government has the opportunity not only to reinstate the many unfair and economy-damaging spending cuts in last year's budget but also to begin phasing out the deficit and reducing government debt. If the Coalition Government axed the Howard Government's tax concessions on superannuation payments, which go predominantly to higher income earners, this would increase revenue by an estimated $30 to $40 billion this year. They were introduced at the height of the mining boom which greatly boosted revenue.
This additional revenue would permit restoration of the projected 20% funding cuts to universities and cancelling the cuts to science research, the ABC and SBS, Medicare, public housing and many other social services. And the Government could restore the $80 million funding of Youth Connections' support programs for the educationally deprived, Labor's preventative health programs and the Coalition's $8 billion annual cuts to the States' health and education budgets. Moreover it would permit the Government to fund the entire Gonski schools' program rather than the Coalition's highly truncated version. It would also allow financing, not only the projected improvements to pre-school education and child care but their considerable expansion and improvement incorporating research findings that the quality of intellectual and emotional input in the child's early years provides the optimal foundation for future intellectual and personal development.
In an ABC 7.30 interview on February 9 Treasurer Hockey claimed cuts to services are inevitable stating "we just can't continue to spend more than our revenue". But his argument becomes nonsense by ignoring therevenue loss from unfair superannuation tax concessions, tax avoidance (see below) and negative gearing (costing revenue an estimated $5 billion this year).
Many of the Coalition Government's policies in this year's budget (2014-15) are counter-productive and likely to entrench a substantial further increase in thedeficit or, if that is unacceptable to this Government, lead to greater cuts in government services.
Perhaps the most counter-productive policy is the elimination of 3,000 jobs in the Australian Taxation Office --with another 1,700 to come. This will enormously reduce the ATO's capacity to fight tax evasion by wealthy individuals and national and multi-national corporations. Among the employees to accept redundancies are some of the most experienced in areas where tax avoidance is an art form. Those who have accepted private sector offers will be able to provide their professional knowledge and experience to the very organisations that deprive the Australian economy of huge tax revenue at the cost of essential government services. A recent report by the Tax Justice Network estimated current tax avoidance by the top 200 companies at over $8.4 billion annually. This figure would be significantly increased if more companies and wealthy individuals were included.
Another counter-productive policy with enormous potential for harming the economy is the $151 million cut to science funding which includes $115 million cut to the CSIRO. While this is critical to Australia's science budget it's a minuscule part of the Government's $415 billion budget. And it comes at the very time that new high-tech developments in industry (rural, manufacturing and tertiary) are required to help compensate for both the decline of the mining industry and the forthcoming demise of the motor vehicle industry. The latter will have a serious impact on employment since, with component manufacturers and taking account of multiplier effects, this could displace over 100,000 workers.
The CSIRO reports that, by June 30 this year, funding cuts will have led to the loss of 1391 workers or 21.5% of its work force including 500 science and research staff. They claim this will lead to the cancellation of vital research and that staff morale has reached record lows inducing many future science graduates to lose confidence in our science future and seek jobs overseas. This could deprive Australia of future transformative scientific developments placing us outside the league of the most highly advanced nations. However, the Government saw fit to provide $90 million to search for MH 370, the Malaysian plane believed to have crashed in the Indian Ocean, and it has now promised additional funding.
A third critical counter-productive policy is the Coalition's decision to cease funding the Labor Government's renewable energy agency (Arena). The decision is currently blocked in the Senate by Labor and the crossbenchers. Industry concern over this policy is held to be the likely reason for the 88% decline in renewable energy investment between 2013 and 2014-- from $1.3 billion to $240 million. Apart from impacting on greenhouse gas emissions this will reduce both employment and tax revenue.
Fourth, the Government has scrapped Labor's modest $368 million four-year States Agreement on Preventative Health and a $201 million Agreement with the States on improving public hospital services. This appears to conflict with the Government's concern over increased health spending. Health authorities have long regarded preventative measures designed to improve public health as the most effective way of arresting the escalating health budget-leaving aside improving the quality of life.
Fifth, the Government has, for the first time, dismissed the Head of Treasury and appointed a replacement from outside Treasury who was an investment banker but worked in Treasury until 1993. The apparent reason for such unique action was the Government's disapproval with the views of both the dismissed Head and his next in line. The chosen appointee's macro-economic views appear to echo those of the Government. This is a disturbing precedent for future governments and a perilous path for the pursuit of government policy. The purpose of an independent merit-based public service is to provide impartial, fearless policy advice. The new Treasury Head proclaims support for the free market "austerity" policies of the European Union during and since the GFC –the very policies which have led to massive increases in unemployment in almost every European country. Leading Treasury staff, whose academic background would almost certainly have led them to support economic stimulus in times of rising unemployment which we are now entering, will face a serious dilemma. Will the new appointee lead us down the European path?
There is inadequate space to deal with many other Government policies that are likely to have deleterious effects on the economy and public welfare. These include the watering down of the previous government's FOFA legislation to regulate financial advisors; the possible adverse effects of the Trans Pacific Partnership Agreement on some controls over the environment, medications and legislation (existing and potential) concerning tobacco, alcohol and food products; the near-free rein given to foreign investment in housing, farmland and corporation takeovers; and continued government subsidies and loans to the many new profit-based private training colleges, who this year will receive $1.6 billion (the science budget was cut $151 million), despite a flood of evidence (revealed on the ABC 7.30 program from ex-students and staff) of many colleges, including the largest, deliberately recruiting unsuitable students, signing them up for expensive courses, providing little effective training and submitting false documents to the Government; and all this while training-based government TAFES suffer substantial cuts.