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22-November 2013

Hockey Will Soon Have A Deficit Of His Own

The Coalition's plan to cut spending by sacking public servants has been foiled - Labor got there first. Joe Hockey is finding he can't whinge his way to good economic management.

Lucky Joe Hockey. His economic credibility is unravelling. But no-one is noticing, owing to the Abbott government's first major crisis in the Indonesian spying scandal.

That's the take-home point from this week's intriguing Senate Estimates hearings, which saw a remarkable spectacle: the Coalition attacking Labor for slashing jobs in the public service.

Say what? That's right, the Coalition is upset at how many public servants Labor had slated for redundancy. Scratching your heads as to why the Coalition is upset about a shrinking public service? Join the club.

The news came to light on Tuesday, when Hockey and finance Minister Mathais Cormann issued a bizarre media release complaining about Labor's cost-cutting in office.

More evidence of Labor's budget deception has emerged, the release began, with advice showing the former Government concealed almost 14,500 public service job cuts initiated before the last election.

Quelle horreur! Labor has stolen Hockey's thunder! Not content with holding government expenditure to lower levels than the Howard government, it now appears that Labor's dreaded efficiency dividend has so squeezed the Canberra bureaucracy that the jobs Joe Hockey wanted to cut aren't there to cut anymore.

As Bernard Keane remarked yesterday, you'd think this would be a pleasant surprise. The real surprise is that Hockey and Cormann are trying on such a ridiculous argument. Labor's efficiency dividend was hardly a state secret. It was the former government's favourite tool of spending restraint, prominently displayed in the budget papers.

The efficiency dividend regularly led to redundancies throughout the life of the last government. The whole point of the dividend was to squeeze departments and agencies until they reduced their expenditures. In the early years, low-hanging fruit like executive travel and stationery costs were harvested, without too much pain. But as Labor's budget woes deepened, Wayne Swan and Penny Wong ramped up the dividend. In the end, the only way to make ends meet was to let people go.

And that's exactly what's happened in recent years. The advice given to the government by the Finance Department, funnily enough, this is one piece of public service advice the government is happy to release, shows that Labor's final budget settings entailed around 14,470 job losses.

Labor's blanket and secret staffing cuts were also largely untargeted, Hockey and Cormann complained, making no distinction between higher or lower priority areas of spending and having no regard to the financial health of different parts of government.

Well, yes. That's how the efficiency dividend works. Agencies are given a funding cut, 2, 3 even 4 per cent, and are left to work out how to fund it. This is one reason why the Centre for Policy Development's Christopher Stone has long argued that the efficiency dividend is actually highly inefficient. By claiming some kind of cover-up, Hockey and Cromann are revealing that they didn't properly read the last budget.

Now that there's no need to cut the public service by 12,000, Hockey and Cormann are trying to attack Labor for financial mismanagement. It's a strange sort of attack.

For years, Hockey made merry with Labor's deficits, regularly accusing Wayne Swan of profligacy and ramping up the doom-laden rhetoric about Australia's tiny public debt. Now he's trying to claim that cuts to the public service that mirror Coalition policy are some sort of dastardly deception.

The argument fell apart rather quickly in Senate Estimates yesterday, under careful questioning from Penny Wong. As Finance Secretary David Tune patiently explained, there have been efficiency dividends since the 1980s.

We work out what the efficiency dividend will mean on a whole of government basis and then we divvy it up amongst the agencies according to the profile we have and then, as you say, they choose how they apply that, Tune said in Estimates. Basically we reduce their budgets by their proportion of the efficiency dividend and they manage that within their own means.

As government secrets go, this is not quite in the same class as tapping the Indonesian President's phone.

Where does that leave the public service? It appears as though the Coalition is not going to go through with its promise of 12,000 further job cuts. We will review the timing and approach to this further reduction to take into account the impact of Labor's secret public service cuts, Hockey and Cormann stated.

That's good news. Australia's public service is already very efficient. It's difficult to see how further cuts will improve services for ordinary citizens. Indeed, given that Australia runs one of the smallest governments in the OECD, there is a good argument to make that greater public investment is required if Australia is to continue to deliver high-quality government services.

Nor will job cuts to the public service make that big a difference to the budget bottom line. In another hearing of Senate Estimates yesterday, we discovered why. Senators at the hearing with Treasury Secretary Martin Parkinson and Treasury's chief macroeconomist David Gruen heard that the Australian economy is slowing. That means tax revenues are likely to stall.

As any accountant knows, spending is only one side of the ledger. Revenue is just as important. What really drives government tax revenue is economic growth: especially nominal growth. But nominal growth is still low.

The government has been counting on a lift in confidence to kickstart economic growth from its current, mediocre levels. But any gain in confidence from an Abbott victory appears to have been evanescent.

That's not as bad for the general economy as it could be: because inflation is also low, real growth is still positive. What counts for tax revenues is the nominal figure, which means the budget deficit is probably still deepening.

With the easy cuts already made by Labor, Hockey will have some hard choices come budget time. He could make even deeper cuts, risking a further deterioration in the economy. Or, he could raise taxes.

Failing that, he could simply run a modest deficit, as Labor did. No wonder he is seeking to increase the government's debt limit, to $500 billion, a move yesterday described by Parkinson as prudent.

For years, Hockey attacked Labor's debt and deficits. Soon, he will have a deficit of his own to explain. Ironically, the ongoing fiscal stimulus of a deficit would be the best policy for Australia's economy.

Whether it is the best politics for the Abbott government remains to be seen. The fact that government is delaying the release of the Mid-Year Economic and Fiscal Outlook suggests it's not particularly happy with the current state of the books.

No doubt Hockey will blame any deficit on Labor. But, as Labor painfully discovered, talking tough on government deficits and making a surplus the measure of your economic credibility creates big reputational risks. And by May next year, there may not be a crisis in foreign policy to distract attention from Joe Hockey's first budget.



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