Tony Abbott’s diabolic Budget choice: Politically painful cuts or a broken promise?

PM Tony Abbott has a diabolic Budget choice – politically devastating spending cuts or break his promise not to raise tax.

“I’LL be back”, intoned Australia’s Belgian-born finance minister and terminator of government waste, Mathias Cormann, on Thursday morning concluding a press briefing introducing journalists to the National Commission of Audit.

Chuckles at the uncanny resemblance to another Austrian-born Terminator soon turned to stony silence as journalists began rifling through the 1200-plus pages of recommended budget cuts.

Rip up Medicare. Deny families welfare benefits. Make Australians work longer. Slug patients $15 for every trip to the GP. Include the family home in the assets test for the pension. Eat into value of the age pension over time.

It all came with a grim warning about the nation’s finances. Under a “business as usual” scenario, government net debt will double to $440 billion in a decade. Ballooning interest payments on that debt will reach $30 billion — more than we currently spend on defence and education.

The Commission of Audit capped off the toughest week of Tony Abbott’s Prime Ministership so far.

Forced to water down his “signature” paid parental leave scheme for working mothers, Abbott also faced a backlash from his own backbenchers, not to mention voters, after his refusal to rule out a rumoured new debt tax.

YOUR FIVE-MINUTE GUIDE: To the Commission of Audit

Under fire ... the Chair of the National Commission of Audit Tony Shepherd appearing before a Senate Select Committee into the Abbott Government’s Commission of Audit. Picture: Kym Smith

Election promises have collided with budget reality to devastating political effect.

Tony Abbott staked his claim of trust with voters on a promise he could fix the national budget without resorting to tax hikes.

This week revealed just what a herculean task that will be.

Abbott could adopt every single nasty cut recommended by his audit and still not see a surplus until 2019-2020. And he’d only just scrape it in on another promise to return the budget to a surplus of 1 per cent of GDP within a decade.

Abbot is caught between a rock and a hard place: unprecedented spending cuts or breaking an election promise and raising taxes.

Economists are appalled at the debt tax proposal.

“I don’t think it’s a great idea,” the chief economist at HSBC Australia, Paul Bloxham, said. “I think that we ought to be focused on medium term structural adjustment to the budget rather than making short term changes that fix the bottom line quickly.”

Mr Bloxham said the government should wait and build consensus about the need for more fundamental tax reform.

“Ideas like lifting the GST or broadening the GST offer far more merit,” he said.

The chief economist at Merrill Lynch, Saul Eslake, is similarly sceptical about the need for a debt tax.

“It’s really about politics — 1) allowing the Government to argue that “everyone is contributing”; 2) really only hitting people who live either in safe Liberal electorates, or in the ACT (safe Labor electorates); and 3) putting pressure on spending Ministers to come up with additional savings measures so that the Government can then abolish it.

Eslake says while important the budget is put on a believable path back to surplus, Abbott should not resort to increasing taxes. “I would much prefer to see that achieved by broadening the income tax base, rather than by raising rates of tax on the existing base.”

Broadening the GST would raise $12 billion a year — more than the mooted debt levy would raise in four years, Deloitte Access Economics figures show.

House of pain ... Treasurer Joe Hockey and Finance Minister Mathias Cormann holding a media conference on the release of the Commission of Audit at Parliament House in Canberra. Picture: Kym Smith

“If you’re going to break a promise on tax, you may as well break it properly,” says John Daly, head of think tank the Grattan Institute. Daley is not opposed to a debt tax on high income earners, but says clamping down on high income tax concessions, such as on super, would be a better way to share the pain with the rich.

The coming two weeks will be crucial for Abbott’s political future as he and Treasurer Joe Hockey seek to sell their harsh budget medicine.

The government has already ruled out a large part of the audit’s savings, protecting the family home from the pensions asset test and ruling out any further watering down of parental leave.

Nonetheless, it is likely to be the toughest budget since John Howard swept to power almost two decades ago.

Howard was able to ignore the majority of his own Audit Commission’s recommendations, but the future is not looking so pretty for Abbott.

The end of the mining boom has left a hole in government finances and spending is on an unsustainable growth path thanks to big spending promises on health, disability, education and welfare.

As audit chair and business leader, Tony Shepherd, spelled it out: “The problem is when you add it up we haven’t got enough money to pay for them.”

Voters will get to see in just a little over a week when the federal budget is handed down on May 13 which of this week’s harsh spending cut proposals Abbott has decided to unleash.

For now, the Commission’s spending cuts remain just a blueprint. An idea. A suggestion.

But make no mistake: they’ll be back.

Originally published as Tony Abbott’s diabolic Budget choice: Politically painful cuts or a broken promise?