Need for sustainable fiscal policy, not poll cash splash

Josh Frydenberg will present his first budget next Tuesday. Before next week is out, Scott Morrison is expected to announce an election date in May. No matter how novel, worthy or sensible the measures are in the annual compendium of taxing and spending, it will be, first and foremost, a political manifesto to return the Coalition to office. Labor’s budget response must be seen in that vein as well. The temptation, as always, will be to spend big now, pay later. That’s as true for fiscal conservatives John Howard and Peter Costello during the fat years of the mining boom as it was for Labor spendthrifts Julia Gillard and Wayne Swan, who bequeathed the Coalition a series of social-spending time bombs. The common mistake — and there are worrying signs both major parties will succumb — is to make permanent spending promises when the budget is temporarily flush on high commodity prices and volumes.

The economic backdrop to this pre-election budget is particularly tricky. The economy has been slowing, especially during the second half of last year, with consumers reluctant to spend and farm production hit by the drought. Public sector spending alone is sustaining GDP growth, particularly large transport infrastructure projects and swelling public service payrolls. As well, simply having more people living here is pumping up the economy. In the year to September, Australia’s population grew by 395,000, or 1.6 per cent. Net overseas migration accounted for 60 per cent of that growth. With more people in work, personal income tax revenue is growing strongly. While wages growth is improving after years of stagnation, the large falls in capital city home prices have left householders feeling vulnerable and shy in chasing large purchases, such as new cars.

The Treasurer told Simon Benson at the weekend the budget was the next instalment of the Coalition’s economic plan and that it would frame the next election. That election, Mr Frydenberg said, “will be about what kind of nation Australians want over the next decade”. He argues the Coalition will balance the budget while growing the economy, which means more jobs. The Coalition’s pitch is it can guarantee services — roads, hospitals and schools — without raising taxes. The Prime Minister yesterday flagged the prospect of more tax cuts for workers. The Morrison government legislated $144 billion in personal income tax cuts in three stages, the first coming into effect last July. It is expected the next two stages, due in 2022 and 2024, will be brought forward to boost take-home pay, spur consumer spending, and neutralise Labor and the ACTU’s campaign to lift wages for the lowest paid. The Coalition also has signalled it will focus on low and middle-income earners in a new round of tax cuts, while there is speculation cash payments — which flow quickly into the economy — will go to families, pensioners and retirees.

Since the mid-year fiscal update in December, the budget’s bottom line has been improving off the back of strong iron ore and coal prices, which have swelled company tax collections, and rising personal income tax. Despite slow wages growth, fiscal drag has pushed workers into higher tax brackets, with Deloitte Access Economics estimating “bracket creep” will take average tax rates on ordinary workers to their highest level since the GST was introduced. But Deloitte warns against repeating the mistakes of the mid-2000s, when both major parties offered tax cuts and new spending based on temporary revenues, thus creating the conditions for the persistent deficits of the past decade after the economy turned.

We support lower taxes in principle. They encourage work participation; workers should be free to spend as they see fit, rather than governments churning their funds inefficiently through a tax-welfare-services wash cycle. More discipline is required on spending to deliver larger surpluses, needed to eat into the stock of deficits. The Coalition has been a mostly good and steady economic manager. But since its politically disastrous 2014 budget, it has been shy to cut waste in Canberra. Instead, it raised taxes on banks and the Medicare levy when it had its back against the wall with ratings agencies two years ago.

The Treasurer’s task is far from easy. In recent years, Treasury’s forecasts have been far too optimistic on growth, wages and revenue. Mr Frydenberg will stress the global economic outlook is uncertain and only the Coalition can be trusted to navigate the future. But if he is too gloomy, the Treasurer could kill confidence, which has not been helped by the Coalition’s internal divisions. As the International Monetary Fund has warned, the two-decade budget strategy of a surplus “on average over the economic cycle” may not be adequate, given our debt levels. Higher, sustainable surpluses would give us the buffer required to ward off a collapse in the demand for our exports, from a weaker China, for instance. That’s the prudent standard our major parties must aspire to in the campaign. A desperate series of tax cuts, one-off cash bribes and reckless social-spending promises will add up to an eye-watering bill that imperils our future prosperity.