“Responsible economic management & fiscal restraint”-really?

budget_balance_1617

The 2016-17 Budget is very disappointing, but economists and former Treasury officials were always going to be disappointed in an election year. It is also a Budget that is particularly disappointing to the Queensland Government, due to a lack of funding for new infrastructure projects that are high on the Government’s priority list, such as Cross River Rail and the Townsville Super Stadium (both arguably dubious projects, however). Funding has only been allocated for less exciting projects such as the Ipswich Motorway upgrade (overdue and likely a beneficial project) and for pre-construction works and land acquisition for the Melbourne-to-Brisbane Inland Rail project (possibly economic, but I would like to see a decent business case for it).

As I commented last year, the Federal Government has basically given up on the task of budget repair. Sure, the Budget balance gradually improves over the forward estimates, but forward estimates are typically too optimistic, as they do not include the unforeseen spending requirements that always seem to emerge. The real indication of the Government’s commitment to “responsible economic management and fiscal restraint”, which it lays claim to in the Budget Overview, is the forecast 2016-17 budget deficit of 2.2 percent of GDP ($37.1 billion) which is only a marginal improvement on the 2015-16 deficit of 2.4 percent of GDP ($39.9 billion) (see chart above). This is a pretty pathetic effort at fiscal restraint.

The Centre for Independent Studies’s media release is a concise and hard hitting summary of the problem with last night’s Budget:

The [2016-17] Budget has no credible plan to reduce expenditure and return the budget to balance, according to policy experts and economists at The Centre for Independent Studies.

“Far from tackling Australia’s spending problem, Treasurer Scott Morrison keeps spending at near record levels,” CIS Research Manager Simon Cowan said.

“Government spending remains at 25.8% of GDP the same level as 2015/16, and only falls to 25.2% by the end of the forward estimates…

…”The Treasurer has repeated his predecessor’s mistake of relying on future revenue increases to return the budget near balance: receipts continue to rise far above their historical average, increasing by 1.2 percentage points of GDP over the next four years.

Why should we worry about this? Because we are now very likely stuck on a path of permanent deficits and ever growing debt, a debt that will increasingly worry the ratings agencies who may well reconsider our AAA credit rating in future years. Also, what happens when we eventually experience a recession? The Budget deficit will blow out even further.

The problem the Government has, like many modern governments, is an addiction to unnecessary spending. Let us consider one egregious example from the current Budget, the Youth Jobs PaTH Program. Under one component of the program, the Government will pay 30,000 young people an additional $200 a fortnight (on top on income support) to undertake a 4-12 week internship with a business that will receive $1,000 to host them. This has rort written all over it! There are already well established internship programs run by universities, and there appears to be many internships already occurring. Indeed, I have benefited from work provided by a number of interns over the years. This part of the  program is a complete waste of money, and I have huge doubts about the merits of the wage subsidy of up to $10,000 that is also part of the Youth Jobs PaTH program. Again there is a huge risk of employers rorting this and getting paid for taking on a young person they would have anyway.

Finally, I should note there are some things I like about this Budget, including the lifting of the middle income tax threshold from $80,000 to $87,000, the crackdown on tax avoidance by multinationals such as Google and Apple, and the tax cuts for small and medium-sized businesses. Michael Knox has written a very good note on the pro-business measures in last night’s Budget:

Economic Strategy for Extraordinary Times

Also, the $171 million in funding for the Great Barrier Reef’s long-term sustainability plan is welcome, even though it is almost certain the Federal Government will have to spend much more than this if we are to avoid the Reef becoming endangered.

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6 Responses to “Responsible economic management & fiscal restraint”-really?

  1. Glen says:

    I struggle to understand how a conservative govt can come up with such a bad idea as their youth jobs package. Have we learnt nothing from the pink batts fiasco where money is thrown around for a quick fix, all we end up with is untrained people placed in short term jobs with little skills or qualifications in return. Just bad policy.

    • Gene Tunny says:

      No, governments don’t tend to learn, unfortunately. The quick fix is so attractive. And there is always the problem of spending other people’s money on other people, as Friedman identified. Thanks for the comment, Glen.

  2. Toby says:

    “Sure, the Budget balance gradually improves over the forward estimates, but forward estimates are typically too optimistic, as they do not include the unforeseen spending requirements that always seem to emerge.”

    Totally agree Gene but maybe you are a little too kind. Government forecasts are notorious for making sure not to “scare the horses” on the revenue side too. They are heavily politicised and the last place you would go for a forecast if you were actually investing your own money. If things get worse and people in Australia are taken by surprise, look no further than the majority of Government forecasters, see Graph 1 here as a classic example of how it works:

    http://www.rba.gov.au/speeches/2015/sp-so-2015-11-20.html

  3. Jim says:

    Gene

    Thank you for bringing to my attention the Youth Jobs PaTH Program. I will immediately cease my efforts to recruit a junior at market rates at my own expense and replace that junior with a string of subsidised internships under the Youth Jobs PaTH Program.

    Posted with tongue firmly in cheek…

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