RUTHFULLY YOURS

“We all know what to do, but we don’t know how to get re-elected once we have done it.” So the Prime Minister of Luxemburg, Jean-Claude Juncker, recently said. But do politicians at large really know what to do? I don’t think they do.

Hockey was a poster child for political incompetence. Why do we think a bunch of self-promoters who are good at getting people to vote for them will be competent at running government? Sir Humphrey had it right: politicians can’t be trusted to run governments. What then is the answer? There isn’t one.

Imagine yourself as Treasurer and it is your first budget. You try to cut the deficit by screwing pensioners, denying young people unemployment pay, and charging poor people for doctors’ visits in order to underwrite gee-wiz medical research. You couldn’t write home about such ineptness. This is not an example of a politician knowing what to do and bearing the electoral pain. It is an example of a typically blundering politician who has not the least idea of what to do.

Budget deficits can only be reduced sustainably by cutting the growth in future expenditure below aspirational levels. Of course, even this can’t be done without incurring the wrath of special interests. But it possibly can be done without losing too many votes. Actually cutting expenditure is largely impossible; except for relatively minor amounts in insensitive areas.

Raising taxes doesn’t work because governments can’t resist spending the revenue. To them, an extra dollar of tax revenue is an extra dollar to splurge. That is why they are fond of trumpeting — incurable spendthrifts and debtors that they are — that additional spending has been fully funded; perish the thought that the funds might have been used to pay down debt.

When it comes to welfare expenditure the way to tackle it, certainly in an initial phase, is to target only those earning above a prescribed amount. Don’t hit the poor. When it comes to large items of recurring and capital expenditure, such as on health and education, the only feasible option is to control their future rates of growth; and, vitally, to introduce no new programs.

So how did Scott Morrison do based on these criteria? The answer, unfortunately, is not well enough, though infinitely better than Hockey. Last year, the deficit forecast for this financial year (2015-16) was $35 billion (rounded) it is now estimated to come in at $40 billion. The forecast for 2016-17 is $37 billion. It is anybody’s guess whether this soft target will be achieved. Taking the last three full financial years of the Gillard/Rudd government, the deficit averaged $37 billion per year. From July 2013 until June 2016 it is on track to average $42 billion. If progress has been made it is well disguised.

Treasury reports that net government debt will be $286 billion at the end of June this year; with net interest payments running at $1 billion per month. Savour that as the price of overspending. Net debt is on track to grow by another $40 billion over the course of next financial year; with interest payments growing commensurately. It must be time for belt tightening? Not so tight evidently; the budget papers show that since the last MYEFO, issued only last December, an additional $2.9 billion has been promised for public hospitals (up to 2019-20); and $928 million for schools. These no doubt are worthy expenditures. However, they are patently unaffordable.

Taxation is a vexed economic matter. Reducing income and company taxes is regarded as beneficial by conservative economists. At the same time, it is a brave Laffer-like* call to argue that the boost to economic activity that reduced taxation brings will result in no diminution in government revenue. Oh but wait — Surprise! Surprise — the reduction in taxes on small businesses and the minor adjustment to bracket creep are fully funded apparently; largely by increased taxes on cigarettes and on ‘the rich’.

You know, “the rich” — those people who pay nearly all income taxes and yet are pilloried for paying less tax on their superannuation contributions than they ought. A “too generous” concession it is called. Never mind Labor and the Greens, the safe politics of shaking down the rich is alive and well in Coalition ranks.

Tax reductions are good when they are affordable. Getting them affordable is contingent on reducing the growth in outlays and bringing down debt. Right now too much is owed and too much overspending is occurring. To take the same three year comparison as above, government payments averaged 24.5% of GDP in the last full three years of the Gillard /Rudd government compared with 25.7% in the three years to 2015-16. That lack of progress can’t be disguised.

Increasing taxes on cigarettes is fine. It will have no deleterious effect on economic activity. But the money should have been banked. As to the superannuation changes, they are short-sighted, without merit, and riven with left-wing envy. (editor’s note: buttleggers and chop-chop vendors must love this budget with a passion unequalled since America’s 18th Amendment introduced Prohibition and further incited Al Capone’s entrepreneurial instincts).

Businesses small and large in these times of debt and deficits can best be helped by eliminating burdensome regulations — including labour market, environmental and red-tape regulations — which impede business start-ups, development and expansion. Mind you, finding a way through Australia’s obstructionist Senate is fraught with frustration whether the goal is to reduce spending or eliminate regulations.

At question is whether Australia is any longer governable and, correspondingly, whether growing debt will progressively act as a dead weight on the economy, as it has elsewhere. An exaggeration? Perhaps, but have a listen to Senators Di Natale and Xenophon, who will likely control the next Senate. Prospects are not good. A lot has changed for the worse in Australia’s body politic since Hawke, Keating and Howard.

* Arthur Laffer is a supply-side economist who was part of an economic board advising President Reagan. Famous for the Laffer Curve showing that at some point reducing taxes raises revenue and vice versa.