Budget Won’t Slow Government Spending

For all the fire and brimstone that accompanied last week’s commentary on the budget, the bottom line is simple: under the Coalition, government spending is going up, not down.

This is the long-term significance of Joe Hockey’s first budget.

A modest 1.7 per cent real reduction in expenditure next financial year will be more than offset by 0.4 per cent growth the year after, 2.1 per cent growth the year after that, and 2.6 per cent growth in the 2017-18 financial year (the end of the Treasury’s forward projections).

And tax? Well, while this year the government will collect $363 billion, by 2017-18 it plans to collect $467 billion. That’s a jump in the tax take from 23 per cent of GDP to 24.9 per cent.

Yes, the budget does things like abolish 70 government bodies and 230 programs. Some of that is great.

But, ultimately, a party which was elected promising to reduce the size of government and reduce taxes, will preside over large expenditure growth and is hiking, not axing, tax.

It’s widely appreciated that deep down Tony Abbott is a tax-and-spend conservative. Now we know his is a tax-and-spend government.

But there’s a lot of trickery in the budget to conceal that fact.

The most controversial policies (like the “learn or earn” welfare changes, the increase in the pension age, and the university reforms) sound like classic austerity measures but in truth don’t alter the fiscal equation all that much. They’re social reforms being smuggled in under the cover of a budgetary crisis.

And most of the big spending cuts to health and education have been punted far into the future – beyond the next election, and many out past the Treasury’s forward estimates.

Hockey says it would hurt the economy to cut hard immediately. Here’s a more cynical explanation. He’s hedging. The Treasurer is pledging but delaying cuts in the hope the Coalition will be able to rescind those cuts for future election sweeteners.

The budget is also full of policies that superficially look like aggressive cost reductions but are in fact new spending.

For instance, the $7 GP co-payment is, astonishingly, being poured into a huge new medical research fund. It will apparently be the biggest in the world.

This is a bizarre decision. The policy case for a co-payment is that introducing price signals will give patients a financial stake in their healthcare choices. But using that money to fund an entirely new government program makes the $7 charge look less like a co-payment and more like a research tax.

Likewise, the reindexation of the fuel excise isn’t to fix the budget emergency, but for new road projects. This is so Tony Abbott can live up to his self-applied “infrastructure prime minister” nickname.

Abbott said in August, 2013 that “the only party which is going to increase taxes after the election is the Labor Party”. It’s worrying the Coalition now pretends no such commitment was made.

In opposition Coalition spruikers said Abbott offered two things: the integrity Julia Gillard lacked, and the fiscal discipline Kevin Rudd lacked. After this budget, what’s left?

So this is a significant budget. In opposition, the Coalition was rhetorically committed to reducing the size of government – probably more so than any opposition since the time of John Hewson.

But now it has power, it can’t bring itself to make significant long-term change.

Abbott is no Gough Whitlam-of-the-right. He has no plan to redefine the relationship between state and citizen, despite his stirring oratory from opposition.

Nor, contrary to Joe Hockey’s assertions, has the age of entitlement come to an end. The paid parental leave scheme puts a lie to that little fantasy.

Governments think election to election. But Australia’s fiscal problem is measured in decades, not electoral cycles. Political logic means spending is popular and taxing is not. This encourages governments to go into deficit.

When the next economic crisis arrives, it seems unlikely a government of whatever stripe will be able to resist the calls for deficit-financed stimulus.

If the budget has not recovered by then – if we do not have the sort of surplus that was available to Kevin Rudd in 2008 – we’re going to be in trouble. The European fiscal death-spiral was driven by the fact that their budgets were ruined before the Global Financial Crisis hit.

Politically, however, Joe Hockey’s budget may work. At least for a bit.

Until now the Abbott government has lacked that patina of authority which marks a confident government. Things like reintroducing imperial honours have made the Coalition look indulgent.

The budget itself will be unpopular but it has at least given the government a purpose.

But the question the Coalition needs to ask is this: how will voters respond when they realise that, for all the harsh measures in the budget, it’s for very little? All that pain, and still both spending and taxation are going up.