Click go the shears: Joe Hockey softens up the public for budget pain

It has become an autumn ritual in national politics. As the trees turn yellow in Canberra, treasurers recycle a well-worn narrative of budget pain. They speak of tough calls, difficult choices and the need for sacrifice if the nation’s books are to balance.

After many years of budget watching, the veteran market economist Saul Eslake says treasurers in newly elected governments have an additional part of the script that requires them to say that ”their predecessors left things in worse shape than previously disclosed, so that the decisions contained in the forthcoming budget will be even more ‘difficult’ and ‘painful’ than would have otherwise been the case”.

But even by the standards of incoming treasurers, Joe Hockey’s language has been strident.

Hockey has warned of a ”tsunami” of spending demands and that the budget will be in deficit ”for at least a decade” without big changes.

This week Hockey said he was morally obliged to repair the government’s finances.

”We owe it to our children not to leave them with a mortgage that paid for our lifestyle,” he said.

The ominously named commission of audit, ordered soon after the Abbott government gained office, has added extra spice to this year’s budget prelude.

The 900-page report, which includes 86 recommendations, will be released next Thursday. Hockey gave a sneak peak in a Wednesday speech titled ”The Case for Change”. ”The report makes it clear that Australia has a serious spending problem,” he said.

The audit focuses on the 15 largest and fastest-growing government programs, mainly covering welfare, health, education and defence.

They are, in almost all cases, projected to grow faster than average government expenditure and expand faster than the economy. ”To put it simply, our biggest costs are also our fastest-growing,” Hockey warned.

Hockey singled out the age pension, which at $40 billion a year is the biggest single government program by a fair margin.

”Increasingly the burden of our ageing is being borne by other people,” he said.

”Of Australians over the age of 65, four out of five receive a full or part pension. If we also take into account the concessionary health card, then only 14 per cent of older Australians receive no government payments.

”At least for the age pension, this situation is unlikely to be much different in 2050. Despite spending billions of dollars in taxation benefits for superannuation, by 2050 the ratio of Australians receiving a full or part pension will still be around four out of five.”

Demand for government programs is outstripping the capacity of taxpayers to fund them – between 2010 and 2050 the percentage of people of working age supporting those over the age of 65 will almost halve.

”So the policies must be changed, either now or more dramatically in the future,” Hockey said.

The Treasurer’s tough rhetoric is reminiscent of his Liberal predecessor Peter Costello, who made much of the ”Beazley black hole” unearthed when the Coalition won office in 1996.

That line was an integral part of the Howard government’s political rhetoric for more than a decade.

Hansard shows Hockey himself was still telling Parliament about the ”Beazley black hole” in 2008, more than 12 years after it was unearthed.

Costello managed big spending cuts of between 0.5 to 1 per cent of gross domestic product during his first two years in office. But as the proceeds from the mining boom rolled in, the Howard government did not maintain its spending restraint.

In Wednesday’s speech, Hockey forecast a much more frugal approach. His target is to limit annual spending growth to an unprecedented 1.75 per cent above inflation for a decade.

It is unusual for an incoming Treasurer to peer so far into the future with such ambition.

”That would be heroic if they pulled it off,” said John Daley, chief executive of the Grattan Institute.

”It would be a lot better than any Australian government has done for a very long time.”

The fiscal future Hockey foreshadows is in marked contrast to what many voters have come to expect from budgets. For most of this century, budget night has been like a financial lucky dip. No voter had to wait long before something came their way.

But those days are now gone.

”If Australians ask themselves of the budget in May ‘what’s in it for me?’ my response will be ‘a better future,’ ” Hockey said on Wednesday.

”I ask Australians not to judge this budget on what they get or lose today. This budget is about our quality of life for the years ahead.”

Budget hawks are urging Hockey to follow Costello’s example and wield the axe. ”Our main advice to the new government is to cut early and cut hard, because they will never have a better chance than now to fix the budget,” said Stephen Anthony, an economist at consultancy firm Macroeconomics.

But some economists think Hockey is exaggerating his budget problems. After all, Australia’s financial position is far better than that of most advanced countries.

Australia is one of only eight nations with a stable outlook AAA rating from all three credit agencies. How does that fit with talk of a budget crisis?

”Mr Hockey has got an easier job than finance ministers just about anywhere else in the world,” says Stephen Koukoulas, an economist and former adviser to prime minister Julia Gillard.

Koukoulas thinks Hockey is right to take action to improve the budget position but he likens the problem to a Rolls-Royce with a flat tyre.

”Sure, you’ve just got to fix the tyre, but you’ve still got a Rolls-Royce,” he said. ”It’s hardly a disaster.”

Eslake says Hockey can be forgiven for using extreme language about the budget situation, given the need to build political support for far-reaching reforms.

But he thinks the short-term impact of next month’s budget will be constrained by promises made by the Coalition before the last election and by the fragile state of the economy, which could be harmed by a sharp contraction in government spending.

”What’s different about Hockey’s toughening up rhetoric … is that the tough decisions he’s talking about are ones that are going to impact after 2016-17,” he said.

”Firstly, that would allow the government to argue that it has not broken promises made before the election. ”Number two, that’s sensible economics because it doesn’t inflict damage on the economy when it’s not well-placed to handle it.

”And number three, it’s actually directed at where the real problem is.”

The Grattan Institute’s Daley doubts whether Hockey’s tough talk will be matched by his actions, in view of the Coalition’s election commitments.

”Given the size of the problem, the kinds of things they are talking about just don’t look big enough to get us out of trouble,” he said.

Daley points out that imposing a $6 co-payment on each visit to the doctor – one of the measures proposed in the budget prelude – will raise only about $250 million a year.

”When your budget hole is $30 billion and rapidly rising … $250 million is a rounding error,” he said.

”The kinds of things that are big enough to make a difference are, by and large, the things that the Prime Minister has taken off the table.”

Daley says the government must do something more than just saying ”trust us” to get the budget on a sustainable footing over time.

”A credible approach is one that shows you are on a plausible path to surplus within the next three or four years, bearing in mind that at this point in the economic cycle Australia should be running a balanced budget, and it’s not even close,” he said.

Earlier this month Treasury secretary Martin Parkinson warned that without any changes in policy, the budget would be in deficit for the next 10 years.

”If this situation came to pass, it would mean that the budget would be in deficit for 16 consecutive years – substantially longer than the seven years of deficits in the early 1990s,” he said.

Parkinson has also pointed out that the effects of bracket creep – when taxpayers are pulled into higher tax brackets as their wages rise – will add to the government’s financial challenge.

Without any changes to the present tax brackets, a taxpayer earning the projected average full-time wage in 2023-24 will pay tax at 28 per cent, up from 23 per cent this year – a rise in the tax burden for those individuals of almost one quarter.

Parkinson warns that this would drive down workforce participation rates and exacerbate further the impact on living standards from an ageing population.

However, any future change in tax brackets to ease the burden on middle-income workers will make the savings task required to return the budget to surplus even bigger.

While Hockey has declined to go into specifics about his budget plans, he has hinted that welfare programs will be a target for long-term savings, including pensions, aged care and the Pharmaceutical Benefits Scheme.

But Hockey insists the burden will be shared.

”Our approach to budget repair is a principled one,” he said. ”Every sector of the community – households, corporates and the public sector alike – will be expected to contribute.”

Voters will have to wait until budget night, May 13, to discover exactly how much and when.

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