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Good Fiscal Policy

I spoke in parliament today about the importance of good fiscal management.

Matter of Public Importance – Fiscal Policy, 5 February 2013

It is a pleasure to rise today to speak on an important issue of economic management. When we talk about the importance of good budget management it is important to remember one simple fact: if the tax-to-GDP ratio today were the same as it had been under the Howard government then the budget would be strongly in surplus.

Dr Emerson:  By more than $20 billion.

Dr LEIGH:  By more than $20 billion, I am informed by the minister. But if the tax-to-GDP ratio under the Howard government had been what it is today then many of their budgets would have been in deficit. That is a simple fact which those opposite cannot deny. Driving things at the moment are two big factors. First of all, mineral prices have softened, and that has brought down corporate revenue. Second, the Australian dollar remains high. Why does the Australian dollar remain high? Because Europe is underperforming. With Europe underperforming, investors are looking around the world to where they can find AAA-rated government debt. And they are finding it in Australia, one of the few countries that maintains that AAA rating. Despite the fact that minerals prices are coming off, the Australian dollar remains high. So this double-whammy hits revenues, and this is reason revenues for 2012-13 are $20 billion down from what Treasury projected in 2010.

So what should a government do under those circumstances? Prior to Christmas there was a suite of policy advice coming at the government from across the political spectrum. John Quiggin and Warwick McKibbin do not agree on every issue in public finance, but they were among the many economists who were saying that as revenue fell it was not the best approach to fill the government’s revenue shortfall by making further budget cuts. The OECD and the IMF were among those saying the same thing. So that was what drove the Treasurer’s announcement before Christmas.

But it is important to put this in a broader context. We have had a few bits of history being disinterred over recent times—we have just discovered where Richard III is buried. And thanks to an IMF report we have discovered a little bit about past budget practices in Australia. An IMF report released in January examined 200 years of government financial records across 55 leading economies. It identified two periods of fiscal profligacy in recent years. When were those periods? Well, if you listened to those opposite, you would be led to think that it was under the current government. But in fact that is not what the IMF found. The IMF found that those two periods of fiscal profligacy were under John Howard’s term in office in 2003 and during his final years in office from 2005 to 2007.

Why did that fiscal profligacy occur? A report by David Hetherington and Dominic Prior from Per Capita called After the party: how Australia spent its mining boom windfall found that ‘the Howard government gave at least $25 billion away in tax cuts and concessions…. It used another $50 billion in inflated spending programs’. As a result, the report concludes, ‘we missed the opportunity to invest $75 billion into long-term productive assets’. And the Howard government, of course, was unable to make the tough decisions that have been made under this government.

Stephen Koukoulas has observed that during their combined total of more than 20 years in office the Fraser and Howard governments never once cut real spending. Labor governments have cut real spending on five occasions since the mid-1980s. In the last five years we have found savings of $138 billion, and they have not been easy savings to find. When we means tested the family tax benefits and the private health insurance rebate, those opposite said we were playing ‘the politics of envy’. When we phased out the outdated dependent spouse tax rebate – a measure that discourages work by secondary earners – we were told we were attacking the family. When we reduced the baby bonus for second and subsequent children the member for North Sydney drew comparisons with China’s one child policy. That is how serious those opposite are about finding savings.

But you do not have to take my word for it. The IMF’s article IV report from 16 November said that:

‘the authorities’ adept handling of the fallout from the GFC, their prudent economic management, and strong supervision of the financial sector, has kept Australia on the dwindling list of AAA rated countries.’

The OECD economic surveys Australia 14 December said:

‘Adjustment to the mining boom so far has produced favourable results, thanks to the robust macroeconomic policy framework and the largely decentralised wage setting system …’

Authorities at the OECD think we have got the balance right on industrial relations, unlike those opposite.

At the same time we have been making the right investments. In my own electorate of Fraser the ANU has seen an increase in enrolments, up from 6,350 to 7,086. That is part of a nationwide increase of 150,000 in student numbers. ANU funding is up $130 million, 15,000 more students nationally getting youth allowance. And, as the Prime Minister and the Leader of the Opposition did, I would acknowledge the very generous donation today from Graham Tuckwell of $50 million to improve scholarship opportunities at the Australian National University.

This morning I joined the minister for transport, the member for Eden-Monaro, Senator Lundy and the member for Canberra at the sod-turning for the Majura Parkway, the biggest ever road investment in the ACT—$288 million, half federal, half ACT, which could teach the New South Wales government a lesson about co-contribution—an important road which will take the pressure off traffic in my electorate.

By contrast, those opposite have been coy about what will happen if they come to office. Senator Sinodinos said that the opposition was doing something like the dance of the seven veils, which does make one wonder whose head is going to be on the platter. Senator Abetz said that the opposition was offering a policy skeleton and that only further down the track would there be flesh on the bones.

But yesterday the cat was belled in the form of Senator Humphries. Senator Gary Humphries is now facing a preselection challenge from Zed Seselja, who assured the people of Brindabella of his undying loyalty just a few short months ago but has now decided that he would prefer to abandon them for a shot at the red carpet. When querying this on PM Agenda yesterday, the interviewer said that under an Abbott-led government the interests of the people of Canberra would not rate. Senator Humphries said, ‘Well, it is a question then of making sure they are constrained in the knowledge that this impacts very badly on one of their colleagues.’ Senator Humphries is now admitting that an Abbott government would impact ‘very badly’ on the ACT.

He said in another interview:

‘Canberra is going to be facing very heavy pressures. We know that this city will be the subject of some very tough decisions by an incoming government.’

We know why that is: the member for Canning, in a previous debate, described public servants as those who ‘feed on others’. The member for North Sydney gets the Public Service numbers wrong every time he stands up to speak on them and thinks that there has been an extra 20,000 public servants, a number in which he appears to be including Defence Force reservists as public servants. That now seems to be their new target for public sector job cuts—20,000 public servants. Those opposite say that they have an aspirational target for job creation, but the only policy they have released on jobs is a target for job destruction. It is a target for getting rid of 20,000 Canberra public servants.

Let me just finish with an article that I would commend to members of the House on ‘The limits of hairshirt economics’ by Tony Abbott, from the Adelaide Review, November 1994. This is an article in which the Leader of the Opposition questioned the floating of the dollar. He said as follows:

‘The floating dollar remains an article of faith with the leadership of both main parties, notwithstanding its exceedingly dubious outcome for Australia—’

8 Comments

  1. [...] it looks like Andrew Leigh has fallen into bad company. He was singing a duet with Craig Emerson in the Parliament this afternoon: It is a pleasure to rise today to speak on an important issue of economic management. When we talk [...]

  2. Puff Of Smoke says:

    Please stop comparing the current situation to how it was under Howard and telling us that Labor is doing it better purely because of made up numbers. I have supported my sick partner for years and right now we’re living on very little because my income seen as rich (above $80k) and means my partner and myself get nothing in benefits yet end up paying for others who are deemed to need it. A few years ago when the Liberals were in charge our situation was similar (I was on slightly less income) yet on a day to day basis we had more spending money and could actually afford to enjoy ourselves with a night out every now and then. Please stop trying to tell me how well off I am now when I can see how badly off I am now compared to how I was under Howard. Of course, I am one of the few people in the population that the government doesn’t care about, high income but supporting a disabled other who is due no benefits due to my “huge” income (yet that huge income divided by two is less than the average income each). Stop trying to tell me how well off I am when every day I experience that I’m not.

    • And your point is? says:

      So just because you feel your situation is worse off, you think that everything that is said is wrong??
      That’s ridiculous
      I feel sorry for you if you are genuinely struggling but whilst you may have been better off under a Howard government, the country as a whole doesn’t seem to have been generally better off.
      And I’d caution any optimism you may have about a change of government improving your circumstance – they simply can’t make the numbers they are talking about add up so they will have to backtrack and cut harder
      I’d say you will still remain in the ‘few people in the population that the government doesn’t care about…’
      Sorry

      • Puff Of Smoke says:

        “They” would be our current Labor government? The ones that have put us billions in debt with nothing to show for it? I guess you’re not personally affected – yet – but you might get it one day when it does personally affect you.

  3. Keith says:

    So, lower taxing as a percentage of GDP is a good thing (or at least somehow ‘better’ than the Howard years), according to Mr Leigh. How about SPENDING as a proportion of GDP ? What’s that? Don’t want to know? If that’s the case you must wake up every morning mystified at the continuing mounting government debt. Mr Leigh thinks he can cherry-pick a supposed positive from the entire ledger of national accounts and pretend the rest doesn’t exist. Good luck with that. Doing a double act with Emerson is indicative of the delusional path Leigh has decided to follow. Now that you’ve got the duet nailed, it’s time to work on the synchronized dance moves.

  4. Gareth says:

    Keith, including Government spending as a proportion of GDP was unnecessary because his statement assume they stay yhe same. However, for your information, Gov. spending to GDP has actually decrased undr Labor. Unless you want to claim Treasury are covering up for Labor, or something…

    http://archive.treasury.gov.au/documents/1352/HTML/docshell.asp?URL=03_spending_growth.asp