Don't panic: Joe Hockey’s budget more than just a mixed message

Joe Hockey's pre-budget message is more than mixed, it's pureed. Having spent four years telling us that governments, like households, need to live within their means, on Tuesday he told mums and dads that households need to crack out the credit cards to keep the economy strong. According to the Treasurer "Now is the time (for households) to borrow and invest ... invest in the things that help to create jobs". No Joe, that's the government's job.

Prime Minister Tony Abbott poses with the Treasurer Joe Hockey as they look through budget papers.
Prime Minister Tony Abbott poses with the Treasurer Joe Hockey as they look through budget papers. Photo: Andrew Meares

Having had more positions on fiscal policy than the karma sutra, Joe Hockey has now invented one all of his own – he wants to outsource fiscal stimulus to Australian households. He wants Australian households to rack up more debt to help create jobs for their neighbours. This guy is actually our treasurer.

Before analysing where it's got to, let's take a quick look at where Hockey's "position" on fiscal policy has been.  When the GFC first hit the Coalition endorsed the need for the government to increase spending and increase the budget deficit in order to prevent economic activity from contracting. It worked.

As it became obvious that the combination of a big increase in government spending and big cuts in monetary policy had spared Australia from the worst of the GFC, the Coalition switched from supporting fiscal stimulus to quibbling over the projects. With a bit of help from The Australian newspaper, they managed to define the most successful fiscal stimulus package in the OECD in terms of the inflated price of a handful of school halls.

By the time the 2013 election came around the Coalition had reversed their position entirely and argued, day in and day out, that the existence of budget deficits was proof of poor economic management by the ALP. Bizarrely, despite their claimed obsession with reducing the deficit, the Coalition's main policy commitments in 2013 were to abolish two sources of revenue, the mining tax and the carbon tax. And despite scrapping the carbon tax they committed to retain the compensation package. What could go wrong?

Even despite Joe Hockey's optimism, the iron ore price fell from its once in a century peak. In a result that surprised only the Treasurer and the mining companies, the flood of new output from the new iron ore and coal mines approved in the past five years pushed world prices down as fast as last year's budget thumped consumer confidence.

The federal and Western Australian treasurers are both working hard to blame their budgetary woes on the falling iron ore price, but the inconvenient truth is that iron ore prices remain well above their historic average. Indeed they are well above the price Kevin Rudd inherited in 2007. Imagine if a farmer demanded drought relief despite above average rains – just because they were less than the year before.

So here we are in 2013 with Joe Hockey and Tony Abbott in charge of "managing the economy". The deficit is rising fast, unemployment is higher than it was during the GFC, and thanks to the unfair and unaffordable tax cuts delivered by "Profligate Pete" Costello at the beginning of the mining boom, tax revenue is at its lowest level in decades. What to do?

From an economic point of view the first thing is to avoid panic. Actual economists are rarely as worried about deficits as the politicians who claim to "manage" our economy. The vast majority of economists believe that borrowing money to make good long run investments is good for the economy in the long run. Similarly, most actual economists think that cutting spending when the economy is slowing will make things worse, not better.

But from the Coalition's point of view, doctrine demands his first step should be to create panic (an "emergency" if you like) and then "rescue" the budget by cutting services and income support for low income earners. Fortunately for the economy, and unfortunately for Hockey, neither the Senate nor his own backbench will let him have another crack at the traditional Liberal play book.

The Treasurer really only has two options. He can either tell the electorate that budget deficits aren't all that bad (when they are caused by the Coalition) or, collect the revenue required to reduce the deficit. We'll need to wait till next week to discover which part of the Coalition play book Hockey will rip up. But as Peter Costello showed both in his time as treasurer and in his recent commentary, the only thing that the Liberals hate more than deficits is collecting the revenue to fix them.

While big budget deficits will be embarrassing for Hockey and Abbott, they will still be used by future conservative governments as an excuse to hurt those who never vote for them. But at the same time, big tax increases when the economy is slowing can have a similar impact on economic growth and unemployment as cuts in spending.

Taking a dollar in extra tax from a middle income earner and using it to reduce the deficit reduces the consumption expenditure of the worker without increasing the consumption spending of the government. Such a tax increase is contractionary, even if the budget is in deficit, and is likely to slow growth and increase unemployment. It's as bad an idea as Costello's decision to cut tax rates when the economy was booming (a decision which forced the RBA to lift interest rates to try and slow the economy down).

Luckily there is a solution that is both politically popular and economically responsible. Closing the tax concessions and loopholes favoured by the wealthiest Australians has no such impact. The most expensive, and inequitable, tax concessions are provided for superannuation which, significantly, is a form of saving. Collecting more tax on superannuation contributions and earnings would reduce the budget deficit without reducing consumption spending as the money is being saved not spent. While such reform would reduce the rate at which the multimillion dollar superannuation balances are growing, it would have no harmful macroeconomic effects.

The only down side of targeting the rorts favoured by the wealthiest Australians is that many Liberals seemed to have gone into Parliament specifically to defend and extend such obscene inequities. But the upside of living in a democracy is that if Tony Abbott and Joe Hockey want to keep their jobs, they really do need the support of about half of the 99 per cent.

Over the past 10 years the Coalition has reduced fiscal policy to some simple slogans. Such simplification has helped their candidates stay "on message", but they provide no guidance for the job of the Treasurer during challenging times.

While Peter Costello is adamant that the Hockey should stick to the former treasurer's old play book, Joe may have realised he needs a new one. Whether it is designed to deliver for the 1 per cent or the majority will define not just his term as Treasurer, but the Liberals claim to be "good economic managers".

Richard Denniss is an economist and executive director of The Australia Institute.