Two years ago when Labor forecast a deficit of $18 billion, the Coalition declared a "budget emergency". Senior Coalition ministers and former Treasurer Joe Hockey billed it as a crisis, "Labor's debt and deficit disaster", and the Coalition's leader, Tony Abbott, would do everything in his power to bring it down.
After two years of Abbott government, the deficit forecast has more than doubled to $37.4 billion. Scott Morrison, who took over as treasurer after Abbott lost office to Malcolm Turnbull, confirmed the figure on Tuesday.
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An economy protecting MYEFO
The Age's Economics Editor Peter Martin explains the overall picture of Scott Morrison's first test as Treasurer - MYEFO.
Net government debt was headed for a peak of $191.6 billion or 11.4 per cent of GDP in Labor's final budget. Two years later it is headed for $336.4 billion or 18.5 per cent of GDP, Morrison said. This was Abbott's self-professed "adult government". What happened?
There's no emergency, not any more. Just a slow and steady journey.
"There are no shortcuts," Morrison told the Perth press conference that launched the midyear budget update. Bringing down the deficit was like driving on a road with lots of delays.
"There will be plenty of people in the back seat – which often happens when I'm driving the family – saying 'are we there yet?'," he said. "That's natural. But our path back to budget balance is very similar to that. We need to take a very safe and careful route and one that does not put at risk the very important objectives we have on growth and on jobs."
By the end of the week Morrison was far more blunt. Eliminating the deficit quickly by slashing spending "would have absolutely tanked household consumption; it would have had quite a devastating impact on the domestic economy".
The right way to bring down the deficit was to help the economy to grow. If businesses and taxpayers spent more they would pay more tax. Mindlessly and quickly hacking into the budget could snuff out what growth there is in spending and make the budget worse.
It's a conventional and commonsense position, completely in line with Morrison's predecessors, Wayne Swan and Joe Hockey. And yet oddly, it seems to conflict with the views of the head of his own department.
John Fraser, who was brought in from the private sector to run the Treasury by Tony Abbott, told Morrison in a briefing note released under freedom of information laws that budget repair had become "essential".
"Regardless of how economic conditions evolve, Australia will be better placed to respond if the budget is in a stronger position," he said. "We therefore cannot wait for economic growth to fix the budget bottom line."
That's because waiting makes the outlook worse.
Morrison has abandoned the line he used repeatedly early in the job that he had 'a spending problem, not a revenue problem'. It’s the other way around.
In May the government was set to rake in $398 billion this financial year and spend $429.8 billion.
The spending figure is little changed. It's a shade lower at $428.3 billion. But the revenue figure is far worse. It's $394.9 billion instead of $398 billion. Morrison has abandoned the line he used repeatedly after becoming Treasurer that he had "a spending problem, not a revenue problem". It's the other way around.
The iron-ore price was $US60 a tonne when the May budget was delivered. It's now US$40. At its peak four years ago it was $US180. Although the lower dollar offsets much of the lost income, companies such as BHP, Rio Tinto and Fortescue aren't going to the pay the tax it looked as if they would have just six months ago.
Petroleum firms are investing more than $160 billion in massive new liquefied natural gas platforms off Western Australia and Queensland, one of them Australia's biggest-ever infrastructure project. They were predicated on an oil price of $US100 a barrel. It had slid to just $US60 by this year's May budget. It's now US$36.
Former treasury economist Stephen Anthony says a 5 per cent fall in Australia's terms of trade takes $4 billion to $6 billion a year from budget income. In the past six months the terms of trade have slid 6 per cent. Some but not all of the loss has been recouped by higher export volumes.
The government will collect $450 million less than it had planned this year in petroleum resource rent tax, $1.1 billion less in company tax, $1.35 billion less in superannuation tax (because of the weaker sharemarket) and $1.6 billion less in gross personal income tax. Employment is holding up, but wages are climbing at their slowest rate on record. Bracket creep, which Morrison also used to talk about a lot on taking the job, isn't much of a problem. We are not being pushed into higher tax brackets at the rate expected.
In the short term, the missing revenue doesn't do much damage. Right now the government is spending about $1.08 for each $1 it brings in. It is borrowing to make up the difference. But borrowing to make up the difference and to pay the interest bills year after year eventually pushes the interest bills very high, so high they become a budget program in their own right.
Eight years ago the government paid nothing in net interest. It wasn't a cost. Then Labor ran deficits during the global financial crisis and interest payments began to climb (even though they were held back by extraordinarily low global interest rates). This year the bill will be $11.2 billion in interest. By way of comparison, the defence bill is $26.3 billion and the universities bill $9.3 billion. The government is shelling out almost half as much in interest as it is on defence and more than it is on higher education.
And that's if it's lucky. One of the risks identified in the update is that global interest rates might rise. At an all-time low of 2.6 per cent at the time of the May budget, the government's borrowing rate had already climbed to 2.9 per cent. If it climbed further to 3.9 per cent, an increase the update describes as "relatively modest" the interest bill would be $5 billion per year higher within a decade. Instead of being in surplus by 2025-26, the budget would slide back into deficit.
On Thursday the US Federal Reserve began lifting interest rates for the first time in nine years. It's likely to lift them several more times in the years ahead. The era of low rates is ending.
Blame all round
Were it not for the slowdown in China, the budget would be in good shape. Swan's final budget forecast revenue of $428.9 billion in 2015-16, about the same as the $428.3 billion the government is now spending. Revenue grew at nothing like the pace expected because the price of the things China buys plummeted and Australian companies paid far less tax than expected.
The first Abbott budget would have helped put things right. It would have slowed spending growth by lifting age and disability pensions more slowly in line with the consumer price index rather than wages. It would have lifted the pension age from 67 to 70 in line with longer lifespans, and it would have indexed fuel excise so that the amount taken per litre climbed with inflation. But the Senate knocked back the first measure, has not yet passed the second, and approved the third only after opposing it for a year.
But much of the damage has been done by Abbott. He abolished the carbon tax and the mining tax while keeping in place the spending on carbon tax compensation. In a frenzied rush to get money out of the door before the end of 2013-14 to make the last Labor budget look bad he handed Victoria $1.5 billion for the East-West Link road project despite what the Auditor-General says was "clear advice" that the money wasn't yet needed and that the project wasn't ready.
And he refused to tackle the fastest-growing hole in Australia's tax system: the tens of billions of superannuation tax breaks skewed to Australians who are already very rich. By taking on the recipients of pensions rather than the better-off recipients of tax breaks he showed that he didn't really regard the deficit as an emergency and made it easy for the Senate to knock back whatever he did propose.
Fixing the budget
Some of the cuts in the update will be painful. The government's claim that it can cut $225 million a year from incentive payments for bulk billing without hurting bulk billing is fanciful. Others may never materialise. It's unlikely the government can raise an extra $700 million a year from cracking down on welfare fraud. Back in May it promised to raise an extra $300 million.
But they are minor compared to what is needed.
It's important not to tank the economy, so the big cuts have to take effect slowly, as Hockey planned in his first budget.
But in his own first budget and in the tax changes he will take to the election Morrison will have at his disposal all of the arms of government instead of just some. Unlike Abbott, Morrison has made it quite clear he is prepared to crack down on superannuation tax concessions. The Senate will treat him seriously.
To succeed he will have to abandon his commitment not to lift the tax take. If he faced anything like an emergency, he would.
Peter Martin is economics editor of The Age.