Budget’s Economics Must Survive the Politics of Vested Interest

Australia’s deepest problems are not economic – they are political. Politics is about the power of vested interests. Governments in the past decade have fed vested interests with significant economic rents.

They could do this because Australia received a significant economic gift from the global economy through the mining boom. The increasing sway of vested interests in the past decade is clear in the expansion of corruption during this period now reported daily from various public inquiries. The power of vested interests also shows in the skewing of economic resources into the hands of those with most influence in the political process.

The fact that so many vested interests are making so much noise about the first budget of the Coalition government suggests it might be a budget at least moving in the right direction.

This budget attempts to address the politically driven economic errors of the Labor government and the latter years of the Howard government but it is still a budget shaped by politics within an economic imperative. There are political decisions in the document that would have been better designed in the national economic interest rather than a narrower political interest, but there are many policies that are welcome.

Australia’s economic problem is not that there was a budget emergency in the short term. It is that for a decade there was a lot of wasted government spending that was financed by debt. In the medium term this together with unfunded spending promises created a potential fiscal time bomb that urgently needed to be addressed in the near term. During the 2013 election campaign both sides of politics made further unsustainable fiscal promises. Australia could not afford either side of politics keeping those promises.

 The Abbott government has understood this and has moved to address core economic issues although there is still a lot of politics in the budget. The pendulum needs to keep moving towards the national interest in coming years.

Macro-economic strategy correct

The good news in the budget for the aggregate economy is the overall fiscal strategy of gradual but sustained cuts to spending towards a lower long-run level of debt is the right macro-economic approach. A focus on infrastructure as a key driver of economic growth is also welcome.

One can legitimately debate how the burden of this strategy has been distributed across the population but the overall macro-economic strategy is the correct one. Also the focus mostly on cutting spending rather than raising taxes is good for Australia in the long run. Income redistribution is better done through direct payments rather than hidden transfers and distortions that cause aggregate economic losses in order to disguise political choices. However, there is a rise in taxation on wage earners (admittedly on the higher-income earners) whereas the best long-term strategy for Australia would be to replace taxes on working with taxes on spending.

Clearly there is a political strategy in the budget of cutting payments to states for education and health which ultimately will lead to a call by states for higher GST revenue to finance these activities.

Again politics has trumped economics because of fearmongering against a change in the GST. The best choice of more revenue from the GST and less from taxing work effort has been postponed. It would have been better to grasp the GST/income-tax switch now rather than later, but the politics has clearly prevented this. The strategy of an eventual substitution is in place but there are many hurdles yet to jump before this will be realised.

Another political fix in the budget is the way the paid parental leave scheme is to be funded. Why use billions of taxpayers’ money to fund a scheme that otherwise could be funded like the Higher Education Contribution Scheme?Under a paid parental contribution scheme individuals could receive income while they are on leave raising a baby, but the family would repay the loan from the government once their income level reaches a threshold. As well as solving the funding issue for faster budget repair, a paid parental contribution scheme would also solve the political problem of subsidising high-wealth individuals. Individual responsibility should be at the core of the policy as it is with the HECS scheme so that the users eventually pay when they can afford to.

The bottom line is a budget that addresses the key economic issues head-on. However this budget will face a number of obstacles to success in the Senate and the states. It is easy to imagine that cherry picking by vested interests and politics may undermine the strategy.

The question for all politicians in this Parliament is whether they will act in the national interest or support the vested interests that have undermined the Australian economy for a decade. This is a much bigger question for Australia’s future success than who broke which promises.