Big-spending Joe Hockey delivers a federal budget that will please no one

May 12, 2015

By Stephen Koukoulas

12 May 2015

Despite an improving global economy, Treasurer Joe Hockey is spending money in a manner that suggests the Australian economy is being confronted by something as severe as the 2008 to 2010 global financial crisis. Given the absence of a crisis, this is not sound economic policy.

Nor is there an obvious target for fiscal policy and the budget. A return to surplus and lower government debt remain a pipe dream, while unemployment is being left to drift with Treasury forecasting no reduction in the unemployment rate until 2017 – at the earliest.

Treasury is forecasting considerable strength in Australia’s major trading partners, with annual growth expected to be 4.5 per cent in both 2015 and 2016 and 4.25 per cent in 2017. For Australia’s major trading partners, this is a strong scenario. This positive back-drop together with the significant stimulus from record low interest rates and the recent depreciation of the Australian dollar, underpin Treasury forecasts for an acceleration of domestic economic growth over the forward estimates to the point where the economy is back at a trend rate of expansion by 2016-17.

Surprisingly, Mr Hockey’s budget has government spending rising to a hefty 25.9 per cent of GDP in 2014-15 and staying at that elevated level in 2015-16. Even at the end of the forward estimates in 2018-19, government spending is high at 25.3 per cent of GDP. Peak government spending under the Rudd government stimulus measures during the global crisis was 26.0 per cent of GDP in 2009-10 as it ramped up spending in response to a severe global recession. It is noteworthy that after these Gfc stimulus, spending fell to 24.6 per cent of GDP in 2011-12 and then 24.1 per cent in 2012-13.

In 2015-16 dollar terms, 1 per cent of GDP is approximately $16.5 billion.

The critical question is why, other than political fancy, is government spending so high?

In last year’s budget, which had debt reduction and austerity as its focus, Mr Hockey estimated the average level of government spending over the four years to 2017-18 to be 24.9 per cent of GDP. This year’s budget has ramped up that spending ratio to 25.7 per cent. That is an increase of over $13 billion each year over the forward estimates. Without this extra spending, the budget would comfortably be in surplus in 2018-19.

There is also an important political point that the level of spending is now is higher than assumed in the post-election Mid Year Economic and Fiscal Outlook in December 2013, which the Abbott government used to beat up on the previous government as big spending and reckless fiscal managers.

In addition to government spending running well above long-run averages, government revenue is flooding back to the point where total revenue will rise to 25.2 per cent of GDP in 2018-19, over 3.5 per cent of GDP higher than the revenue collected in the aftermath of the global crisis in 2010-11

In terms of a benchmark of this big government budget, since 1988-89, the government spending to GDP ratio has been higher than 25.9 per cent in only three years, while the revenue to GDP has been higher than 25.2 per cent in only five of those 30 years.

Collecting all of that revenue and not running a budget surplus shows the problem with the budget is on the spending side. Not in any year of the budget forward estimates is there a forecast to cut government spending in real terms which is unlike the post-Gfc period when after the stimulus measures, government spending fell in real terms in both 2010-11 and 2012-13.

The economic strategy of the budget is a paradox. There is none of that pre-election vitality which was about implementing policies to deliver a surplus and reduce debt, nor is there any strategy to tackle unemployment given the budget forecasts assume the jobless rate to remain at 6 per cent or more through to 2017.

It is likely to be a budget that pleases no one.

Not the fiscal hard heads who wish for smaller government, budget surpluses and low or no debt, nor will it please the government interventionists who reckon fiscal policy can deliver full employment and on-going prosperity.