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Tuesday, September 29, 2015

Morrison's start was woeful, but there's time

Scott Morrison's first outings as Treasurer were woeful.

On the night of the spill, Malcolm Turnbull promised something different: "a style of leadership that respects the people's intelligence, that explains these complex issues and then sets out the course of action we believe we should take, and makes a case for it".

Turnbull promised "advocacy, not slogans".

Morrison gave us, "work, save, invest".

And then this slogan: "We have a spending problem, not a revenue problem."

It isn't even the truth. Australia does indeed have a revenue problem, as Morrison's predecessor was happy to acknowledge. From the turn of this century right through to the global financial crisis, the Australian government's income never dipped below 25 per cent of gross domestic product. Then it collapsed and hasn't fully recovered. We do indeed have a revenue problem, as well as a spending problem. Spending is 25.9 per cent of GDP, revenue is 24 per cent.

Pressed by journalist Leigh Sales about the need to tackle both, Morrison replied that the budget forward estimates had revenue climbing back to a touch over 25 per cent of GDP by 2018-19, which meant things would be fine.

Except that it won't. The budget forecasts have revenue barely climbing at all, reaching just 24.2 per cent of GDP in 2016-17. After that, the budget projections have it climbing to a tad over 25 per cent. But projections aren't forecasts. The difference is enormously important, and a treasurer who could really explain complex issues would have pointed it out.

Forecasts are the Treasury's best guesses, taking everything into account. Each budget it produces forecasts for the following two financial years, and for the years beyond that, when it's too difficult to make forecasts, it produces "projections"...

The projections come with a health warning. Here's how the Treasury spelt it out in the budget from which Morrison quoted: "These projections are not forecasts, but rather are based on a set of medium-term assumptions."

The assumptions are odd, and they produce odd results, at times quite different to those of any reasonable forecast. They assume "spare capacity in the economy is absorbed over five years". That's a fancy way of saying they assume the unemployment rate will slide to 5 per cent.

That's right. They assume a slide in unemployment (which would indeed boost government revenue).

To get the fall in unemployment, the Treasury projections produce a very fast economic growth rate of 3.5 per cent a year ("above trend") for five consecutive years.

Naturally, it boosts projected revenue. But it has no basis in reality. There's no particular reason to think it will happen. It's the automatic output of a blindly mechanical model. It's wishful thinking.

Right now, Australia's economy is growing at an annual pace of just 2 per cent. For as long as that happens, we are indeed going to have a revenue problem, and also a spending problem.

And for as long as commodity prices fall. The Reserve Bank's index of commodity prices has been sliding for the past four years. It's now only half what it was, and it is continuing to edge down. The news from China offers little hope. Commodity prices drive taxation revenue. Our government is both collecting too little for the amount it is spending and spending too much for the amount it is collecting. A treasurer able to address complex issues would talk about both. But Morrison has already shut down discussion.

"I'm not in that camp," he says, when asked about the need to tackle revenue.

Closing off an option will limit our trust in the new Treasurer and make us feel he is not really prepared to govern in our interests.

It will also make it more difficult for him to manage the budget, should the downturn in revenue continue.

It's less than Turnbull had led us to hope for, but it's not too late.

The best thing for Morrison to say for the next few weeks is not that much, as he reads into the job. Then he should start a really open conversation about the budget and tax where all options are on the table (although some more preferred than others), including the option of raising more tax.

The most popular premier in the land will be pleased to help. Morrison's NSW colleague Mike Baird believes we will have to raise more in order to properly fund hospitals. Victoria's Labor Treasurer, Tim Pallas, believes the same thing. So does South Australia Premier Jay Weatherill​.

Their views shouldn't be instantly dismissed. They're going to be down $80 billion over the next 10 years because of a decision by Joe Hockey to cut their funding formula to tart up his first budget. They're the real victims of the slowdown in revenue. And they're the ones who are going to have to provide the services we need. We are entitled to an open and honest conversation about how much we are prepared to pay for our services, as well as how much spending on them should be cut.

Morrison has the ability to transcend his past by opening up an intelligent conversation. It's what Turnbull led us to expect. Or he can revert to form and hide behind slogans. It's what we've become used to.

In The Age and Sydney Morning Herald