Wednesday, July 03, 2013

Could Labor be preparing to blow out the budget deficit?

Update: Apparently not

Could Labor be preparing to blow out the budget deficit?

In his first full press conference as Treasurer on Tuesday Chris Bowen drew a line under the Gillard era.

Rather than being “strong” as claimed by the former prime minister, Australia’s economy faced headwinds that would require “very careful management”. Asked whether he would be prepared to let the deficit blow out further if needed he used an intriguing set of words:

“We stand by our fiscal strategy, which is to return to surplus over the economic cycle. Now of course, we do that in a responsible way, we do that in response to emerging challenges and difficulties. But our long term commitment has been to a surplus over the economic cycle.”

Which could mean that if needed Labor will let the deficit blow out. His more downbeat assessment of the economy may have even been preparing the way. After all, it was the Rudd government that managed “the transition through the global financial crisis and through to the other side more successfully than any other advanced major economy”.

Bowen said: “It is in that tradition that this Government will approach the economic times ahead”.

There are reasons to think it will need to push out the deficit...

Quickly abandoning the $24.15 a tonne price for carbon and moving to the European floating price (around $6.50 a tonne) would cost the budget $3 billion to $4 billion per year. Lifting the lagging Newstart unemployment benefit by $50 per week would cost $1 billion per year.

This year’s deficit is penciled in at $18 billion deficit. Adopting just two of the proposals Kevin Rudd’s has flagged would blow it out to $23 billion. It would also delay the return to a slight surplus, at the moment scheduled for 2015-16.

And there are reasons to think the government would be unwise to cut too hard or raise taxes too much in other areas to compensate.

On Monday July 1 the superannuation levy climbed from 9 per cent of most salaries to 9.25 per cent. That won’t affect the economy much now, but by next July the effects will be apparent in lower wage rises than would have otherwise happened as employers scramble for money to pay the levy. Also on July 1 next year the Medicare levy will climb from 1.5 per cent of most salaries to 2 per cent to fund the disability insurance scheme, further denting incomes. And on the same date the superannuation levy will climb another 0.25 percentage points to 9.5 per cent. From then on it will climb at double that pace - 0.50 percentage points per year, each year until the end of the decade.

Incomes are about to be squeezed. Only a brave or (more likely) a foolhardy government would squeeze them further while the economy faced headwinds.

Chris Bowen may be brave, but he is not coming across as foolhardy.

In The National Times

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