Is Hockey creating the real emergency?

First off, let me say I am not an economist. That makes what I’m about to demonstrate seem all that more believable. Let’s be clear. For all the hardship, Joe Hockey is cutting little from Labor’s spending, but expecting a massive hike in revenue. 

the government is expecting to reduce investment whilst expecting faster growth in the economy

For the last few decades government spending has been steadily increasing. In part it’s because of welfare and an ageing population, but it’s also because of an increasingly complex tax regime. GST, for example, created income that also went out to the States as well as created the need for more compensatory measures for lower income households. So more money passed through the government coffers. As each successive government muddies the waters the more our tax system becomes one of rules, loopholes and adaptive measures that are later found to have their own loopholes.

The extent of all this is clearly shown in this graph. I have taken the expenditure and revenue figures for each budget since 1989. Then I adjusted the figures to 2013 prices and worked them out per head of population. So, this is an indexed per capita figure. Clearly the revenue and expenditure lines are moving sharply upwards. The government is trafficking money like there’s no tomorrow.

The blue shaded area marks what many perceive to be the halcyon days of the Howard government. The blue revenue line is above the expenditure line – the budget is in the black. Yet, Howard and Costello spent more per head of population than the Hawke Keating government ever did. In fact their last year shows somewhat of a splurge adding an extra $15 billion in expenditure for the one year alone ($18 billion in today’s prices). They must have known they were going to lose.

So you could argue that Labor inherited the Coaliton’s mess. That would have been fine if the GFC hadn’t hit and government revenue fell sharply. Otherwise the graph shows, for all the talk of reckless spending, even with the measures to combat the GFC, Labor managed to bring that growth in expenditure under control.

What’s curious with Joe Hockey’s budget (again the forward figures are based on 2013 prices, assuming a 2.5% per annum growth rate and assuming the population grows at 1.7 percent per year) is that he merely expects to maintain the expenditure figures established in the last couple of years of the labor government. He cuts a little, but its not of emergency proportions.

Instead, Hockey expects to return to surplus through a growth in revenue. A neat trick for a government promising to lower taxes. It’s also quite an achievement with an increasing liability for our ageing population. Short of euthanasia, governments will have to pay more for the elderly, leaving less money for growth activities, such as funding education.

So the government is expecting to reduce investment whilst stimulating faster growth in the economy (meaning more people and companies paying the government).

Lets imagine, for pure hypothetical reasons, he can’t do that. The revenue figure doesn’t increase. Suppose Hockey’s budget makes people lose confidence in the economy, growth slows and government receipts fall – or, at best, hold steady. Joe’s budget would never reach a surplus. Unless he decided to try and move that expenditure line down. Even more savage cuts. Nobody has ever tried that (except for Labor the year after the GFC cash splash). As it is, it seems Hockey is inflicting a lot of pain just to stay still.

In fact, the only recent government that managed to flatline revenue whilst growing income was under Keating. Perhaps it’s time for Joe to have a mentoring session. I’m sure it would focus a lot on getting your extra revenue from those who can afford it, rather than starting an ideological class war.

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