Budget 2014: Why politics and media cloud intelligent economic debate

With the Federal Budget being announced tonight, economist Tristan Knowles suggests we try to look past the catchy headlines to the real issues facing Australia.

DISCUSSIONS REGARDING the Federal Budget in Australia remain infantile.

During the election campaigns of 2013, we were warned about the perils of a continued budget deficit and reminded of the good times under former Prime Minister, John Howard, when our budget was in surplus. We were promised a return to budget surpluses and more prudent economic management by an incoming Coalition government.

At the same time, Labor warned us that the Coalition's plans for budget cuts would result in a recession.

Late in 2013, the release of the Mid Year Economic and Fiscal Outlook (MYEFO) brought budgets back in the news cycle.

The headlines around the time were predictable.

From the ABC:

'MYEFO reveals $17 billion budget blowout; Joe Hockey warns wasteful spending will be 'eliminated.'

The Australian:

'It's time to live within our means'

The Guardian:

'Hockey warns of cuts to come after $68bn budget blowout'

More recently, the National Commission of Audit’s report into areas where budgetary savings might be made provided ample headline fodder.

The problem with sensational headlines is that the more important economic stories get lost in the fog of the news cycle. Manipulation of the narrative to suit political aims is partly to blame. So too is the non-reporting of issues that really matter.

On the issue of the manipulation of language, the political hand in the MYEFO was apparent. You can pretty clearly identify the paragraphs likely to have been written by Treasury and those likely written by somebody in the Treasurer’s office.

For example, note the following two quotes from the MYEFO.

Firstly:

'Firstly, a softening in the economic outlook has resulted in significantly lower nominal GDP, which has largely driven the reduction in tax receipts by more than $37 billion over the forward estimates…The Australian economy will continue to transition from resources-investment led growth to broader sources of growth over the forecast period. However, the transition is now forecast to be slower than at the 2013 PEFO.'

And then, further down in the document, this paragraph:

'Without policy change and taking no remedial action, budget deficits would be projected in each and every year to 2023-24…This is an unsustainable fiscal position and the Government is committed to taking the hard decisions to live within its means. The 2014-15 Budget will outline the fiscal strategy to return the budget to surplus and pay down debt.'

Because deficits and surpluses are ultimately a reflection of other issues in the economy, the continual focus on budget surpluses and deficits alone is akin to arguing about symptoms of a patient without investigating the cause or the options for treatment.

JOE HOCKEY: Well, but I am not an economist and I'm certainly not going to pretend to be one #auspol #budget2014 http://t.co/eFjtKUOB7o
— Quiet_Please (@Quiet__Please) May 13, 2014

For example, on the expenditure side, the MYEFO suggested that rising spending on healthcare was a large part of the changing budgetary position. On the revenue side, the shortfall was partly due to a structural deficit due to the so-called 'two speed' economy going down a gear.

'While the fall in resources investment is expected to be sharper than previously forecast, the recovery in the non-resources sector is expected to be more gradual.'

As for the Commission of Audit, the Australia Institute has published the most structured rebuke via its report Auditing the Auditors: The People’s Commission of Audit. (Recommended reading and I won’t go into the many shortcomings of the Commissions’ report here.)

Ultimately there are four choices Australia has: we can increase taxes, reduce spending, borrow to fund deficits or pursue a combination of the above

The MYEFO paper, and the Government's continual use of the phrase 'living within its means' is a clear indication that they favour the second option.

This is a strange idea because 'our means' at budget level are not fixed in the same way our personal incomes might be constrained by our salaries. Our national budget is subject to the dual strings of tax receipts and government spending. And the obvious omission to this debate is of course more meaningful tax reform.

Cutting spending is ultimately the easy way out, it doesn't really address the structural issues facing an economy. In this way, promising spending cuts as the primary solution to budget deficit is a bit like driving slower because you need new tires. Sure it will help, but it's not going to fix the problem.

There are two main reasons why spending cuts are favoured.

The first is ideological.

The current coalition Government appears to be pursuing a ‘small government’ agenda very similar to that espoused by the Tea Party Movement in the USA. Bernard Keane and Glenn Dyer have written an excellent article discussing trouble the coalition now faces, having staunchly supported a Tea Party-esque narrative of budgets and debt in recent years.

The second reason why spending cuts are politically preferable to tax reform is because they're easier to legislate and less likely to annoy voters.

Tax reform is likely to be drawn out, difficult and far from populist. And continuing to borrow while supporting structural adjustment packages would take a long time, in a country where three years pass between elections.

As the budget carnival rolls into town tonight, try to look past the political manipulation and catchy headlines. Because beneath these, you’ll find the real issues facing the Australian economy, and these are the ones we should be discussing.

You can read more by Tristan at Economists at Large. You can follow Economists at Large on Twitter @ecolarge.

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License