The fiscal challenge: The column

Here’s the column foreshadowed in a previous post as published today in the Fin. I was only given 500 words, so whether or not you find it sweet, I had to keep it short.

Fiscal Problem – what Problem?

Its the alarm du jour. Going into the election with an overheating economy, the election became a fiscal auction. That was despite the unanimous agreement of those with any kind of reputation to protect that this was a recipe for further inflationary pressure, necessitating further tightening by the RBA.

Still . . . I’m not so sure theres a problem. Unless the world economy goes badly awry, the new Government should set itself the objective of facing the next election having kept its promises with increased budget surpluses.

If revenue doesnt surprise on the upside as its consistently done for years now theres a suite of other options.

First: let’s be grateful for small mercies. The greater fiscal responsibility of the ALPs election promises turned out to be more than merely token.

Second: our current situation reflects the fecklessness of the Howard Government. To have no idea how one should spend a few extra billion the first time it turned up in your coffers was a misfortune. To still have no idea the next time . . . and the next . . . year after year looks like carelessness. That leaves plenty of things that can be wound back without much pain. Some departments have more than doubled in size.

And just as the Coalition took credit for the economic boom without telling us just what Government policies produced it, so their scare campaign was equally generic.

So, oddly and unusually, Labor wasnt forced into a long list of denials about what it wouldnt do. Together with its insistence that it would get out the meat axe this gives the new Government surprisingly clear air.

Third: as governments age theres an accumulation of policy no-go zones where change would reverse previous policy commitments. Thus for instance Labor could nibble away at the worst rorts. It could leave negative gearing in tact but constrain it to claims not exceeding some proportion say 20% of deducted costs.

And theres lots of small fry. Some examples . . .

After April Fool’s day this year small gifts to employees and contractors are deductible if kept under $300. It used to be $100. But just like a bottle of wine at a travelling lunch, such expenses should be after both GST and income tax.
Paintings can be depreciated at 1.5%. Yet they appreciate.
Deductible company car costs could be capped at the luxury car threshold.

And so on . . . raising revenue and lowering compliance costs.

Finally theres the elephant in the room. Emissions trading. If emission permits were auctioned and fetched $20 per tonne, theyd bring in nearly $12 billion per year thats one percent of GDP right there! If trading applied only to stationary emitters, its revenue haul would be around half that. Sadly political bribes to ease the introduction of trading will probably eat into the windfall, but heres hoping the government hard heads snaffle most of it.

To paraphrase a lame joke, fondly retold within treasuries the world over . . . a million here, a billion there. Pretty soon youre talking real money.

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stephen bartos
stephen bartos
14 years ago

“A billion here, a billion there, soon you’re talking real money…” is one of those apocryphal quotes, attributed to Republican Senator Everett Dirksen of Illinois. I used to think it was a genuine quote until the myth busting powers of researchers who’ve actually searched everything he said came to the fore.

On the main point, there is easily scope for reducing spending: starting with the literally hundreds of new measures that have been introduced in each budget since the second Howard government (the first term was relatively restrained, but every one since has seen in the budget papers a list of new programs and proposals the length of which has been unprecedented in Australian budgetary history).

Tax expenditures are another obvious target, and need deep and searching examination (I’ve written elsewhere about these).

You may have underestimated emissions trading values – some of my colleagues have estimated them at more than $50b – but if gains from permit auctions are higher, that only reinforces the point you are making.

The trick will be persuading the public that restraining spending and tax concessions in the interests of economic stability is worthwhile – because the inevitable result (barring international events precipitating a recession) will be growth in the size of the surplus.

Then something has to be done with surpluses.

The best and most rational thing would be to increase provisioning for the future – a fund like the Norwegian Government Pension Fund (previously the Petroleum Fund, still called that in media reports) would set up future generations of Australians for economic downturns in the future: especially, coping with the turmoil likely to arise from global warming. However, politicians have been of the view that the public is not far sighted enough to support putting away current dollars for future needs. I am not sure the received political wisdom is correct – it does not give the Australian voter much credit for forward thinking. We’ll have to wait to see what the new government does.

derrida derider
derrida derider
14 years ago

I agree the PS needs a bit of pruning and reorganisation, but this is worth doing for its own sake rather than in expectation of massive savings – the fact is, running the PS is just not a really big ticket item in expenditure. I’m surprised to see you fall for the “we’ll make [painless] savings by cutting out waste and extravagance” line by politicians.

Similarly, the examples you’ve chosen on the tax side are really small beer – you can think about whether they’re worthwhile for their own sake, but it’s not where the bucks are. You’d need an awful lot of such tiny savings (with a consequent awful lot of annoyed people) to add up to “real money”.

If you want to make serious inroads into expenditure you have to think much more strategically and focus on the big ticket items in (in approximate order) welfare, health, education and defence. And there really is little fat to chop out of those first two, and not an enormous amount out of the next two, without big political (and economic and social) consequences.

Why a Labor government in current circumstances should want to wear such a hairshirt beats me. Remember it very nearly made the Coalition a one-term government – and they had both stronger ideological reasons and much better circumstantial reasons for swinging the big bloodsoaked axe than this lot do. Anyway, let’s see how courageous (in the Sir Humphrey sense) Rudd is.

observa
observa
14 years ago

“Finally theres the elephant in the room. Emissions trading. If emission permits were auctioned and fetched $20 per tonne, theyd bring in nearly $12 billion per year thats one percent of GDP right there! If trading applied only to stationary emitters, its revenue haul would be around half that.”
That’s not going to happen and you know it Nic. To set a price (in this case say 1% of GDP) on carbon emissions would see that tax increase immediately passed on to consumers. The Govt either wears the approbrium, or when it was really tested by the Coalition’s tax cuts policy, showed its true metoo colours. The only conclusion you can draw from that is it will follow the backdoor tax lead of so many Kyoto signatories and give the right to tax away and let business wear the flak.

In the absence of that (ie alternatively via an auction), I’m not sure how you get the 1%/$12bill/year figure from. Isn’t it simply a once off revenue gain? I can see how it is an ongoing revenue stream if they simply sell an annual decreasing permit, albeit one that can be freely traded by the licensee, unlike say a driver’s licence. Presumably a 1 tonne permit today, say decreasing by 2% pa, ends up as a 0.4 tonne permit in 30 years time. (the magical 60% reduction by 2048) Actually the low hanging fruit argument might call for some front end loading and some tail end relief. ie drop the last 10 years reductions by 0.5% and add it to the first 10. Whatever, but the Govt/we owns the permit all the way through and at the end and can charge what annual fee it likes for it at any time it chooses, bearing in mind it’s impact on the overall trading price. Essentially it can capture the full economic rent over time, although its a case of trial and error. However setting any price to begin with is an extra tax and the punters will want compensation or a bloody good reason for the extra expenditure.

observa
observa
14 years ago

“..they require a new culture, the kind of culture that businesses strive for in which employees try to continually improve the efficiency of the system they administer.”

That’s pretty naive at the grunt end of the workforce. Private enterprise does give some workers incentives like bonuses, commissions and the like, but generally its the owners of capital who drive the efficiencies, due to competition and the profit motive. That’s totally absent in the public circus and it shows. Why make yourself an unpopular boss riding the workers when you can grow the Dept and get more bucks yourself as a bigger manager? That ethos quickly takes hold of the most diligent new chum, even when they’re used to private enterprise. I know a few who’ve made the move and have experienced just that. It’s basically like semi-retirement for them.

tony harris
tony harris
14 years ago

derrida derrider is correct to say that commonwealth administration is only a small part of the federal budget but, if you add together the cost of goods and serices purchased by the government and the cost of salaries and other entitlements, you get $67 billion. If you can save only a couple of per cent of that it is over a billion. And if you cancel the super hornet contracts and pay out the cancellation fee, you still save over $6 billion. It would not be too hard to save anything up to $10 billlion, which might be enough to stave off the reserve bank’s next interest rate increase.

Alex Robson
Alex Robson
14 years ago

On the ABC’s Counterpoint program you said:

“Inflation fell to the level it’s currently at of about 2.5% in about 1993,
perhaps 1992, and was kept there. So Howard and Costello then went further
by writing an agreement by the Reserve Bank, but the hard work had been
done.”

This is wrong. The average headline inflation rate between December 1994 and June 1996 was 4 per cent, not 2.5%.

Fyodor
14 years ago

Pretty partisan and pointless nit-picking there, Alex.

Anyone who’s interested can see the long-run data series for themselves here.

The period that you’re cherry-picking was a temporary surge that faded out by the second half of 1996. By September 1996, CPI growth was down to around 2.1% due to monetary tightening undertaken by the RBA in 1994, under the Keating government.

Ken Parish
Admin
Ken Parish(@ken-parish)
14 years ago

Hmm. “Partisan and pointless nit-picking” seems a very mild description of Alex’s gambit. Deliberately misleading and deceptive would be closer to the mark.

Bring Back CL's blog
Bring Back CL's blog
14 years ago

Aw Ken sinkers and alex had a worse election campaign than Tony Abbott or Peter Garrett.

allow him a little slack after that

Jc
Jc
14 years ago

“due to monetary tightening undertaken by the RBA in 1994, under the Keating government.”

Monetary choking more like it. That of course was the ghost of the recession we had to have. The coffin lid was opened just a little to scare away the kids. Printing Press Bernie was Paul’s man who ought be rated the worst RBA gov. of all time. In fact I’ll correct that: possibly the worst central bank boss in post war history- even worse than the Fed’s George Miller who at least was gracious enough to bow out after 2 years of monetary destruction and was promoted as Carters Treasury Secretary where hed do less harm.

http://en.wikipedia.org/wiki/G._William_Miller

Theres also BIG gains in little stuff – because there are so many little things that can be done. But they cant be done from the top – Razor Gang style – they require a new culture, the kind of culture that businesses strive for in which employees try to continually improve the efficiency of the system they administer.

Only thing is, Nic, there hasn’t been one government of any stripe in the west where there has been a significant long-term cut in government spending or government payroll in the longest time. Clinton’s record was the peace dividend rolling through where nearly all cuts were made in the military spending.

GOP was doing an average of 5,000 earmarks. Dems have got that up to 28,000 making the GOP look like rank amateurs.. They ran on a policy against excessive spending by the GOP- the bridge to nowhere. Even Bush is now bothered by it and that’s saying something.

Fyodor
14 years ago

Here’s a top tip for you, Busty Joe: you don’t have to launch into another OT rant & ramble just to prove my point.

Bring Back CL's blog
Bring Back CL's blog
14 years ago

JC shows no understanding of economics in his incoherent ramble.

The recession whivch Supermac said was what the RBA brought forward gave us low inflation for the first time in a generation. however it started to rise again.
It was Bernie who was determined to ensure it didn’t.
We now have low inflation thanks to Bernie.
He is the best governor we ever have.

The RBA has a better record on inflation than the Fed since 1993 when they adopted an inflation target

Jc
Jc
14 years ago

Nic

Bernie and the world’s greatest treasurer by 1994 had a decade to stamp out inflation. The fact they were up to their eyeballs in that swamp in 1994 reminds me of Abbott and Costello’s (no not them) who’s on first comedy routine. Hilarious, but by that time painful.

Rate raises to stamp out inflationary impulses is not a sign of strength or policy foresight. Its a clear sign of past policy screw-ups which in this case means responsibility rests primarily with Keating for not firing Bernie as the RBA was not independent at the time. In short, Bernie should have been fired ages ago and Keating ought to take the rap.

The RBA has a better record on inflation than the Fed since 1993 when they adopted an inflation target

check the figs, Homer. Bernie left in 96 we’re in 07 now in case you didn’t realize.

Jc
Jc
14 years ago

Come on Nic. I’m really trying to stick to the issues and what I think are pertinent without playing “nice” like Homer was. Sorry if you get the wrong impression as that wasn’t my intention.

I don’t see anything good coming out of monetary disequilibria, which is not necessarily highlighted in the CPI.

The negative aftershocks to potential GDP growth rates have lasting effects when it is molested by policy tightening to curb previous monetary disequilibria brought on by policy mistakes.

We look at the CPI think it well behaved but that isn’t necessarily indicating the monetary mess behind the scene. I don’t understand for the life of me how anyone can argue/behave as though money is a neutral concept and have central banks that give almost no consideration to monetary aggregates these days.

Let me ask you this though. Why is a little bit of inflation a good thing, while a little bit of deflation is a bad thing? Honest question here and I’m not trying to play gotcha.

If one of the objectives is to try and help the not so will off then the answer is neither of these. Especially not a little bit of inflation, as they don’t have the resources to buy protective hedges.

Bring Back CL's blog
Bring Back CL's blog
14 years ago

Bernie raised rates to ensure core inflation which was rising above 3% fell down to the 1-3% range he wanted it to.
He had to raise rates by more than he wanted to to gain the credibility the RBA had not had up to that time.
He did it and the RBA has had cred ever since and Australia has had a better inflation record ever since as well.

you two last sentences make no sense though the one you quote from me does

Jc
Jc
14 years ago

Bernie raised rates to ensure core inflation which was rising above 3% fell down to the 1-3% range he wanted it to.

Well if he raised rates in 1994, he certainly wasn’t raising because the CPI was over the target level in that year as CPI was as follaws
1994 %
March q 1.4
June q 1.7
Sept q 1.5
Dec q 2.5

Inflation really began to kick arse in 1995
1995
March 3.9
June 4.5
Sep 5.1
Dec 5.1

Shit a brick , we then had deflation in three quarters of 1996/997 with CPI regestering negative so it looks like the RBA hit the brakes hard. It also looks like Howard’s first term was marked with very strong disinflationary pull judging from these figs and the central bank must have been lowering rates like crazy. You could look and confirm this , homer so let us know what cash rates did during this time.

Wow! the RBA from mrch 1983 to dec 1990 ran an inflation rate of 7.7%. That’s huge.

http://www.rba.gov.au/Statistics/Bulletin/G01hist.xls

Bring Back CL's blog
Bring Back CL's blog
14 years ago

JC,

Central Banks raise or cut interest rates according to future levels of inflation.

The reason Bernie put rates up from August to December 1994 was because the RBA was expecting inflation to rise they wanted to put a stop to it once and for all.

They did.

Keating might well have hoped Bernie would have cut rates in late 195 or early 1996 but he let the Liberals gain the glory for that.

Jc
Jc
14 years ago

Central Banks raise or cut interest rates according to future levels of inflation.

Well not exactly Homerpath. They put up rates to amend previous policy crew-ups.

The reason Bernie put rates up from August to December 1994 was because the RBA was expecting inflation to rise they wanted to put a stop to it once and for all.

What you really mean is Bernie panicked during the recession “we had to have”, lowered rates like crazy, missed the stop sign and then went barreling into inflation again. He thought he was driving an automatic instead of a stick shift.

Keating might well have hoped Bernie would have cut rates in late 195 or early 1996 but he let the Liberals gain the glory for that

What with 3 straight quarters of negative CPI (see above)? That sure looks good on the old resume. I’m sure the Libs would have had a ball during that first term if the CPI was any indication of the times. I wasn’t here to judge. Did you feel the love, Homes? Was it a boom time?

Bring Back CL's blog
Bring Back CL's blog
14 years ago

No JC,

if you did any research at all you would have found out the RBA was concerned that the principal actors in wage negotiations under the new deregulated labour market did not believe the RBA would put rates up and so they could either go for specious wage claims or merely pass on cost rises.

Bernie gave the RBA street cred. Something it had never had and as the present time it has never lost.

It takes pain to keep inflation down at first

Jc
Jc
14 years ago

Homer:

Are you broke? You keep buying these bridges that you must have run outta cash by now. And stop it with the reading assigments. You’re a fine one to be teaching history let alone economic history.

the RBA was concerned that the principal actors in wage negotiations under the new deregulated labour market

This is not you saying this, right? Some one must be ghosting you, Homerpath. I’d complain if I were you. :-)

Alex Robson
Alex Robson
14 years ago

My point was not partisan. I don’t vote Liberal – never have, never will.

Ad hominum attacks from Parish and others don’t change the simple facts: inflation rose above 2.5% in the period that I specified. It wasn’t “kept” at 2.5% as Nick claimed.

I never said that inflation didn’t fall during the Keating administration. It is clear that it did, and I give Keating full credit, as well as full blame for the recession that he deliberatly engineered.

I am simply making a very narrow point: inflation fell and then rose again, and averaged 4 per cent over quite a long period of time. 4 per cent is still quite low, but it is not 2.5%. When something is running at 4%, I don’t think it is right that we say that it was “kept” at 2.5%.

I fail to see how there is anything partisan about any of these points. I am just reporting what the data says.

Fyodor
14 years ago

You don’t have to vote Liberal to be partisan, Alex, and the “quite a long period of time” that CPI growth exceeded 2.5% was six quarters. BFD.

You neglected to mention that CPU growth has also exceeded 2.5% in a number of periods since, most notably around the introduction of the GST, but on each occasion the growth has proved to be a transitory surge. IN THE MAIN, the RBA has kept CPI growth “at or about 2.5%”.

You were nit-picking with the aim of scoring cheap points. There’s plenty in Nicholas’ economics to dispute – I suggest you choose something substantive next time.

Bring Back CL's blog
Bring Back CL's blog
14 years ago

JC,

There is a thing called RBA bulletins that outlines the decisions they made.
It is also clear to those people who were around at the time.

It is hard for those like yourself who clearly have litte understnding of economics.

alex is dong a JC. Fyodor nailed him and quite clearly.

After his and sinkers disasterous election campaign I doubt whethet he or sinkers have much creddibilty left!

Jc
Jc
14 years ago

Alex says:

I dont vote Liberal – never have, never will.

Rasputin says:

You dont have to vote Liberal to be partisan, Alex,

LOL

You neglected to mention that CPU growth has also exceeded 2.5% in a number of periods since, most notably around the introduction of the GST, but on each occasion the growth has proved to be a transitory surge. IN THE MAIN, the RBA has kept CPI growth at or about 2.5%.

So we’re talking about different periods now. LOL

You were nit-picking with the aim of scoring cheap points. Theres plenty in Nicholas economics to dispute – I suggest you choose something substantive next time.

Thanks for agreeing with my point :-)

Homer:
For the life of me, I really don’t get what it is your trying to convey. RBA bulletins are best thrown in the waste paper basket. I always did.

Jc
Jc
14 years ago

IN THE MAIN, the RBA has kept CPI growth at or about 2.5%.

Not in the 80’s it didn’t. Check out the link. CPI averaged aprox 7.7% from 1985 to 1994.

Fyodor
14 years ago

Look up “partisan” in a dictionary, Busty Joe, and tell me where it says you have to be a liberal voter to be partisan. You can use small words if you have to.

For the life of me, I really dont get what it is your trying to convey. RBA bulletins are best thrown in the waste paper basket. I always did.

No surprise there – you’re known for your aversion to facts; your arguments hold up much better if you rely on stuff you make up. I do find it curious, however, that you were linking to said bulletin data tables at #20. Probably because you were copying my earlier link at #9.

Not in the 80s it didnt. Check out the link. CPI averaged aprox 7.7% from 1985 to 1994.

It was my link, Busty Joe. And it’s clear to everyone but you that we’re talking about post-1992, as quoted by Alex at #8. The only person who keeps referring to the 1980s is you, probably because you haven’t left it yet.

Learn to read, doofus.

Jc
Jc
14 years ago

Look up partisan in a dictionary, Busty Joe, and tell me where it says you have to be a liberal voter to be partisan

You’re not serious are you, ras. Is this really the best you can come up with?

I do find it curious, however, that you were linking to said bulletin data tables at #20. Probably because you were copying my earlier link at #9.

Good point, I should have simply used yours instead of Googling RBA inflation stats seeing your links normally support the other person argument :-). You’re right; it would have saved me time.

It was my link, Busty Joe.

You’re very possessive with your “links” aren’t you?

And its clear to everyone but you that were talking about post-1992, as quoted by Alex at #8

.

Yes. It was Alex’s failing not to bring up “weekend at Bernie’s” economic corpse of the 80s. He should have, as it would have shown what Weekend Bernie had been really up to.

The only person who keeps referring to the 1980s is you, probably because you havent left it yet.

That’s funny. I mean that. But I can’t take that honor as Homer’s around and he would get that award in a heart beat.

Learn to read, doofus.

Stop stealing my insults. Get your own.

Bring Back CL's blog
Bring Back CL's blog
14 years ago

JC,

if you read the RBA bulletins you would ask so many daft questions

Jc
Jc
14 years ago

Oh, what questions have I asked, homerpath, other than rhetorical ones? Quite frankly I would be asking Ras a serious question before I asked you. Don’t underate yourself, Homer :-)

if you read the RBA bulletins………..

And that would help because……?

Bring Back CL's blog
Bring Back CL's blog
14 years ago

JC, it is all there in black and white to your state of ignorance of why the RBA acted as it did.

It must be said Bernie was a lot more prescient about the near future than either the market was or most economists.

he was far away the best governmor we have ever had

Fyodor
13 years ago

Busty Joe, you’ve demonstrated yet again your inability to follow an argument, and your juvenile OT cut & paste rambling is the proof of it.

Go back to the start and pay attention this time. Try to keep up with the rest of the group – you’re slowing down the group with your inane drivel.

Stop stealing my insults. Get your own.

For a doofus as linguistically incompetent as your deluded self you’re rather possessive about words, aren’tcha?

Jc
Jc
13 years ago

Fyodor

Do you agree with Homer, that Weekend Bernie was the best RBA head we ever had? Do you? :-)

JC, it is all there in black and white to your state of ignorance of why the RBA acted as it did.

For someone who believes that man and dinosaurs walked around in Africa or wherever at the same time, homes, you should be the last person giving advice on what/who you consider to be ignorant. No offense meant, but you are getting a little ahead of yourself here, Archimedes.

He was far away the best governmor we have ever had</blockquote

>
Homer would you accept, Fyodor’s “unbiasd” opinion? No, not about the dinosaurs, but about Weekend at Bernies. Lol

—————————

Busty Joe, youve demonstrated yet again your inability to follow an argument, and your juvenile OT cut & paste rambling is the proof of it.

Panties Ras, youre the master of cut and paste. You ought to talk, MR. One liner.

Go back to the start and pay attention this time. Try to keep up with the rest of the group – youre slowing down the group with your inane drivel.

Oh please. Stop it with the irrelevant comments. Look in the mirror.

For a doofus as linguistically incompetent as your deluded self youre rather possessive about words, arentcha?

“Doofus”, now “possessive”. For someone critical of others you sure copy a lot Panties Ras.

Moreover if you’re going to plagiarize my terms etc., you shouldn’t have a problem with people using your links against you :-)

Now lets get back on track and return to stoushing on relevant points to the thread.

Do you think Weekend at Bernies was the greatest RBA boss ever, Ras?

Fyodor
13 years ago

Are you drunk, Busty Joe? I know you’re incoherent at the best of times, but you’re setting a PB here, you daft old duffer.

Firstly, doofus, you can’t “plagiarise” a word. I know you have all the literary sophistication of your more retarded garden snail, but take it from me that you don’t have any form of copyright over words you happen to like, doofus.

Second, I noted you used my link not because I thought you were “plagiarising” me, doofus, but because you were attempting another cack-handed “gotcha” moment while in reality inserting your foot in your capacious mouth. I’ll put it more simply for your feeble brain: I don’t need you to show me data that I’ve already shown you. I can use crayons and stick figure cartoons to explain this further if it’ll get the point through your dense skull.

Third, whether you think Bernie Fraser is the best or worst RBA boss ever blah di fecking blah is NOT the relevant point of this thread. The fact that you inserted the inane topic into the thread does not make it relevant; it just makes it of interest to one deluded crank. I haven’t commented on this bizarre little distraction of yours because I honestly don’t give a rats’ arse about the topic. Needless to say, your opinion on the subject is, like all of your rantings, profoundly pointless and irrelevant.

Jc
Jc
13 years ago

Ras:

But do you agree with homer, that Weekend Bernie was the best RBA boss we ever, ever had… bar none?