MYEFO reveals Turnbull government's surplus by assumption

Monday's fiscal update confirms the Federal Parliament is not serious about retaining Australia's coveted AAA credit rating. Blaming Labor is no more a credible government plan to return the budget to surplus than is Labor's criticism of the prospective loss of our credit rating while refusing to countenance further spending reductions to retain it. While the three ratings agencies have confirmed their AAA rating for Australia, not much needs to go wrong before it is again at risk.

In warning of a credit downgrade, the ratings agencies called for a combination of revenue measures and expenditure savings to repair the budget. Yet for purely ideological reasons the government has refused to go any further on the revenue side.

Indeed, the government is willing to forgo $48 billion in revenue for company tax cuts which, for foreign investors, wouldn't start until 2022. Even the most sympathetic economic modelling does not pretend that the tax cut for multinational corporations would be self-financing. If the government genuinely wanted to attract more foreign investment it would implement an investment allowance forthwith and reassess the case for a company tax rate cut further down the track.

Yet the government expects the Australian people to accept the need for restraint while also telling them that finding $48 billion for company tax cuts is no problem. On almost a weekly basis the public receives news that many multinationals successfully avoid paying any tax at all. Is it any wonder that the public doesn't believe the government when it insists it has no choice but to cut spending on health and education?

As the Grattan Institute has repeatedly pointed out in these pages, the government seems intransigent about paring back the tax advantages Peter Costello conferred on retirees. The reason? They are the foundation of the Coalition's political support base.

Economic policy has regressed three decades. As it did back then, Australia's hard left again argues that budget deficits don't matter, that all that is required is increased government spending, which lifts growth, creates jobs, boosts consumption and everybody's happy. And as it did back then, the hard right argues that all that is required is tax cuts, which lift growth, create jobs, boosts consumption and everybody's happy.

Both are wrong now as they were then. It seems today's warriors of the left and the right completely missed the Hawke-Keating era and are re-prosecuting the failed policies that preceded it. Faced with a ratings downgrade, Hawke and Keating implemented the largest cuts in government spending on record and won the 1987 election on the back of them. They did so by painstakingly explaining to the Australian people the need for budget repair and implementing savings under the banner of "restraint with equity" – protecting the poor and requiring the better off to contribute to the task.

On 10 occasions in these pages since the May budget I have warned that its underlying economic assumptions were too rosy and the budget task was much greater than the government was claiming. The figures in the final two years of the four-year budget period are not forecasts but projections that, as Treasury explains, are based on "some key assumptions". Those assumptions include that the economy will miraculously grow faster than its medium-term potential rate of growth in the final two years of the forward estimates. That's right, faster than potential.

Non-mining investment is flat, wages growth is stagnant, consumer confidence is down, the housing boom can't last forever, US interest rates are rising and Australian households are indebted to the hilt. Yet the government has been assuming the economy will bounce back in two years' time to grow faster than potential as it absorbs the existing spare capacity. The mid-year economic update repeats this assumption, retaining the budget projections for real economic growth, inflation and wages growth.

Most of the budget repair measures that have passed the Senate since the election have done so with Labor support. If major stakeholders such as business organisations, the trade union movement and civil society groups could agree on a further set of budget repair measures on both the revenue and expenditure sides as part of a larger reform program, the major parties should also be able to find further common ground. A reconvened National Reform Summit, building on the one supported in 2015 by KPMG and The Australian Financial Review, would be a good start.