Cut Deficit, Win The Election

In this election year the Government has taken a journey on tax reform that has led it up one dry gully after another. Meanwhile, the Opposition has set the policy agenda. Yet neither tax reform nor extra spending on health and education – as worthy as they are – will determine the election outcome. Rather, Australia’s debt trajectory under the two parties will: rising government debt will be the number one issue in the election campaign.

While the Liberal base demands tax cuts and the Labor base demands more spending on just about everything as if deficits don’t matter, the swinging centre will decide the election. It always does. And the centre knows governments cannot run deficits forever.

International ratings agencies are confirming the swinging centre’s fears of the cost of ongoing deficits and debt accumulation, warning that Australia’s AAA rating will come under pressure if the budget deficit continues to widen. Moody’s calculates that gross government debt will soon reach 38 per cent of GDP, just short of the median of our AAA-rated peer countries. The biggest worry is that while our peers are reducing their debt, Australia’s is galloping in the opposite direction with no turnaround in sight – the projected budget deficit over four years is $48 billion greater than it was in 2014. Yet when Moody’s pointed out that averting a downgrade would require both tax increases and expenditure restraint, federal treasurer Scott Morrison rebuked the agency, pledging that any revenue measures would be used to pay for tax cuts elsewhere.

For its part, the Labor opposition has blocked several major savings measures in the Senate and is promising to scrap them if elected. To pay for this extra spending, Labor has announced a series of major new revenue measures and some fairly minor spending cuts totalling $100 billion over a decade. But if Labor is to have a more credible path back to surplus than the Coalition’s, it will need to find further spending cuts. Just as the Coalition cannot fix the budget deficit by solely relying on spending cuts, Labor cannot do so by solely relying on tax increases.

Already the government is rehearsing its story: in making the transition from the end of the mining boom, we must live within our means and only the Coalition can be relied upon to do so. It’s remarkably similar to the story told by the Hawke government during the 1987 election campaign. In 1987, the Hawke government needed to deal with a yawning current account deficit following a collapse in agricultural export prices. In 2016 the Turnbull government needs to deal with a yawning budget deficit following a collapse in mineral export prices. In the August 1986 budget and the 1987 May statement, Hawke and Keating announced the biggest cuts to government spending in Australia’s history. Hawke, like Turnbull, called an early double dissolution election. Hawke offered restraint with equity, means testing family payments for the first time and cutting other top-end benefits to demonstrate that everyone other than the poor was being called upon to make a contribution. Hawke’s opponent, John Howard, offered tax cuts – including a lowering of the top marginal rate and the abolition of the capital gains tax, fringe benefits tax and limits on negative gearing – plus the scrapping of the assets test on pensions. He would pay for this largely by “taking a scalpel to Medicare.” Voters chose the Hawke-Keating program, Labor increasing its majority by four seats at the July 1987 election.

Although it’s now almost 30 years later, the swinging centre’s membership list has changed but its attitudes have not. Ten days into the election campaign, Treasury will release its independent assessment of the economic and fiscal outlook, including the debt and deficit trajectories. Unless the government applies a large proportion of new revenue measures to the deficit reduction task in the May 3 budget, those projections won’t be pretty. Labor’s story will be that its budget repair will be fair. But will it be adequate?

Labor might consider taking a leaf out of the Hawke-Keating storybook and do better than the Coalition on deficit reduction while the Coalition might do well to abandon its pretence that no tax increases are required to return the budget to surplus. At least it’s looking like the 2016 election will be decided on which party has the best policy program. That’s an encouraging change from personality politics and three-word slogans of the last six years.