By now, Treasury officials will be making their way to meet the Treasurer, carrying their blue book – the incoming government brief. It will contain Treasury’s economic and fiscal forecasts. If Treasury is doing its job, those forecasts will be more downbeat than the numbers in the April budget and in Treasury’s pre-election economic and fiscal outlook published only a few weeks ago. They will confirm a slowing economy and a deteriorating budget bottom line, making it challenging for the government to keep all its election promises.
The 2019 budget forecasts always looked optimistic. No lesser authority than the Reserve Bank has effectively confirmed that view. Its statement on monetary policy, released just over a week before the election, downgraded its own forecast for growth in consumer spending for the coming financial year to just 2 per cent, compared with a budget prediction of 2.75 per cent.
Combined with recently released figures showing flat wages growth and zero inflation, weak consumer spending means less government revenue and slower overall economic activity. The prime minister’s campaign statement that the government “brought the budget back to surplus next year” might still eventuate, but it will rely on a stream – if not a river – of gold flowing from China.
Iron ore prices have spiked, owing to a catastrophic dam collapse in Brazil at one of Vale’s iron ore mines. When Vale figures out how to build a safe dam, the stream of gold flowing into Australia’s treasury from China will slow to a trickle. That could affect the 2020-21 budget, the one that has already been brought back to surplus, but will have a greater impact on the immediately ensuing budgets.
During what is clearly an economic slowdown a modest fiscal stimulus is warranted. It will be provided by the Morrison government’s promised tax cut of $1,080 from 1 July when parliament is recalled within a matter of weeks. But will it be enough?
The government could consider further tax cuts in the coming financial year without necessarily breaking its promise to achieve a surplus in the subsequent year. But they, too, might need to be one-off rather than ongoing, if the surplus is to eventuate.
An obvious way of boosting consumer spending and protecting jobs is to close down one or more tax shelters being used mainly be the better off, who save much of their income, and provide greater support for low-income earners, who spend most of their income. But that avenue has been closed off by the Coalition’s campaign against franking credit refunds, negative gearing and changing the tax treatment of family trusts.
Indeed, by promising not to touch these shelters, the government has foreclosed on meaningful tax reform. It won’t be able to do anything unpopular at the lower end while leaving open obvious shelters that serve no useful economic or equity purpose.
But it must be acknowledged that the government has a mandate to keep the current, inefficient tax system in place – and no mandate to change it. Indeed, having brought the budget back to surplus next year, and promised further tax cuts for higher-income earners, the government does not have much room to move on any reform at all.
From the perspective of government MPs and ministers, that’s a better circumstance than moving over to the opposition benches. And to be fair, it is the will of the Australian people. The election campaign was tough but clean and the leaders were respectful of each other. Apart from one corkscrew incident in Warringah there was no violence and booth workers from different parties were civil towards each other.
The Australian people filed past, a majority refusing how-to-vote cards. They had made their decision. They have now spoken. We should admire and respect democracy at work.
Congratulations to Scott Morrison for running a disciplined campaign. A majority of Australians have placed their trust in you. Commiserations to Bill Shorten and Labor, but the party will get up, shake itself off and press ahead in the battle that is always worth having – the battle of ideas in the greatest country on earth.