The Federal government’s Mid-Year Economic and Fiscal Outlook (MYEFO) was always going to throw up a surprise or two. And it duly delivered.
That there were spending cuts on the table wasn’t altogether surprising. Instead, the real surprise was the Coalition’s sly negotiating tactic. Erring on the side of mischief, the government forced the Opposition into a Mexican standoff.
I’ll expand on that momentarily. But first to the MYEFO.
Treasurer Scott Morrison outlined a proposal to slash $3.7 billion in spending. Unceremoniously, the brunt of the cuts would hit the needy the hardest. Welfare, aged care and health would all lose crucial funding.
Under normal circumstances, the Coalition’s move would be a dicey gamble. It runs the risk of angering voters. And with an election looming in the new year, it might not seem like the wisest move right now.
But in the world of politics, nothing is ever that simple. This is a calculated risk by the Coalition. Treasurer Morrison is trying to goad a reaction from the Opposition.
And it worked. It was a smart move on the government’s part.
Both parties know the budget deficit, at $37 billion, is a guillotine hanging over the economy. Neither needs reminding of that fact that fixing the budget is a top priority. And that it will remain that way regardless of who’s in power next year.
But what was it about this particular proposal that made it so clever?
The government put together a deal that makes them look bad. Levying $3.7 billion worth of cuts that hurt the disadvantaged most is never a good look.
And yet they went ahead with it anyway. Why?
The government knew the proposal would result in a public outcry. And it knew it would draw a reaction out of Labor. But that’s exactly what it was hoping for.
It gives the Coalition an upper hand. Because they can tell Labor: ‘what are you going to do about it? If you’ve got better ideas, let’s hear them.’
Labor’s response to this was exactly what you might expect.
Shadow treasurer Chris Bowen came out swinging. As expected, he didn’t rule out blocking the proposal in the Senate. Though he did talk of further ‘consultation’. And he referred to a ‘number of issues…that cause deep concern’.
In other words, Mr Bowen is sitting on the fence shaking his fist. He doesn’t want to issue a response because saying anything could make Labor look bad. Yet not saying anything makes Labor look indecisive, which might be worse.
All this is music to the ears of the Coalition government. In the lead up to an election, the Coalition is goading Labor into offering alternatives to fixing the budget. Yet whatever answer Labor give will be the wrong one. Especially when there really is no easy way of fixing the budget.
What’s more, by proposing spending cuts, the government is shifting attention away from tax reforms.
Labor can moan about cuts all it likes, but the alternative is to raise taxes. And Labor knows striking a fine balance between the two is a delicate matter. One that could decide the outcome of the election.
At this point, Treasurer Morrison is taking the mickey. You know it just by reading this comment:
‘I’ll take something off the table if someone can put something on the table of equal measure.’
It’s the equivalent wiping your hands and walking away. He’s putting all the pressure back on Labor. It’s a calculated move, but a very clever one.
If the Opposition doesn’t block the cuts, the government achieves two things. It passes cuts necessary to reducing the budget (what both parties want). And two, Labor ends up looking like it’s supporting spending cuts on the neediest.
But if Labor does block it, then the government comes out smelling of roses. How? Because it looks as if it’s at least making an effort to reduce the budget deficit. Meanwhile Labor looks as if it’s doing all it can to obstruct progress.
Now you can see why Morrison is telling the Opposition to come up with something better. He’s basically forcing Labor to dictate budget deficit reduction policy. It’s a ballsy move. But one the Coalition has pulled off deftly.
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Budget deficit: a symptom of the revenue problem
In any case, fixing the budget won’t be easy. Whether the Coalition, or Labor, is in power doesn’t matter either. The cause of the deficit is beyond any government control.
The current economic climate makes any return to surplus unlikely. At least not during this decade, anyway. The best case estimates suggest a surplus is still some six years off.
And while the MYEFO suggests spending is the issue, the real problem is revenue. Slow wage growth and the mining downturn have left the government facing years of revenue shortfalls. Spending cuts are a result of weaker tax revenues. They’re not an outcome of too much spending.
Either way, with tax revenues on the wane, getting back to surplus is no easy task. The Coalition government was never going to achieve that feat in its first term. And it won’t, even if it wins a second term next year.
So where does that leave us? Unfortunately, with a budget deficit that will worsen before it improves.
Spending cuts may be topical this week, but tax reform will be the real battleground. That, more than anything, could decide the election. But we’ll have to wait and see who blinks first on taxes.
For now, both sides are trying to gain whatever advantage they can. We’ll see what cards Labor has up its sleeve.
Junior Analyst, The Daily Reckoning
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