Monday 22 February 2010

Uninterested Advice.

Well, after a long hiatus, let's bring a long story!

As the Australian and global economies are already out of the woods, as we all know, it's time to resume growth.

This is the Business Council of Australia (BCA, "CEOs of 100 of Australia's top companies" [1]) uninterested advice:

"The federal government has committed itself to fiscal discipline and a high-productivity future. The Budget must include a plan to reduce the level of government involvement in the economy. It must shift the focus of revenue and spending to support business growth, job creation and workforce participation." My emphasis [2].

The reader might remember the Rudd government has vaguely stated its intention to keep federal budget bound to 2% real increases. Well, this is the commitment alluded, and the BCA is asking for a change in the way government money is raised and spent, to flesh out the Rudd government commitment.

What kind of changes is the BCA talking about?

"The BCA endorses the government's strategy to return the budget to surplus via expenditure constraint and savings rather than higher taxes". My emphasis [2].

Now, the Federal government is yet to reveal the detailed contents of the Henry Tax Review report, which not surprisingly, deals with taxes. Extra-officially a proposal to reduce income tax has leaked to the media. The shortfall in revenue, according to what has transpired, would be covered by a tax on natural resources rent (a.k.a. a tax on mining). With the statement above, I'm sure the BCA doesn't mean they want this "tax on mining" to be scrapped.

However, the BCA has made clear what taxes should be reduced, and what should increase:

"The essence of the BCA's position is that tax reforms arising from the Henry review should reduce the reliance on corporate income tax (and capital income taxes more broadly), increase the reliance on the least distortive taxes (notably consumption and property taxes) and not increase taxes on labour income". My emphasis [3].

Among those "least distortive taxes" is the GST.

So, if the Budget is (A) to be on surplus [4], but (B) new or increased corporate taxes are not desired, this suggests that government spending must also be cut, not simply "constrained" as stated above (unless the idea were to plug the deficit just with an increased GST).

If you've followed this far, you might be asking: "Okay, then, to cut government spending where?"

Well, the BCA suggests several places:

1. "Progressively increase the qualifying age for the age pension to 67 years was a step in the right direction - more difficult decisions of a structural nature like this will be required". Although the BCA does not specify a more appropriate retirement age, it does state that "as a purely illustrative exercise, it is estimated that the traditional retirement age of 65 years would need to increase to 73 years by 2049 in order to ensure that the age dependency ratio at that time is equal to its current proportion of 5 people of working age for every 1 retired". My emphasis [5].
2. "To meet its expenditure commitments, the government should consider ways to tighten eligibility and apply means testing to some of its larger payment items (…)".
3. "(…) And subject unspent stimulus funding to a re-assessment against other fiscal priorities and Australia's future needs".
4. "In this context, funding in a mixed public and private system represents a key lever for shaping and directing the health system". My emphasis in all items [6].

The first item requires no further comment, as it is self-explanatory,

In regards to the second item, as human memory is a risky thing, I will remind the reader that last year, as part of its stimulus package, the federal government relaxed the eligibility criteria for unemployment benefits (Newstart Allowance), without increasing the fortnightly amount paid.

This way, an unemployed homeowner couple with combined assets exceeding $11,000 and up to $252,500, is able to claim up to $411.50 each partner per fortnight. But in this case, as the asset amount exceeds $11,000, the payments may be delayed. And payments are reduced by at least $0.50 by each dollar income the couple might have in excess of $62 per fortnight (say, interests on savings) [7].

The third item is also quite self-explanatory, but I will make a little comment: the idea is to cancel works for which the federal government has already allocated funds, but whose execution has not started.

The fourth item is by far the vaguest. Regardless, I am sure it has nothing to do with the sudden Opposition intention to privatize Medibank Private, should they win the next federal elections. [8]

Although the document under analysis is a Budget Submission, and thus should deal on fiscal policy issues, the BCA goes further with items unrelated to federal budgets, such as "the need for ongoing structural reforms to our system of workplace relations and enhancements to our education and training base". [9]

As before, I will draw the reader's attention to the extraordinary coincidence between this statement and Mr. Abbott's intention to restore the system of individual work contracts.

Concluding remarks

The BCA Submission is interesting, for what it contains and for what it leaves out.

In spite of its recommendations against new taxes, it leaves out the ETS, called by Mr. Abbott the "new great tax on everything". Does this mean the BCA considers the ETS is definitely dead? Or they don't mind this specific "new great tax on everything"?

To increase the retirement age, as suggested, unless made effective immediately, will do nothing to reduce spending in the near future, which is the scope of a federal budget. But it comes at a price that no government would be happy to pay in an election year.

How much savings can tighter eligibility criteria for Newstart Allowance bring? Hard to say, but it shouldn't be much: if the employment situation is improving as much as ABS statistics say, unemployment benefits should be falling already, automatically.

The BCA doesn't specify what kind of workplace reform is required, unless one were to assume that Mr. Abbott's words reflect the institutional opinion of the BCA. Still, given that the Australian economy has performed as magnificently as we had been led to believe, there seems to be little point in reforms: it ain't broken, so don't fix it.

Interestingly, the BCA has not made any pronouncement about public sectors lay offs (an obvious way of saving), as the opposition, in the person of Mr. Joyce, has.

Similarly, other than it needs to be cut, little detail is given about the BCA position on health spending, so it's risky to comment on this. Does the opposition Medibank proposal fit in with the BCA Submission?

Given that new taxes or increased corporate, capital and personal income taxes are off limits, I suppose this leaves the Federal government with few options, other than to raise the GST rate.

As with cutting down Federal spending in social security in general, this would be risky in an election year. More importantly, however: it may be counterproductive.

Combined, an increase in GST and a reduction in the already meagre unemployment benefits (considering that workforce underutilisation runs at about 13-14%), could impact aggregate demand, at a moment when the RBA has indicated its intention to continue its policy of rising interest rates, while the global economic outlook remains uncertain.

But, then again, as we all know, we are already out of the woods and now we can forget about demand management and concentrate instead in supply management:

"The BCA endorses the importance of pressing ahead with microeconomic reforms needed to enhance the SUPPLY SIDE of the economy". [10]


[1] Our Members

[2] News Releases. Recovery Road Map Requires Balance, Commitment and Leadership. 14 February 2010.

[3] Balancing Act: Fiscal and Policy Priorities to Support Growth – BCA Budget Submission 2010–11. p. 3.

[4] To the chartalist readers: as I'm trying to merely report what is there in black and white, I'll abstain to go into the subject of whether governments issuing fiat money need to cover their spending or not.

[5] Balancing... p. 5.

[6] News Releases...

[7] A guide to Australian Government Payments. 1 January - 19 March 2010. p. 22.$file/co029_1001en.pdf

[8] Opposition will sell off Medibank. SMH, 21/02/2010.

[9] Balancing... p. 4

[10] Balancing... p. 4