Howard also to blame for Budget’s ills

If Australia has a serious spending problem, as claimed by the Coalition, I find it curious that both Abbott and Hockey continue to remain silent on the ballooning of entitlement spending aimed at middle class families, the aged, and wealthy retirees under the Howard Government, which has arguably contributed much more to Australia’s structural budget deficit than any policies implemented under Labor.

Abbott and Hockey are ignoring the baby bonuses handed out, increases in aged pensions, and the generous tax breaks implemented by the Howard Government for superannuation – including tax free superannuation for retirees and cuts to the superannuation contributions surcharge on higher income earners. Then there is the Howard Government’s short-sighted decision to end indexation of petrol excise, which now costs the Budget some $5 billion per year.

Then there are the Coalition’s own acts in opposition, whereby they opposed nearly every Labor reform that would have improved the long-term sustainability of the Budget, including opposing the mining tax and changing fringe benefits taxes on leased cars. Added to the contradictions is Tony Abbott’s universally deplored paid parental leave scheme, which if implemented will lavish taxpayer largesse on higher income families and blow another large hole in the Budget.

That said, the the Coalition is wrong to assert that the Budget’s main problem is only excessive spending. Although spending will worsen over coming decades as the population ages (see next chart), a collapse in revenue is arguably a bigger issue – a view also acknowledged today by Peter Martin.

As shown in the next chart from The Guardian’s Greg Jericho, the Federal Government’s taxation revenue has collapsed relative to GDP since the Rudd Government was elected in 2007:

Note also from the above chart that Budget revenues ballooned under the Howard Government, who presided over the most lucrative part of the resources boom when commodity prices and the terms-of-trade exploded, providing the key impetus for the rising disposable incomes (see next chart).

Nominal GDP is the dollar value of what’s produced and earned across the economy and is also the measure that drives federal taxation revenue. Due in part to the inexorable rise in the terms-of-trade, the Howard Government experienced ever growing nominal GDP growth as commodity prices surged, whereby it reaped the benefits of growing personal and company taxes, not to mention increased capital gains taxes as asset markets boomed. By comparison, the Rudd/Gillard Governments experienced two episodes where nominal GDP collapsed – both on account of falling commodity prices (see next chart).

Let’s also not forget that the Howard Government made the disastrous decision to halve the rate of capital gains tax (CGT), making property speculation even more fruitful. The decision on CGT also helped kick-off a boom in household debt, whereby debt levels literally exploded over the 11 years that Howard was Prime Minister (see next chart).

This extra demand (spending) by the household sector meant that the Howard Government was able to achieve higher growth and run bigger surpluses, without adversely affecting overall demand in the economy (see next chart).

By the time Kevin Rudd became Prime Minister in late-2007, the ratio of household debt to disposable income had flatlined as households dramatically lifted their savings rates. This deficiency of household demand (spending) effectively left a hole in the economy that had to be filled by increased Budget deficits by the Federal Government.

The truth is, both sides of politics are to blame for Australia’s deteriorating budgetary position. Both have made mistakes that will impact taxpayers for years to come.

If the Coalition wants to harness broad-based electoral support for reform, it needs to drop the politically motivated attacks and engage in an honest assessment of past mistakes, as well as provide a road map for the future.

Lumping all of the budgetary blame on Labor, while ignoring the Howard Government’s own largesse, is likely to breed cynicism and opposition, and stifle the nation’s progress.

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