Hockey’s fairness lecture won’t help him fix the budget

Joe Hockey greets Sydney Institute executive director Gerard Henderson ahead of a speech arguing the merits of the budget. Dan Himbrechts/AAP

One month on, the job of selling Australia’s budget continues. Treasurer Joe Hockey argues criticism of the budget has been unfair and misguided, akin to class warfare.

He has countered the critics by asking if it’s fair that the average Australian works over one month full time each year to pay for the welfare of another Australian.

Before putting Hockey’s claim into perspective, it’s worth reviewing three key themes that have emerged since budget night.

First, it is now understood that while there was no real budget emergency, in the sense that the government would not be able to service its liabilities, there is a need to address structural issues.

Gross government debt as a percentage of GDP remains low at 35%, which is about one third of the OECD Average. Recent research shows that Australia could sustain a debt about 5.5 times higher than the current figure. This suggests we are very far away from a level of debt that could lead to a real budget emergency.

Preparing for down times and our ageing population are sound rationales for starting the budgetary adjustment now, but the adjustment proposed by the Abbott government is significantly smaller than under the budget repair jobs of Hawke and Howard.

The level of government spending will average 24.9% of GDP over the four years to 2017-18 compared to 26.4% in the last three years of Labor. In the first four years of the Howard government, government spending fell by 2.4% of GDP to 23.3%. The Hawke government spending cuts amounted to 4.4% of GDP in the four years to 1989-90, when spending fell to 22.9% of GDP.

While a less substantive budgetary adjustment makes sense, given the soft job market and recent economic performance, it’s clear a more comprehensive approach is needed to address the unfunded challenges of meeting large expenditure commitments.

Hockey believes the burden is being fairly shared: but modelling shows the cuts fall disproportionally on lower income families with children.

Analysis by NATSEM shows that by 2017-18, once all grandfathering arrangements are removed and the budget deficit levy is removed, low income couples with children (bottom 20 %) are worse off by around 6.6% while single parents are worse off by around 10.8% on average. High income families are marginally better off as a result of the removal of the carbon price.

The treasurer has tried to frame the debate around the fairness of the welfare system where an average worker has to make a significant contribution towards the welfare of others.

“In other words, be they a cleaner, a plumber or a teacher, is working one month full time each year just to pay for the welfare of another Australian. Is this fair?”

A skewed argument…

While Hockey has not revealed how he arrived at these figures, I presume it was derived by dividing the estimated total welfare payments mostly for 2014 by the estimate of GDP for 2014, which would yield approximately 9%; one month is 8% of a year.

Putting aside the fact that this is not really a particularly accurate statement – for example, GDP is not a measure of labour income – it is worth then asking how many days an average working Australian would have to work to support tax concessions, where the government gives up revenue, that mostly benefit the rich.

Using the budget’s tax expenditure statements, an average working Australian would have to work around two full weeks a year to fund the capital gains tax and superannuation tax concessions.

While this comparison does not invalidate the Treasurer’s argument that the welfare system needs reform, it creates a problem for his narrative as it provides no reason to focus exclusively on welfare payments, of which roughly 40% are in the form of assistance to the aged, instead of, or in addition to, tax concessions.

And a simplistic one

The reality is that in a modern economy the role of the government is substantive. The legal and regulatory framework and government spending decisions affect the structure of the economy in an asymmetric way. For example, a tax system that allows the cost of debt, but not the cost of equity, to be deducted from assessable income, may favour particular industries or firms with greater access to debt markets. It may also provide encouragement to the financial sector. Moreover, government’s decisions about what infrastructure to fund will benefit particular regions, firms or industries.

This understanding that the government’s actions inevitably distribute fixed resources in the economy challenges any attempt to justify the changes in the tax and welfare system that adversely impact on low and middle income families as a reduction in entitlements that we cannot afford.

Faced with criticisms that have not yet wavered, and the peculiarities of a new Senate where minor parties may play a big role, it is unclear what will become of the budget and what will be the government’s strategy going forward.

Former prime minister John Howard has provided some sound advice such as a two-part test to identity the types of policies that would be supported by the Australian public. The first part consists of identifying policies that are clearly in the national interest. The second part, obviously more elusive, consists of pursuing policies that are fundamentally fair.

Arguably the Abbott government has convinced the public that fixing the budget is in the national interest. The Abbott government’s first budget, however, failed the second part of the test badly by placing a disproportionate burden of the budgetary adjustment on low and middle income families. Instead, the Australian public seems to want to better understand what options are available to fix the budget. A good starting point is to leave slogans behind and instead engage with the Australian public in a more meaningful way.

The way forward for the government is to do more significant, deeper work to build a consensus for reform - reform that redefines the role of government including its size, the nature of expenditures and the provision of social insurance, and the relationship between different governments. Once this is done then it’s possible to rebuild the taxation and payment system in a sustainable way to support the role to be played by the various governments.

The Abbott government has provided some early indications it is willing to ignore some vested interests but it needs to fight the temptation for easy, Band-Aid style fixes and policy on the run if it is to live up to level of accomplishments of the Hawke/Keating and Howard prime-ministerships.