From inside the budget lockup, The Conversation’s Business and Economics editor Peter Martin and political and economic journalist Tim Colebatch from Inside Story shared their reactions to the pre-election budget.
Martin said the budget featured a substantial tax cut “that goes back in time” and that while the government was forecasting “good times around the corner,” there has been barely any sign of them.
He also said he thought while the budget gives Labor an advantage, Treasurer Josh Frydenberg is unlikely to be embarrassed by it in the future.
Colebatch told The Conversation it “was a modest budget” and that the spending measures were “really fairly restrained”.
“It recognises that the debate has shifted and people are less likely to be bought by big spending and more likely to be bought by the impression of fiscal reticence and control and delivering a budget surplus,” he said.
Michelle Grattan: We’re here in the budget lockup and, as we all expected, this document is very much pitched at the imminent election. Here to discuss the politics and the economics, I have today Peter Martin, the economics editor of The Conversation and Tim Colebatch, a writer for Inside Story. Peter, can I start with you? What are the standout features of this budget as far as the ordinary voter is concerned?
Peter Martin: A tax cut that goes back in time, Michelle, which is a pretty tricky thing to do. But people are going to get a bigger tax cut at the end of the financial year that’s about to end than they expected when it began. They’re going to get a rebate of about A$1000 instead of the $500 that was promised. Now, you might say that that’s electoral in focus because that’s money that will be going into people’s pockets in a matter of weeks, depending how soon they get their tax returns in. But it’s probably also economic-based as well, in that in the budget we see that, frankly, the domestic economy – yeah, yeah we’ve got money coming in from mining – but the domestic economy, in terms of consumer spending and so on, isn’t flash. It’s interesting to note the size of this bonus that’s going to people, that’s doubled, will be about $1000 for a lot of people in the middle income range. That $1000 – 500 now doubled to roughly 1000 – is more than the Rudd government’s first cash splash during the GFC of $800.
Michelle Grattan: So, Tim, do you think that in this budget, the government has sacrificed the economic for the political?
Tim Colebatch: No, I think it’s actually a fairly modest budget. It’s really, given that we’re heading right into the election after this week, into the election campaign, it’s really quite modest in what it gives. As Peter says, it’s given another $500 to people in the near term. But then to wait for a bigger tax cut, you’re going to have to wait till 22-23. Well down the track. And the new spending, likewise, is really fairly restrained. It amounts, in net terms, to $2-3 billion a year in a budget of $500 billion a year, so we are not talking big bikkies.
Michelle Grattan: Now just in terms of the economic outlook. There seem to be two messages: that the economy is fundamentally sound but there are all sorts of clouds around the place.
Tim Colebatch: Well I think governments always say the economy is fundamentally sound. I think they were saying that in 1990, and…
Michelle Grattan: Before the recession we had to have.
Tim Colebatch: That’s right. Yes, as we were going into recession, they were saying: the ship is on course. And no, I think what Peter said is quite right. The economy is not flash, as consumer spending is not flash, and there’s reasons to think that the decline in house prices will have an impact on consumer spending. Indeed, Treasury admits that itself in the economic analysis. And so there’s good reason for the government to be giving a bit of stimulus to the economy, and what is in its electoral interests and what is in the economy’s interests are very nicely in coincidence.
Michelle Grattan: Now, Peter, what about the wages story? We’ve heard so much about wages recently.
Peter Martin: What the government has done in this budget is what it’s done in the previous budget – and the budget before that and the budget before that – which is to assume that wages are going to take off. They going to increase. The rate at the moment is 2.3%. After a while it’s going to go up to 3%. But as they’ve done for, I think, about five budgets in a row now, they’ve just pushed out the start date of that improvement. Now we are seeing a little bit of improvement. Wage growth is slightly higher than it has been, but the future of that is uncertain. Not uncertain if you, as Tim said, not uncertain if you look at the perennially “things are okay” sort of budget rhetoric. But with the hit to incomes of housing prices, if businesses start thinking that consumer spending is not going to hold up then, you’re looking at a situation where suddenly workers won’t have whatever bargaining power they’ve got and wage growth will, in fact, weaken or won’t get any stronger. So it’s the forecasts, as always really, forecast that the good times are just around the corner but there’s been scarcely any sign of them. Now, I’m not really blaming the Treasury for forecasting good times around the corner because in the long run, they say, they have a model: wage growth has got to…
Tim Colebatch: They assume that things work in the long run.
Peter Martin: And they assume the long run will happen eventually, right? That wage growth has got to equal inflation, which is around 2%, plus productivity growth, which is around 1%. That’ll give you 3%. The fact that that hasn’t happened hasn’t stopped them from believing it will.
Tim Colebatch: Well, can I just register a slight disagreement of tone? Peter does see things in black and white and I’m more of a grey person. I mean it is – wage growth is rising very slowly. It is rising and I think the forecasts this year are more reasonable than in previous years. They’re not forecasting it to go back to 3.5% or 3 and ¾%. It’s a pretty modest – I think it’s only another quarter of a percent up. They are expecting to get to two and a half this year, which may be heroic, this financial year…
Peter Martin: But it ends up at three as it has always ended up at three.
Tim Colebatch: No, it was 3.75 at one stage.
Peter Martin: The other thing which is good in what they’ve done is, in their forecasts, there’s been realism in the forecast whether that’s come from the Treasury, most probably, or the Treasurer. They could have factored in – the convention would have allowed them to factor in – these high iron ore prices we’ve got. The convention is that you take the previous four weeks iron ore price and assume it will continue for four years. They haven’t done that. They’ve assumed, in line with their advice and common sense, that this iron ore price is going to come down as Chinese demand goes away. Now, that’s cost the government money in the budget. It didn’t need to do that. So I think you would be a brave person to say that the forecasts in totality are anything other than reasonable. You’ve always got to give them some slack. It’s their job, and I don’t think you can say they’ve done it wrong.
Michelle Grattan: Now, Tim, what are the vulnerabilities of this budget that Labor can home in on?
Tim Colebatch: At first sight, I can’t see anything that I would think provides an obvious lever for Labor to hone in on. And, as I said, to me it’s a modest budget. I think what’s particularly interesting about that, Michelle, is that they have not spent all this money. They have programmed in for a budget surplus next year of $7 billion. And, as Peter says, on reasonably conservative and sensible assumptions. For a government in a state, electoral state, that this government is in, that I think shows a fair bit of restraint and it recognises that the debate has shifted. And people are less likely to be bought by big spending and more likely to be bought by the impression of fiscal reticence and control and delivering a budget surplus. And I think what is particularly interesting is that Labor, remember, took a lot of flak in 2016 because it came out with the budget. Its budget was going to be…
Peter Martin: Spending the benefits of the boom!
Tim Colebatch: They were going to have bigger deficits in the short term than the Coalition and this went against their message that in the long term they were better managers. So, I wouldn’t be surprised if Labor actually targets a higher budget surplus in the next year than this one.
Michelle Grattan: And just finally, Peter, do you think that this will change the conversation for the government?
Peter Martin: Will it change the conversation for the government? I think it gives Labor an advantage and Labor has always had that advantage. Ever since it announced its action against negative gearing and capital gains tax, ever since it announced its changes to dividend imputation policy. Labor has more money than the government. I don’t think it will want to disagree with anything in the budget, but it still has an advantage over the government. Now, there is nothing that government could do to take this away. But what Josh Frydenberg has done is brought down a budget, his first, about which he is unlikely to be embarrassed in the future. Look at Peter Costello’s last budget. He gave away money in ways that turned out to be unsustainable, to seniors and all sorts of people. Seniors got cheques just for being old and so on. Josh Frydenberg hasn’t done that. He has begun to build a legacy that Peter Costello began to throw away.
Michelle Grattan: Tim Colebatch, Peter Martin, thank you very much. That’s all for our budget lockup podcast. Thank you to my producer Eliza Berlage. We will be back with more interviews later in the week. Goodbye for now.
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