18/12/2013 - 05:51

Fiscal challenges lie ahead

18/12/2013 - 05:51


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The business sector got the governments it wanted in 2013 but it’s unclear what policies they will deliver.

It came as an enormous relief to the business sector when Tony Abbott was elected prime minister in September.

After nearly six years of erratic government under Labor, there was a general feeling that Australia finally had a government that understood business.

Yet Mr Abbott’s ‘small target’ approach during his years in opposition meant there was always uncertainty about the kind of policy agenda he would pursue in government.

That was highlighted last month when Treasurer Joe Hockey announced the government had rejected a foreign takeover of east coast grains handler Graincorp.

That was generally seen as a win for the ‘agrarian socialists’ led by Nationals leader Barnaby Joyce.

The federal government showed a different set of colours this month when it rejected extra assistance for carmaker Holden.

That was the kind of policy pro-market ministers such as Mr Hockey were expected to advocate, though it’s no coincidence that the Nationals have always opposed assistance for the manufacturing sector.

The challenges facing the Abbott government will not get any easier after this week’s Mid-Year Economic and Fiscal Outlook.

It showed a dramatic deterioration in the federal government’s budget deficit this financial year to $47 billion, up from $30 billion projected prior to the election.

It also showed a declining deficit out to 2023-24 at least; previously a return to surplus was projected by 2016-17.

The decline mainly reflects downwards revisions to economic growth assumptions, which means less revenue growth.

Real GDP growth has been revised down to 2.5 per cent in 2014-15. Treasury has also changed its longer-run assumptions for nominal growth (4.75 per cent versus 5.25 per cent) and the unemployment rate (6.25 per cent versus 5 per cent).

The MYEFO, as always, is a very political document. The government has set up almost a worst-case scenario, which will make future improvements look more impressive.

Those improvements could come simply from a return to ‘normal’ economic growth assumptions.

The real test for the federal government will be the fiscal reforms it implements.

The government has certainly set the scene for significant spending cuts in the May budget, which are likely to focus on welfare, health and possibly education.

A very specific test for Mr Abbott will be whether he insists on implementing his expensive paid parental leave scheme, which has been roundly criticised as extravagant.

The Barnett government also faces a major fiscal challenge, after presiding over the loss of Western Australia’s AAA credit rating earlier this year.

The Barnett government has lacked a fiscal reform agenda to deliver a structural improvement in the budget.

In other words, bold policy decisions rather than mere ‘efficiency dividends’. The same challenge faces their federal counterparts.

The Barnett government has also been found wanting this year in regard to industry policy.

Premier Colin Barnett has stubbornly insisted on pushing ahead with the merger of energy utilities Verve and Synergy, despite a conspicuous lack of support for this back-to-the-future policy.

And he has stubbornly opposed Woodside’s plans to develop the Browse gas fields using floating LNG plants.

One encouraging development was last week’s COAG meeting, where the prime minister and state premiers mapped out a series of sensible reforms in areas including project approvals and occupational licensing.

It wasn’t ambitious – like the grandiose federal-state reforms former prime minister Kevin Rudd advocated – but they do seem achievable, and that would be a big improvement.


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