Debt, deficit, and political death by a thousand cuts

The Government’s latest budget update is part of the political plan but could also be its undoing.

The Mid-Year Economic and Fiscal Outlook’s shock projections of $667 billion in debt and deficits until 2023-24 lays the groundwork for the Commission of Audit.

The Commission of Audit is the government’s major economic ambition for its  first term and its job is to find ways for the government to save money. Mr Abbott has been promising it since March 2012.

Hockey and Abbott want the Commission to have the most receptive environment in which to publish its plans (the Interim report is due in January, the final report by the end of March).  So they need the intense sense of a budget emergency.

MYEFO “will show the Australian people the problem we’ve inherited, and the budget will deliver the solution,” Treasurer Hockey said in November.

Cuts a-coming.
Cuts a-coming.

Rudd tried reform on the tax side.  Disastrous. So this government is prioritising reform on the expenditure side. (The Government has promised a white paper on tax reform within two years – a softer pledge). From an economic perspective that is fair. But it raises political questions.

What is the last “cut” that is heralded as a major political reform? Howard strangled the dole payment down below some estimates of the poverty line, but that’s oddly omitted in his hagiography. Even right-wing economist Judith Sloan has argued the dole should now be raised.

When we list the economic reforms that have made Australia great we include microeconomic reform, floating the dollar, an inflation-targeting central bank and the GST.  Not cuts.

If the Abbott government first term economic reforms can mainly be labelled “cuts”, what will be its legacy? It needs to frame these cuts in a positive way. But that is not easy.

Business council chief executive Jenniffer Westacott has a suggestion. She called the Commission of Audit a “once-in-a-generation opportunity to fortify Australia’s budget foundations and set in train a much-needed reform agenda to keep our economy strong.”

Reform is hard enough to justify on its own. Using reform to justify cuts is going to be a very hard sell indeed. Ms Westacott is not a politician.

When the Commission of Audit presents a menu of reforms, the government will have to read the mood of the nation and of opinion leaders.

Will the government be able to identify which cuts use least political capital? When Rudd picked the eyes out of the Henry Review, he thought the public would support a tax on rich miners and was proved quite wrong.

Abbott has a massive parliamentary lead, but Newspoll shows his government lagging, 48-52. The recommendations of the Commission of Audit will be picked through with an eye to 2016.

The further behind in the polls the government is, the more it will tread softly. Bill Shorten’s mouth will be so tired of using the terms “cut” “slash” and “hack” that by 2016, it will probably go on strike.


If the Government is too selective with the reforms, it will face accusations of having no backbone, and lose some of the most strident support from its barrackers in the News Corp press.  Far better, the Government may think, to be seen as having the courage of convictions even if it means putting some of its vast parliamentary majority to the sword.

But that is a gamble on the reputation of the political right. Too much cutting could poison the Liberals’ reputation as a party that builds the nation.

Can the government create clamour for cuts? Only if the narrative from this Daily Telegraph story sticks in the public’s mind:

“Australian families to wear the pain of Labor’s massive debt bomb, Joe Hockey warns”

UPDATE: I now read that the Tele is Australia’s least trusted news source according to a new survey. Dire warnings indeed.

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Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

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