Budget Repair abandoned as the electoral cycle draws near

Given the fragile state of the Australian economy, surely what we should all be weighing up is whether this budget is pro growth or not and less focused on whether there has been a focus away from budget “repair”.

What the takeaway message for me is that the Abbot/ Hockey government is finally having to accept that last year’s  fiscal cuts hurts an already weakening economy and has diminished both consumer and business confidence. While we can all agree tackling structural fiscal deficit is important for long term economic outlook, focus has to be on ensuring that fiscal measures is supporting growth in a sluggish economy.

The budget revealed that spending has increased, from 25.7% of GDP in 2013-14 to 25.9% of GDP in 2015-16 with a boost of $14 billion worth of stimulus to be pumped into the economy. Extra spending and tax incentives in 2015-16 will lead to a worsening budget deficit of $35 billion — more than double what was forecast last year.

Key to that increase in spending is a 7% increase in defense of $1.7 billion, further $450 million to boost national security, $131 million to the telecommunications industry to help it comply with new metadata collection laws and store metadata of customers and $22 million for social media monitoring to counter online Islamic state recruitment. These measures may lull us to feel safer but has insignificant impact on economic growth.

It should come as no surprise that despite much public support for higher taxes on superannuation contributions from high income earners and wealthy retirees and removal of negative gearing which has contributed to the increases in property prices, this budget has not attempted to address the need for tax reform. This is particularly worrying in a time of revenue pressures from fall in iron ore prices and lower tax base.But given that these changes would directly impact on the Liberal party’s core constiuents, it should not have come as a surprise even if it is the fiscally responsible thing to do.Instead we see sweeteners given to small businesses and farmers, the natural heartland and constituents of the Liberal party.

The question we need to be asking is whether these tax incentives will lead to job creation and improve growth prospects as outlined by economic projections.

Maybe. After  all, this fiscal stimulus is supported by low interest rate regime and lower Aussie dollar that should lower business costs. Spending on infrastructure in the north will certainly improve productive capacity but we will only see that impact in the long run.

While we can acknowledge it is time for the non mining big business to do some serious spending and be the “lifters” not leaners in this economy, doubts still linger as to whether they can be the much needed engine of growth in the short term.

The explosion in gross debt from just $59 billion in June 2008 (or 5 per cent of GDP) to about $430 billion by June 2015 (26.3 per cent of GDP) continues to worry the business sector.

Australia’s gross Commonwealth government debt-to-GDP ratio is now at a historical high and exceeds the 22.9 per cent record set in December 1995 after the 1991 contraction. Then there is household debt, the highest in OECD countries jumping 3.2 times to an incredible 154% since pre-GFC and lower interest rates will likely see this trend worsen.

Given the worrying trends, the business sector may feel it prudent to hold back on investment especially when speculation is rife that should Abbot’s fortunes improve with this more favourable budget, we will be headed to the polls by year end.

While the government may be upbeat about improvements in economic growth, most economists are monitoring what is clearly now a delicate balancing act to head off a recession and I suspect that is one of the reasons behind bringing forward an election. No incumbent government can afford to go into an election in the middle of a recession.

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