Economic situation to keep deteriorating

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    Leadership turmoil may prove an economic disaster

    The Drum
    By ABC's Alan Kohler
    Updated 50 minutes agoThu 12 Feb 2015, 9:17am
    Photo: It's beginning to look like 2017 will now be the next opportunity to reset the budget strategy. (AAP: Dean Lewins)
    This week's spill motion may have destroyed any chance of a decent budget repair for two more years, which is a worry because we need to deal with the structural deficit, writes Alan Kohler.
    The awarding of a knighthood on Australia Day to the Duke of Edinburgh, Prince Philip, may go down in history as one of the truly great disasters of Australian fiscal policy.
    It triggered this week's spill motion, which in turn may have destroyed any chance of a decent budget for two more years.
    Further fiscal repair in the 2015 budget is in the process of being abandoned, and it's beginning to look like 2017 will now be the next opportunity to reset the budget strategy and deal with the structural deficit.
    That's despite the fact that the deficit has continued to worsen since the MYEFO in December, which revealed a $31.6 billion downgrade to tax revenues over the forward estimates. Between then and the budget in May, another $10 billion at least has been added to this year's deficit.
    Meanwhile, the last vestiges of confidence and lucidity at the top level of Government appear to have been removed as a consequence of the knighting of Prince Philip.
    In successive interviews on the ABC's 7.30 program this week, Prime Minister Tony Abbott and Treasurer Joe Hockey were an incoherent mess.
    On Monday, Tony Abbott bizarrely declared that "good government starts today" and then proceeded to foreshadow a new childcare package "which will be very good for people, more money in their pockets", as well as a small business and jobs package and a small business tax cut.
    He then went on to assert: "We're grappling with economic security, particularly the fiscal issue, the budget issue."
    On Tuesday, Joe Hockey was all over the place, almost babbling. In one of his few moments of clarity, he declared that the Intergenerational Report "is going to be the beginning of a major conversation with the Australian people about how we address the challenges of the future".
    The 1998 Charter of Budget Honesty requires an Intergenerational Report every five years. This one will be the fourth, and will no doubt repeat the key points of the last three - that the pressures of an ageing population is going to result in a growing fiscal gap.
    Not only has there been no focused response to any of the previous Intergenerational Reports, but successive governments and parliaments have only made things worse through a variety of tax concessions and extra spending measures - all built on the notion that the commodity boom would go on forever.
    Now that the boom is over, and tax revenue has collapsed, any long-term problems caused by population ageing have been swamped by the immediate cyclical problem of a likely $50 billion deficit in 2014-15, followed by deficits for the foreseeable future.
    Anyway, as Joe Hockey indicated the Intergenerational Report this month will yet again highlight the Australian Government's structural deficit.
    The former head of Treasury, Martin Parkinson, already did it in a speech in December:
    As I have said publicly many times - a point reinforced by both the Governor of the RBA and the head of the independent Parliamentary Budget Office - Australia has a structural problem at the heart of the budget.
    Without action, we are on track for a decade of deficits, rising debt and increasingly constrained policy flexibility in the face of future shocks.
    In fact a succession of serious men and women with pursed lips and furrowed brows have been issuing the same warning for years. There is simply no excuse for politicians on either side of the Parliament to act surprised.
    The key problem is tax - that is, there's not enough of it. Last year's Commission of Audit assumed tax receipts would remain around 24 per cent of GDP, and that's the assumption used in Treasury forecasts. In fact tax revenue is now falling.
    But payments are at 26 per cent of GDP and rising, due to the population ageing, the NDIS and now the pending childcare package.
    There are simply not enough viable spending cuts left to offset both the shortfall in tax revenue and the growth in spending promises.
    As the governor of the Reserve Bank, Glenn Stevens, made clear last year, the main fiscal task of both sides of politics is to prepare the nation for higher taxes, and then to do it.
    Specifically, the rate of GST must be increased and the portion of goods and services to which it applies also increased - there is no real alternative.
    Fiscal drag will help, over time, by pushing income taxpayers into high brackets - if it's allowed to happen, and is not returned through pre-election tax cuts as usual - but the "structural problem at the heart of the budget", as Martin Parkinson put it, comes down to Australia's failure to have an effective consumption tax regime.
    Introducing the imperfect GST that we now have is often described as John Howard's greatest economic reform.
    Fixing it needs to be his successor's.
    Alan Kohler is a finance presenter on ABC News. He tweets at @alankohler.
    Anyway that's one possible solution to falling taxation revenue.
    I have suggested several others on HC recently.
    But bolder steps need to be taken urgently to address this structural deficit.
    Dave R.
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