Sydney / Bloomberg
Australia is prioritizing growth over deficit reduction in its economic programme, Prime Minister Malcolm Turnbull said, signaling he expects to close the gap through rising tax receipts from faster expansion.
The prime minister, a month out from the budget’s release, signaled no plans to try to accelerate a return to the black — despite eight years of deficits and a projected four more to come. His comments also imply a rejection of a panel of senior economists and former high-ranking officials who Tuesday put forward a strategy to return to surplus in three years.
“It is a long-term project,” Turnbull said of restoring the budget in an interview with Sky News Sunday. “The critical thing that we have to do is to ensure we maintain strong economic growth.”
Turnbull’s assessment is grounded in economic and political calculations. He’s betting the economy, already adjusting to weaker commodity prices and an unwinding of mining investment, will be put at risk by a further hit to demand from deep cuts in government spending. He’s also struggling with an electorate unwilling to accept tax increases or a reduction in services — an impasse that has bedeviled his predecessors since the global financial crisis in 2008.
Australia in December forecast an underlying cash deficit of A$37.4 billion ($28.6 billion) in the fiscal year through June, and a A$26.1 billion larger than previously anticipated shortfall in the four years through June 2019.
The overall deficit is forecast to be 1.8 percent of gross domestic product this year, one of the lowest in advanced economies, according to International Monetary Fund data. That’s also well below an average of 2.9 percent for developed economies that are part of the Group of 20 nations.
Meanwhile, recent data showed the economy strengthened in the final three months of 2015, chalking up a record jobs gain and expanding at a solid 3 percent for the year.
“The bigger picture is, if you can grow your economy at a faster rate than your spending then over time your tax receipts from a bigger economy will make up the work,” Turnbull said, citing Prime Minister John Key of New Zealand as having successfully implemented a similar strategy. “There is no question, we have no hope of getting back into balance unless we can maintain strong economic growth. That’s the fundamental premise.”
The Committee for Economic Development of Australia recently
released a report compiled by a panel of experts that included three former secretaries of the Department of Prime Minister and Cabinet, Reserve Bank of Australia board member John Edwards and the country head for credit ratings company Standard & Poor’s. It suggested measures such as halving the capital-gains tax discount, scrapping tax concessions on private pensions and increasing levies on alcohol, tobacco and luxury cars to plug the deficit.
“Australia’s deficit problem is particularly alarming because despite a quarter century of sustained economic expansion, we have had eight years of deficit, with four more to go,” CEDA National Chairman Paul McClintock said.
The report set out A$15 billion in revenue measures and A$2 billion in spending reductions to bring the budget back to surplus.
Successive Australian governments have struggled with deficits since the global financial crisis: first as the currency soared to a post-float record of $1.10, driving some exporters out of business; and then as commodity prices tumbled and wage growth slowed to recession-era levels, national income was cut and fewer people moved into higher tax brackets.
Yet critics point out that in three months’ time Australia will have avoided recession for 25 years, and the government should be in a better budgetary position to respond to an inevitable downturn. The economy has also been stimulated by record-low interest rates at 2 percent and a weaker currency.
“As a player in the global economy, running a large deficit means we have no flexibility to respond to unexpected economic shocks,” McClintock said.
Turnbull, meanwhile, is trying to turn the lack of fiscal space to his advantage in an election year, pointing out that the leader of the opposition Labor party Bill Shorten will have to lay out how he plans to finance new programs.
“He needs to really hike taxes unless he is proposing to plunge us further and further into deficit and debt,” Turnbull said.