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| Image credit: The Australian |
The PBO shows that prior to the 2007 elections in which the conservatives were defeated, the Howard government was structurally in the red. Structural is the word used because if it had not been for the mining boom which had yielded a large tax bonanza, the government's expenses would have exceeded its revenues.
The reason for this deficit was Mr Howard's propensity to engage in "middle class welfare" through tax cuts and benefits such as the "baby bonus" which were not means-tested but applied to all. This was his secret to political longevity. The minerals price boom gave him the means to do it. The IMF earlier this year had called this tendency an act of "fiscal profligacy".
During the 2007 election, the conservative treasurer Peter Costello sought to lock-in the next government into a new round of tax cuts. The then opposition leader Kevin Rudd supported the tax cuts but said, "this reckless spending must stop," signalling his intention to take the mantle of fiscal responsibility from Mr Howard.
A little over a year into office though and Mr Rudd's government faced the daunting task of dealing with the effects of the global financial crisis. This forced him to commit to a large fiscal stimulus program to counter the economic downturn and guarantee the financial system. It worked. Australia avoided a recession, but something else changed. Tax revenues took a hit due to lower corporate income and consumer spending.
Mr Rudd's successor Ms Gillard succeeded in passing a carbon and minerals resource rent tax after a very contentious transition in 2010, but in order to gain the required number of votes in parliament, she had to "overcompensate" the various stakeholders affected, and as commodity prices declined, the revenues which these taxes were meant to generate failed to materialise.
This has left her government scrambling to fill this budget hole not only to regain some economic credibility but to pay for some of her government's signature programs such as school reform and disability insurance. She has sought to unwind some of the so called "middle class welfare" entitlements of the Howard era.
As polls indicate a turnover back to the conservatives in the September election this year, her treasurer Mr Swan in his latest budget sought to tie the hands of the incoming government to fund its social programs in its first term of office out to 2016-17.
This behaviour by incumbent governments to reduce the fiscal space of their successors to either increase spending for social programs (if the incumbents are conservative) or reduce the size of government (if they are progressive) is consistent with strategic budget theory which has been used to explain why governments of advanced economies have been chronically in deficit since the 1970s.
What is clear in all this is that while both sides of politics often talk of being fiscally responsible, neither one is really serious based on the evidence. Both sides play the game; and unfortunately, it is the taxpayer that eventually has to deal with the consequences.
The reason for this deficit was Mr Howard's propensity to engage in "middle class welfare" through tax cuts and benefits such as the "baby bonus" which were not means-tested but applied to all. This was his secret to political longevity. The minerals price boom gave him the means to do it. The IMF earlier this year had called this tendency an act of "fiscal profligacy".
During the 2007 election, the conservative treasurer Peter Costello sought to lock-in the next government into a new round of tax cuts. The then opposition leader Kevin Rudd supported the tax cuts but said, "this reckless spending must stop," signalling his intention to take the mantle of fiscal responsibility from Mr Howard.
A little over a year into office though and Mr Rudd's government faced the daunting task of dealing with the effects of the global financial crisis. This forced him to commit to a large fiscal stimulus program to counter the economic downturn and guarantee the financial system. It worked. Australia avoided a recession, but something else changed. Tax revenues took a hit due to lower corporate income and consumer spending.
Mr Rudd's successor Ms Gillard succeeded in passing a carbon and minerals resource rent tax after a very contentious transition in 2010, but in order to gain the required number of votes in parliament, she had to "overcompensate" the various stakeholders affected, and as commodity prices declined, the revenues which these taxes were meant to generate failed to materialise.
This has left her government scrambling to fill this budget hole not only to regain some economic credibility but to pay for some of her government's signature programs such as school reform and disability insurance. She has sought to unwind some of the so called "middle class welfare" entitlements of the Howard era.
As polls indicate a turnover back to the conservatives in the September election this year, her treasurer Mr Swan in his latest budget sought to tie the hands of the incoming government to fund its social programs in its first term of office out to 2016-17.
This behaviour by incumbent governments to reduce the fiscal space of their successors to either increase spending for social programs (if the incumbents are conservative) or reduce the size of government (if they are progressive) is consistent with strategic budget theory which has been used to explain why governments of advanced economies have been chronically in deficit since the 1970s.
What is clear in all this is that while both sides of politics often talk of being fiscally responsible, neither one is really serious based on the evidence. Both sides play the game; and unfortunately, it is the taxpayer that eventually has to deal with the consequences.
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