Morrison says spending, not revenue, is the problem – sound familiar?

Few doubt that the Federal Government’s first budget was the beginning of the end for Joe Hockey and Tony Abbott. But new Treasurer Scott Morrison has jumped into the same hole and resumed digging, writes Matt Grudnoff.

We have a new Prime Minister, a new Treasurer and the promise of a new discussion on economics and tax reform.

I’m an economist, so this is pretty exciting.

Previously, I found the economic debate reactive and short-sighted, but also misinformed. The Abbott government seemed to have no idea of the causes of our economic difficulties and had even less idea about what the solutions might be.

Unable to grasp the basics, prime minister Tony Abbott and treasurer Joe Hockey blundered through different policies and then ran and hid when nothing seemed to work. Economic reform was put in the too-hard basket and the economy struggled to grow.

Even the most obvious of suggestions were battered aside, no matter who was offering advice. RBA Governor Glenn Stevens told the Government to take advantage of record low interest rates to embark on an infrastructure spending spree to improve growth and productivity. But such a program would involve more debt, and the Government had painted itself into an ideological corner where good economic policy couldn’t reach.

But all this could be behind us. A new PM and Treasurer would surely bring new policies and drop the “nope, nope, nope” economic strategy. A fresh look at the problems facing Australia could see a new reform agenda.

Well, this economist at least had a new sense of hope.

On Tuesday night, ex-secretary of the Treasury and respected economist Ken Henry talked economy with Leigh Sales on 7.30. He was asked if the Australian federal budget had a revenue problem or a spending problem. In his answer, he compared revenue and spending in 2002 under the Howard government to today. Spending is now up by 1 per cent of GDP and revenue down by 1.5 per cent.

So effectively the problem is with both revenue and spending – but 60 per cent of the problem is shrinking revenue, while 40 per cent of the problem is growth in spending.

The next day our new Treasurer was talking with the Daily Telegraph saying we had a spending problem, not a revenue problem, and that he wanted to cut taxes further. That evening he went on ABC’s 7.30 and again made the case that we had a spending problem.

Same question, two opposite answers from Henry and Morrison. So who’s right?

A quick look at the budget figures shows that it’s the respected economist and not the newly minted Treasurer. This is not a good sign. A large part of why Hockey and Abbott couldn’t tackle Australia’s economic problems was because they had built a fantasy that all the problems could be blamed on the Labor government’s spending. It makes a good pitch to the party’s ideologues, but it was never going to solve the problem.

If you don’t get the cause of a problem right, your solutions aren’t likely to fix it.

The first ‘horror’ budget was a spectacular case in point. The only way you balance a budget to abnormally low revenue is to cut things that the public really care about. That plan ended in tears, and few doubt that it was ultimately the beginning of the end of Hockey and Abbott.

But if we take Scott Morrison at his word, it seems like he’s jumped into the same hole that Hockey and Abbott dug, and resumed digging. He is not only saying that he thinks that getting the budget back to surplus should be done entirely through spending cuts, he is also saying he wants to cut taxes, and cull revenue even further.

While it might seem obvious, what is often missed is that when a politician promises tax cuts they are also promising fewer services. Well, either that or a bigger deficit.

What our new Treasurer is promising is less money to pay for your health services. Less money to educate you. Less money if you’re disabled. Less money if you’re elderly. Less money for childcare and paid maternity leave, if you have kids. If you’re one of the growing number of people looking, less money to help you find work. The list goes on.

And the lesson is clear: Fixing the budget by cutting services failed to work for Hockey and Abbott when they tried it in their first budget. Abbott’s electability never recovered.

Ken Henry also said that the next round of tax reform needed to be revenue positive, not revenue negative. We need to increase taxes, not decrease them.

Increasing government revenue does not need to be difficult or disproportionally impact on the poor. The fall in revenue has much to do with the high income tax cuts paid for by the temporary revenue increase during the mining boom and the fact that so much tax is leaking out through things like super tax concessions, negative gearing and the capital gains tax discount.

The Australia Institute examined these issues in our paper before the last budget, titled It’s The Revenue Stupid. It showed the Government could raise almost $20 billion a year simply by making our progressive tax system work the way it was intended.

A change of PM and Treasurer is the perfect time to face up to the real economic challenges that Australia faces and jettison the misguided rhetoric. Let’s hope that the Treasurer’s talk with the Daily Telegraph was a flight of fancy and not a portent of policy to come.

Matt Grudnoff is the senior economist at The Australia Institute. Follow him on Twitter @MattGrudnoff.

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