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This government must have the courage and discipline to cut spending, reduce borrowing and to repay debt.
The mid year economic update (MYEFO) expected this week needs to take the form of a mini-budget. Wayne Swan needs to accept that government spending has and is contributing to the upward pressure on interest rates. We have now seen seven rises under his watch.
The Treasurer was at direct odds with leading economists such as Saul Eslake, Chris Richardson and RBA board member Warwick McKibbin, when he said: “Anybody who’s claiming the stimulus is somehow related to rate rises is simply talking rubbish.”
At the same time Finance Minister Penny Wong says: “what we are delivering for our part is the fastest fiscal consolidation that we have seen since the 1960s.”
In reality, this should be easy after you have just conducted the biggest spending and borrowing spree in Australia’s history.
The government’s latest monthly financial statement, however, which Senator Wong dropped out late on a Friday afternoon, raises serious doubts about the budget returning to surplus in 2012-13.
Senator Wong is on record pledging that the return to surplus is “not negotiable” and ultimately that is the benchmark from which she will be judged.
This was before Friday’s confession from Mr Swan that the high exchange rate could punch a hole in tax revenue, including the $10.5 billion he is banking on from the mining tax.
Labor’s surplus looks to be phoney, cooked up to get it through the election.
In the first three months of this financial year, Labor had racked up a deficit of $25.2 billion and net debt increased from $42.3 billion to $64.6 billion.
For the month of September the deficit was a staggering $13.8 billion, the highest on record.
CommSec chief economist Craig James estimates that the underlying budget deficit in the year to September was also a record $63.3 billion.
Labor’s spending for the first three months of the financial year was $9.6 billion higher than for the same period last year. Despite this, revenue was $1.9 billion lower.
But the Gillard government continues to borrow $100 million each and every day to fund its continued spending. Interest repayments alone on Labor debt will peak at $6.5 billion in 2012-13 - enough to build six world class hospitals.
In response to one quarter of negative growth back in 2008, the Gillard government is spending a further $6 billion on new school halls.
Calls by the Coalition and leading economists for Labor to rein in its spending and make significant cuts have fallen on deaf ears.
Instead of accepting some of the responsibility for the continued upward pressure on interest rates, inflation and the record exchange rate, the government is sitting back letting the Reserve Bank do the heavy lifting.
While the RBA has the foot on the brake, Labor still has its foot planted firmly on the accelerator. It defies logic and confirms the government’s economic team of Gillard, Swan and Wong is out of its depth.
Instead of making cuts to spending it is lazily banking on increased and new taxes as well as dramatic improvements in revenue to bring its ailing budget back to health.
But Craig James noted: “The main concern is that revenues are still trending sideways rather than showing signs of repair. Meanwhile, government spending is at record highs and showing no signs of stabilising.”
Penny Wong demonstrated the huge learning curve she is on when she claimed that $30 billion in new and increased taxes were in fact “cuts in expenditure”.
Therein lies a key philosophical difference between contemporary Labor and the Coalition.
Labor’s notion of economic reform is to tax, spend and borrow, while the Coalition champions fairer, lower and simpler taxes and living within our means. The Howard government paid off $96 billion in debt it inherited from Labor and delivered six real and consecutive surpluses.
As it stands, we are vulnerable to any double dip that may occur. We were able to weather the GFC because we entered it with no debt and significant reserves. That resilience has been eroded by the Rudd-Gillard government.
To re-build the durability and to gain some credibility, Labor must be prepared to bring forward the fiscal consolidation it talks about and make meaningful spending cuts to dud programs like ‘Cash for Clunkers’.
MYEFO has to be more than simply an update of the numbers, it must be a document akin to a mini-budget.
If this doesn’t materialise, Penny Wong will have failed her first big test as Finance Minister.
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