Rewriting Australia?s recent fiscal history has begun in earnest since the release of the Budget earlier this month, with some bodies blaming Howard?era tax cuts for the string of federal budget deficits.
The Parliamentary Budget Office (PBO) yesterday released an analysis (found online on this webpage) profiling the federal structural budget balance, stating the budget was in structural balance, or surplus, up to 2007?08 before falling to a deficit of up to 4.25 per cent of GDP in 2011?12.
It also estimated that two?thirds of the decline in structural receipts, from 2002?03 to 2011?12, was attributable to successive personal income tax cuts between 2003?04 to 2008?09.
In some respects the PBO analysis, and the related media commentary following the release of the report, raises more issues than settles them.
As with many other empirical studies of this nature, the results of this study depend, in large part, upon the assumptions and estimation techniques employed.
These include the calculation of an unobservable ?potential output? to separate temporary and permanent shocks to the economy, estimating lower and upper bounds for a structural terms of trade estimated by the PBO to be above long term historical trends, and using arguably outdated income tax elasticities.
It is also puzzling that the PBO backdates their structural budget balance time series only to 2001?02, replicating an earlier study in 2010 by Treasury officials, but not taking the series further back in time.
The restrictive time coverage of the study means that the important expenditure reductions by, say, the first and second term Howard governments, in their efforts to correct structural budget deficit left behind during the Hawke?Keating period, has been overlooked.
The argument that the size of the structural budget surplus had been in decline during the Howard years have further fuelled arguments made by the ?revenue lobby,? an organisationally loose but intellectually coherent coalition of interests comprising the ATO, Treasury, academics, politicians and some financial commentators, that taxes should not have been cut during that period.
However, criticisms of previous income tax cuts ignore the point that the Labor Party, firstly in opposition and then in government, initially embraced income tax cuts on the basis that it would expand productive capacity, chiefly through an expansion in labour force participation.
According to Swan in mid?2008, the first tranche of income tax rate reductions, along with other relief measures, alone were estimated to increase aggregate labour supply by 65,000 people in the medium term (though I do vaguely recall Swan referring to an even higher labour supply response in the past).
It follows that the effect of having foregone tax cuts would have been a smaller labour supply, than would otherwise be the case, translating into a slower rate of economic growth, a point absent in the arguments of those critical of income tax reductions.
The recent focus on revenues, including the poorly judged latest round of calls for increasing GST, is another attempt to divert public attention away from the ultimate cause of Australia?s fiscal problem, and that is excessive government spending.
Even taking the PBO?s debateable quantum of identified ?temporary? stimulus measures of $67 billion from 2008?09 to 2011?12 as a given, this spending, as far as I can tell, contributed a hit to the structural budget of at least two per cent over that period.
To be sure, foregoing the discretionary fiscal stimulus would not have eliminated the structural budget deficit as estimated by the PBO, since other policy decisions to ramp up expenditures, particularly in the social policy sphere, had been effected during the Rudd?Gillard period.
And as the PBO acknowledges, new expenditure pressures on the federal budget are now being locked in over time, as DisabilityCare and the Gonski school funding package are progressively implemented by the end of this decade and beyond. It is the expenditure bushfire, driven in particular by welfare state spending, that surely needs to be doused in this period of budgetary emergency.
Treasurer Swan may publicly declare a lament that if the tax to GDP ratio were higher his ability to achieve surpluses would have been assured, but it would not surprise if there is now, in perhaps the final months of this government, an emerging sense of regret, in Swan?s quieter moments, about the highly flawed embrace of runaway spending.
POSTSCRIPT: The Treasury Department has released an update of its 2010 study, which reads as a near?carbon copy of the PBO study (coincidence much?!). It can be found here.