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One of the great strengths of Australia has been its political system. Whilst many economists have criticised the undue emphasis on balancing the Budget, I’m in two minds. There is no inherent economic benefit to balancing the Budget -> it can be harmful if you balance the Budget too quickly by withdrawing stimulus from the economy before it has fully recovered from the recession. On the other hand, every other developed nation is struggling because its politicians have been promising tax cuts and spending increases leading to unbalanced budgets. Australia is fortunate because we’ve been careful to spend our money efficiently.

I’ve previously attributed Australia’s strong Budget to having a fused executive and legislature, so the advice of experts within the public service is used most effectively by its legislators who write the Budget. But it can also be attributed to Australia’s emphasis on balanced budgets. The balanced budget political commitment is an effective mechanism to drive continued spending cuts and efficiency dividends. It’s certainly more effective than the debt limit mechanism which America uses – one which failed to restrain spending for the last 10 years and which nearly caused a market collapse this year. But I don’t want to overstate the case – the emphasis on balanced budgets is a relatively recent invention; it is more a symptom of having a fused executive/legislature.

The balanced budget commitment can, however, have negative effects as we have seen from Joe Hockey’s current dilemma. Joe Hockey must make $70bn in savings from spending cuts in order to balance his budget. Is this truly achievable? To give a sense of proportion, the Australian Budget has $365bn in expenditures. Can you really cut 20% of the Australian Budget without so much political backlash that the Opposition can win the next election? It is often said that Oppositions don’t win government, Governments lose government – but this is one Opposition which may have lost government before it was even sworn in.

This $70bn figure does not come from any announcement by Joe Hockey, it is the result of an internal Liberal Party document obtained by Channel 7. The $70bn figure emerges if you add up all of the Opposition’s promises – to dump the carbon tax ($27bn) and mining tax ($11bn), $8bn in tax cut and $37bn in spending promises.

Joe Hockey says that entire departments will be removed, including the Department of Climate Change. But if we cut spending on climate change to $0 (contrary to Liberal Party policy), you still wouldn’t get $70bn in savings. The Government is only spending around $465m on the Department of Climate change,. Another 69.6bn to go. So where is the $70bn going to come from?

In fairness to the Liberal Party, this is not the fault of the whole party. Joe Hockey is a policy dunce whom insiders widely believe is too lazy on policy. Either Andrew Robb or Malcolm Turnbull would make a better Shadow Treasurer.

The $70bn black hole is also the cost of Tony Abbott’s very effective strategy of criticising any tax rises or other economic policy offered by the Government. It seems he’s playing a riskier game than I thought -> whilst his strategy has caused the Government’s popularity to plummet, it may backfire when he is forced to either undo some big political commitments or make unpopular spending cuts.

Another problem is that the Opposition would be caught unprepared if an election was announced today, or if Craig Thompson were to lose his seat and Tony Abbott became Prime Minister. That is a very bad political position to be in.


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