Scott Morrison has inherited a sizeable budget deficit and a large communication problem.
Weak business and consumer confidence, which are holding back businesses from investing and consumers from spending, are well-established thematic problems for the Coalition.
Morrison’s predecessor, Joe Hockey, had difficulty communicating his first budget back in May 2014, bringing cries of unfairness to those not so well off in the community, and a fall in confidence followed.
Morrison now has a couple of months before the mid year budget update (which usually drops a couple of weeks before the Christmas break but can be delayed until the New Year) to work on a compelling narrative and go some way to restoring confidence.
Chris Richardson, partner at Deloitte Access Economics, says Morrison needs to communicate the need for budget repair and the need for reforms. And confidence needs addressing.
“A calm and measured hand on the tiller to reassure families and businesses that things are okay,” he told Business Insider. “We are genuinely doing quite well … it can be even better still if we did those things around tax reform, competition reform and budget repair.”
The government this week released the final result of Hockey’s first budget. It shows an underlying cash deficit of $37.9 billion, about $8 billion more than the $29.8 billion forecast in May 2014.
Against a re-forecast in May this year, the result is a $3.3 billion improvement, mainly due to government spending being $2.9 billion lower than expected.
However, the stand out issue from the final budget outcome is the difficulty forecasting government revenue. It keeps underperforming against forecasts.
Total revenue was $380.7 billion in 2014-15, $3.4 billion lower than estimated at the time of the 2015-16 Budget.
The main reason was a shortfall in tax revenue which was $355.4 billion, about $3.8 billion lower than the estimate at the 2015-16 Budget.
And this miss was mostly driven by lower-than-expected company tax revenue. The company tax revenue shortfall totalled $3.6 billion.
Richardson says government revenue as a share of GDP has fallen to 23.6% from 23.7% the year before.
The standard of living in Australia has fallen, wages rises are slowing and this means the government’s share is also not growing as it once did.
Morrison’s tasks ahead fall into two camps, political and structural.
“The politics sounds simple but is stunningly difficult to do,” Richardson says. He told Business Insider:
He’s got to make people realise that Australian living standards have actually been falling ever since commodity prices started falling and that makes budgeting really, really difficult.
It’s a key reason why yet again revenue was disappointing last year and those headwinds have not gone away.
And there’s a difference between talking straight and worrying people too much. It’s generally the case that the economy is okay. Interest rates and exchange rates are wrapping their loving arms around the economy and protecting it.
But something which is less protected by the China slow down is the budget. So they need to understand that the economy is not going to get the budget back into surplus or anywhere close to it.
Richard says taxes need reform, a shift from bad to good taxes. This chart, from Treasury’s discussion paper on tax reform, show the average burden on taxpayers of different taxes:
“The problem for Scott Morrison is not only that the sorts of things that you can do to promote prosperity while protecting fairness are politically difficult,” Richardson says.
“He’s starting from a reasonably notable deficit … but I have no problem with it being fixed over a decade but you do want to fix it and people need to understand that it does need to be fixed.”
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