Did John Howard’s spending cause Julia Gillard’s budget deficits?

The good times are over. That’s the message both parties are sending out ahead of the budget and September’s election.

Shadow treasurer Joe Hockey promises major cuts to spending and welfare if the coalition is elected while the government, having been forced to walk away from its budget surplus promise, is now cutting previously guaranteed benefits like increases in family benefit payments.

The focus on these sorts of welfare cuts begins the dismantling of policies that were central to John Howard and Peter Costello’s budgets, especially the pair’s final big-spending 2007 budget bestowed generous tax concessions – in areas such as superannuation – and transferred income to families that came to be dubbed “middle class welfare”.

In my comment piece on last year’s federal budget for The Conversation I began with the proposition that “good policy should be free of surprises”.

Although governments need to pay for additional expenditure promises – like Gonski and the NDIS in this case – there is also the need to address the underlying structural problem of reducing existing expenditure when revenues fall.

All this is at a time when the carbon tax, the mining tax – and just about every tax – is not raising the expected revenue, and Treasury’s forecasting performance is not looking good.

The point is that fiscal policy should be made in the context of a long-term vision for the economy. This includes getting everyone who wants to into work, providing the public infrastructure needed to increase productivity, the right mix of private and government provision of health and education; and reform of the regulatory environment. We should see clear lines being drawn between the major parties with regard to their philosophy. However, in recent decades we haven’t seen much of this.

Under John Howard, the Liberal-National Party coalition government sought to position itself as good economic managers in contrast to Labor. It recorded budget surpluses after 1997-98 in every year except one (2001-02), with surpluses reaching around 1% of GDP during its fourth term. The record economic growth led to huge windfalls in receipts from company income tax.

Falls in unemployment, jobs growth and wages growth greatly increased personal income tax receipts. While government expenditure as a proportion of GDP was fairly stable, albeit rising slightly, this has to be seen in the context of a switch from public provision of services to private provision. Consequently, there was less provision of government services but increasing government expenditure.

In the 2004-05 federal budget, treasurer Peter Costello announced the baby bonus, a lump sum payment of A$3000 to parents receivable after the birth of each child. It has since risen from A$3000 on commencement on July 1, 2004, to A$4000 in 2005 and to A$5000 on July 1, 2008, and is indexed to inflation. Wayne Swan subsequently reduced the baby bonus to A$5000 from September 1, 2012, and to A$3000 for second and subsequent children from mid-2013.

In the same budget there were other significant increases in benefits to families with children as well as tax cuts for all Australians. As more than one commentator pointed out, there was an incredible degree of giving with one hand and taking away with the other with inevitable administrative cost and waste.

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