The report in the Australian Financial Review today confirms that the Abbott government’s fiscal strategy is in tatters.

Elected on a platform to ‘fix the budget’ and tackle the ‘budget crisis and emergency’, the Abbott government is now planning a mini-budget in December to deal with the fact that its policies have resulted in a budget deficit blow out that at this stage, looks to be about as significant as some of the misses of the previous government.

According to the AFR, the Abbott government has capitulated on measures that would have lowered the budget deficit by around $30 billion over four years, which only adds to the frenzied spending by the Abbott government on RBA payments, national security, roads, defence and paid parental leave, among other things. Add to that a negative shock from the fall in commodity prices and the terms of trade, and the budget deficit projections that will be in Mid Year Economic and Fiscal Outlook will dwarf the numbers the Abbott government inherited in Pre-Election Fiscal Outlook.

Of course, the government can ‘recast’ its fiscal strategy and in the MYEFO outline spending cuts and tax hikes as it summons all of its zealotry on getting a budget surplus as quickly as possible. The problem with this is that it would occur at a time where even blind Freddie can see the economy is sliding into a sub-trend growth, disinflationary funk. The very fall in commodity prices that is hurting the budget bottom line, is also squeezing economic growth. A round of fiscal austerity in December would be foolhardy, risking a move similar to the silly policy trap that dogged so many European countries when fiscal policy was tightened during the crisis which only exacerbated the recession many were mired in.

It would be folly for Treasurer Hockey to tighten fiscal policy when the economy was already at significant risk of slipping deeper into the economic quick-sand.

For the record, these are the budget numbers inherited by the Abbott government. They are the budget balance (surplus / deficit) numbers calculated in the PEFO in August 2013.

2014-15   -$24.0 billion
2015-16   -$4.7 billion
2016-17   +$4.0 billion

A quick back of the envelope calculation which takes account of the policy flip flops and revised economic parameters, and without seeing any policy changes that may be announced in the next two months, suggests MYEFO will produce budget deficit numbers as follows:

2014-15   -$34 billion
2015-16   -$25 billion
2016-17   -$15 billion

In these three years, that would represent a fiscal blow out of around $50 billion compared with the PEFO numbers.

With a fiscal repair job as misguided as that, it is little wonder the community and business sector are losing faith in the government they elected so convincingly just over a year ago.

The AFR article is here: