The Difference Between Sustainable and Variable Revenue

August 24, 2015 § Leave a comment

What do you do when you get your tax return, or when uncle Harold falls of his perch and leaves you a few grand? Maybe you do that extension, or maybe you put a bit away in the bank, or maybe you have a holiday. What you don’t do is go and employ a gardener, manservant, chauffer, cook, nanny and handyman. Why, because that added wealth is not sustainable income. We know that it won’t last and that we can’t rely on Uncle Harold to repeatedly fall of his perch whenever we need some extra cash.

On the other hand, when your family loses an income, you don’t rush out an borrow a crapload of cash and buy the extended family new TV sets (like Rudd did in the first GFC….I say first because it looks like it’s all happening again).

It would appear that federal Treasurers have a lot to learn from basic home economics.

Whether federal or state governments or local councils, there has been a failure in economic strategy in Australia in regards to the variable nature of revenue. At the top, the Federal government became addicted to the golden revenues generated by the long and sustained mining boom. How much of this did we bank for a rainy day? Nada.

A 2013 IMF Report (http://www.imf.org/external/pubs/ft/wp/2013/wp1305.pdf) would suggest that the Howard years were a lost opportunity to be financially responsible and to bank some of that mining boom bonus.

IMF

That said, the modelling also suggests that Greece were more financially responsible than Howard and look where they are at the moment!  Howard treated the big Variable bonus as sustainable revenue and gave it out as tax cuts to those who probably deserved it most as they were contributing more in tax. What Howard did manage to do was pay down government debt as can be seen below (http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2013/June/Australias_current_debt_position__update_June_2013)

Bar graph showing Australian government gross debt, 1971-2017 and Australian government net debt, 1971-2017

Using excess cash to pay down debt is as good as banking it. None of the lefties have ever acknowledged the amount of debt Howard paid down and it should be noted that he actually left money in the bank when he left office….not nearly as much as there should have been.

Along come Labor….Holy Crap!!! Talk about spending. They went nuts. Not only did they spend everything that Howard left, they borrowed hundreds of billions of dollars and kept spending. Check the graph to the left. All of the work done by Howard was reversed by Rudd/Gillard.

They just kept spending, even though the mining boom was over. The farce was the “MRT” – Mining Resource Tax. What a joke. The boom was over, but Labor and the Greenies thought they could rape the miners one more time to get some easy cash. As it turned out, the mines were already on their way down and they didn’t make a brass Razoo out of it.

So here ends the lesson…..until we have the stability in politics where successive governments are allowed to exhibit long-term economic prudence….we’ll be in the poo. The media should be hounding our politicians to show economic responsibility. The problem is that prudence is boring. The front page is not going to run a story highlighting that we just paid off $100M of debt.

The same scenario holds for state governments. Queensland – $88B in debt after the best mining boom they every had. The size of the public service grew and grew and grew. When the money ran out, the were left with a bloated government that they couldn’t downsize as the unions had a strangle hold. Along comes poor old Campbell Newman and sacks 15,000 of them and he gets thrown out of government. he tried to do the prudent thing. Now Labor are back in power in Queensland, with massive debt, but on a platform that won’t let them cut the spending….and not a peep form the ABC!

Doomed.

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