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The challenge of budget honesty

By Andrew Leigh - posted Tuesday, 20 August 2013

Imagine if you decide one day to use a new accountant to do your taxes. He promises that everything will be done on time, and you’ll get a hefty tax refund.

You hand him the group certificate from your employer. He says the figures on it are not worth the paper they’re written on. You point out that he’ll have to use some estimate of your income. He responds, ‘don’t worry - we won’t be adding up your tax return this year’.

You ask about that promised refund. He shows you a draft of the return. It shows the same deduction claimed in two places.


As tax day approaches, the accountant keeps promising to do your return ‘plenty of time’ before it’s due. But with three weeks to go, you’re starting to fret.

If this tale sounds familiar, it’s what it would look like if Tony Abbott and Joe Hockey ran an accounting firm.

The story to date. In 1998, John Howard and Peter Costello came up with the notion of a ‘charter of budget honesty’. Prior to the election, Treasury would release an independent budget statement (the Pre-Election Fiscal and Economic Outlook, or PEFO) and the resources of Treasury and Finance departments (and now the Parliamentary Budget Office) would be available to all parties to cost their policies. Based on this, both Government and Opposition can produce costed policies.

Ironically, while the Charter of Budget Honesty was a Liberal invention, they failed to comply with it at the last election. Post-election analysis by Treasury uncovered an $11 billion gap in the Liberals’ costings. The Liberals had claimed in that campaign that their costings had been audited, but the firm who did the job were fined for professional misconduct.

This time around, the Liberals have a costings gap that is – on their own admission – $70 billion. They have pledged to give fringe benefits tax breaks back to people who do not use the car for business purposes, and to restore the private health insurance rebate for the richest Australians. Their proposed paid parental leave scheme offers nothing more to a worker on the minimum wage than the current scheme, but provides over $70,000 per baby to those who earn the most. Each of these policies are skewed towards the most affluent. Together, they constitute a massive cost to taxpayers.

The problem for the Liberals is that they have spent the past three years saying ‘no’ to Labor’s sensible savings measures. As a result, they are now in the position of promising to spend more, tax less, and pay down debt faster; oblivious to the fact that it isn’t mathematically possible to achieve all three.


In the first week of the campaign, Mr Abbott’s sole policy announcement of substance was a cut in the company tax rate. Spruiking it, he airily claimed that it would be paid by savings he’d already announced. Unfortunately, those savings have already been taken by the commitment to give a massive tax cut to big miners and big polluters. Once that’s paid for, Mr Abbott has nothing in the kitty.

For Australian families, Mr Abbott’s costings gap means tax increases or service cuts amounting to thousands of dollars for the typical household. Most likely, that means a reduction in the quality of schools, hospitals, and family payments.

Over recent budgets, Labor has made some tough decisions affecting the public service. Anyone who knows our federal public service is aware that any ‘fat’ is long-gone. If elected, the Liberals are likely to maintain the efficiency dividend, and to add on top of it their policy of getting rid of 12,000 to 20,000 Canberra public service job cuts. This would be devastating for our city, and yet it would be only a small fraction of the costings gap that Mr Abbott needs to make up. Even after slashing the Canberra public service, abolishing the Schoolkids Bonus and scrapping Trade Training Centres, Mr Abbott is still left without enough money to pay the bills. 

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This article was originally published in the Canberra Times on 19 August 2013.

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About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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