The Hockey budget is an emergency in itself, writes John Corby. Such an emergency, to the extent that it could in fact be recessionary.

We have been told that we are in a financial crisis and that we must all help to restore the disaster caused by the previous government. This contravenes the views of the 25 leading Australian Economists surveyed in the Sydney Morning Herald on July 16 who believe that we are in fact in a very strong financial position with a most manageable deficit of 21.51% of GDP. Our deficit is far more manageable than virtually all other counties in the western world. These were not “left wing loonies” but were economists from many of Australia’s most respected companies. (See “Economists rubbish talk of debt crisis”).

However, perhaps Joe Hockey (who has a BA in Arts and Law, not economics) is correct and he knows more than all of these Economists, and more than Nobel Prize winning US economist Joseph Stieglitz. Perhaps we really must pull all stops out to fix the deficit immediately in the most direct and effective way to get the economy back on track. Is the 2014 budget going to do this, and will it stimulate the economy in the long run? I say absolutely not. The government’s own calculations don’t suggest that it will make big inroads into the deficit even if the Senate does pass all measures.

My concern is what I believe will to be the negative effect on the economy that this budget will cause. I don’t see any of these measures stimulating our economy at all, in fact I see that some of the measures will have the opposite effect and will work to retard economic growth.

The decision to force the unemployed 18 to 30 year olds into 6 months out of every 12 with no income support might stimulate the security sector (as this will mean that 1 in 8 people in this group who are not involved in education will be destitute and will probably need to resort to crime to survive). We will probably need more police, but this will increase government costs, not reduce them. It will however create jobs. (1 in 8 is based on the 12% unemployment level in this sector at the moment. I believe it is likely to increase so this is a conservative estimate).

The government’s decision to “bury their heads” regarding the huge growth potential of the alternative energy sector will most certainly put Australia behind the 8 ball and force us to export our innovators and import the innovations, after all no one could even entertain the belief that the price of: electricity, petrol, gas, and the other fossil fuels will decrease, regardless of the environment.

These are minor economic concerns compared to what I see as the major problem. It seems to me that the real damage to our economy will come from the decision to deregulate university fees and change the way student loans are treated. University graduates traditionally make up a large part of our middle class. All professional people are university educated. They are the ones who have a reasonable level of disposable income. They buy their own homes, regularly eat out at restaurants, go on holidays, turn over their cars every few years and buy new clothes each season. They play a very important roll in keeping the wheels of our economy turning. Their demand for goods and services fuels the economy more than any other sector because of their number and the size of their disposable income.

The very rich are a much smaller group within society but they still only eat the same number of meals and wear the same number of clothes. They may own more houses and more cars and have more holidays, but their consumption certainly doesn’t impact the economy to anything like the extent that the middle class does, because there are not many of them.

They are, however the ones that own the businesses and make the decisions on the boards of the companies that employ many of the people. The companies involved in: retail, wholesale, manufacturing, service and primary industry are all demand driven. If there is no demand for something, there is no financial benefit in providing it. If demand for something drops there will be a corresponding drop in the need for people to be employed to provide that particular good or service. Those making financial decisions on the boards of our large companies, or those individuals making decisions for their small and medium sized businesses must respond to the market. If they don’t, they will fail in industry. The market works on demand. No one will employ people based on the good of the country, only on the good of the company.

This brings me back to the deregulation of university fees.

Wealthy people will pay up front to send their children to universities and these graduates will be able to continue their privileged life styles and consume at the rate you would expect. Those that have to borrow to go to university will be in a completely different situation. Not only will their debt be higher than it has been for previous graduates, but there will be an urgent need to pay it off as quickly as possible to avoid the mounting compound interest. Previous graduates owed HECS to the government and were charged at an annual interest rate matched to the CPI, so in effect the size of their debt never increased (in real terms). The next generation will be charged at a 6% compound interest (and this may increase). This means that their unpaid debt would be spiraling upwards.

Although no one knows what the deregulated charges for universities will be, it is certainly going to bring about a substantial fee increase. Graduates would be leaving university with large debts but no assets or income. Their ability to secure a housing loan or other personal loan would be greatly reduced and the pressure to repay the debt before the interest mounts would be enormous. The disposable income of this huge part of society will dry up and the knock on effect will be profound. If there is a substantial drop in demand for: new houses, cars, holidays, restaurants, high end electronics, and the likes, there will be a corresponding huge drop in the supply of these things. This means many businesses will close or scale down. The result must be increased unemployment and negative growth. This budget appears to me to be a sure way to lead to a recession.

Like Mr. Hockey, I am no economist. I proudly received an award for economics in Year 12 but I have spent the rest of my life following other pursuits. I would, however, like someone to explain to me where my logic is flawed and where the economic benefit of this budget actually is. I believe that there certainly is a budget emergency but the emergency is not one left by the previous government, it is one that will eventuate over time because of the current budget.

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