Wednesday, May 18, 2011

Budget's not tough enough? Get real

THE Age/Nielsen poll tells us 44 per cent of Australians are satisfied with the federal budget, and 44 per cent are dissatisfied. I'm with both groups.

We are right to be satisfied. This was a workmanlike budget that responded to Australia's economic needs. It invested in skills training, trimmed spending on middle-class welfare, kept the budget on track to surplus by 2012-13, and kept investing in infrastructure.

And we are right to be dissatisfied. Australia needs more than a workmanlike budget. We need to train many more skilled workers, to invest far more in infrastructure, and to pay for it by reforms to shut tax loopholes and use our resources more efficiently. That didn't happen.

But the critics hit the budget for the wrong reasons. The Australian slammed it on Wednesday for being too soft - ''That's not a knife, Treasurer'', its headline ran - then reversed course on Thursday to claim Labor had declared ''War on middle-class welfare'' (without a knife to fight with?)

It was wrong both times. Treasury estimates that the last two budgets will deliver the sharpest fiscal tightening seen since records began. In the three years from mid-2010 to mid-2013, Treasury predicts, the budget will go from a deficit of 4.3 per cent of GDP to a surplus of 0.2 per cent.

That would withdraw 4.5 per cent of GDP in three years. By contrast, the Howard government lifted the budget balance by 4.1 per cent in four years. The Hawke/Keating/Walsh team in the '80s raised it by 4.8 per cent over five years (but largely by cutting grants to the states).

Think of this: the government over these three years will suck a cumulative $126 billion out of the economy. It has taken out $12.5 billion in the year just ending, and will take $43.5 billion out by 2011-12, and $70 billion out by 2012-13. That is like shutting Australia's communications and IT industry for three years.

Not tough enough? When half the economy is going sideways or backwards? Get real.

I suspect that is why Tony Abbott virtually ignored the budget in his budget reply. This is a well-crafted, workmanlike budget that is tough without belting anyone really hard. The right demanded cuts to middle-class welfare. It is humbug for it to whinge when its calls are acted on.

Some on the left criticise the budget for using sticks as well as carrots to try to get the unemployed from welfare to work. These measures might not be perfect, but the direction is right. They recognise that the long-term jobless are jobless mostly because, in some way, their lives are messed up, and they lack the mix of education, skills, health, and self-discipline we need to be effective workers.

Getting people from welfare to work costs money in the short to medium term. It delivers rewards in the long term. The failure of the Howard government to understand that cost us dearly; by 2007, 10 per cent of Australian men aged 15 to 54 were outside the workforce. Labor has understood that, and plans to invest in people who need help to return to the workforce. Too modestly, perhaps, but enough to deserve applause.

But this budget won't stop the Reserve Bank raising interest rates, some moan. No, sadly, nothing will stop the Reserve Bank raising interest rates. It is certain that Australia is heading into a mega-boom. It forecasts that non-farm GDP will jump 6 per cent in the nine months to December, which will send inflation soaring unless it raises rates.

Mere lack of evidence has not dissuaded the Reserve from this view, nor that it got it wrong last year (when it forecast non-farm growth of 3.25 per cent, but we got 2.1 per cent). Would cutting the budget deficit even harder change its mind? No. Governor Glenn Stevens says it will lift interest rates when it thinks they're too low, even if the budget too is cutting demand.

Some people I respect criticise the budget for making policy decisions that give a net stimulus of $2.4 billion in 2011-12, when the Reserve wants to slam on the brakes. But look closely: all of that ''stimulus'' and more comes from just three items.

They are: $1.4 billion to bring forward tax breaks for low-income earners; $1.2 billion to keep our soldiers in Afghanistan, East Timor and the Solomon Islands; and $700 million to allow small business to defer part of its tax bill until next year.

Which would you scrap? These tax breaks will help those not sharing in the resources boom to cope with its strains.

The real flaw in this budget is not what it does, but what it doesn't do. Issues Abbott won't talk about are mostly ignored: and they are big ones for our future.

We need to build the infrastructure for our cities to cope with a future Australia of 40 million people. We need to make housing affordable again for younger Australian families without rich parents. And we need to fix the tax system.

This means the government must return to the neglected Henry review. We need a proper mining tax to replace the weak one Julia Gillard gave us. We need to cut (and preferably end) the rort of negative gearing, in a broad reform of savings incentives. We need to cut effective marginal tax rates, and across the board, end tax rorts so we can cut tax rates.