Wednesday, May 11, 2011

Labor is too weak to cut spending? Sorry.

HOW do we explain it? Unemployment is less than 5 per cent. Banks and mining companies are reporting record profits, even if High Street is hurting. The global financial crisis ended here long ago. Soaring export prices have made Australia richer than ever.

Yet our federal budget is sick. This year's deficit will be almost as big as last year's. And then, even with a formidable $22 billion of spending cuts and revenue rises announced yesterday, and on optimistic forecasts of economic growth, Treasury estimates that it will still be in deficit next financial year, although less so, and will deliver only small surpluses in the following three years.

The Liberals want us to think it's because Labor is too weak to cut spending. Sorry, guys, but this budget cuts spending quite a lot. We will see that in coming days because the Liberals and Nationals will be screaming blue murder against the very cuts they say there should have been more of.

It can't have been an easy political decision for Labor's leadership to take $2 billion off middle-class families by freezing family benefit payments and thresholds at the upper levels. It can't have been easy to choose to lose votes by cutting younger Australians' access to a dependent spouse rebate, or to halve the discount for making HECS payments as you go.

This budget has hundreds of savings measures, mostly transparent, and some of them deliberately opaque. That includes an extra $1 billion saved by increasing the so-called "efficiency dividend" by which the starting point for every allocation is cut by 1.5 per cent. It's a tactic that forces bureaucrats to cut programs without the politicians having their fingerprints on it.

But wait, there's more. On top of that, the budget makes dozens of cuts mostly small, one very big for additional "efficiency savings" in specific departments and agencies, and many other silent cuts by requiring departments to fund new programs from existing resources. The Defence Department alone has been ordered to make $1.2 billion of additional savings over four years. The Department of Education, Employment and Workplace Relations will have to fund $128 million of new programs from existing resources.

This is not a hair-shirt budget, and most of its savings will be used to fund new spending: on workforce training, mental health, hospitals, flood relief, and more support for families with teenagers. At first sight, most of that seems well-targeted, even overdue. The budget estimates the net savings over five years at just $3 billion, which is not much help towards Labor's goal of ensuring that the budget is back in surplus by 2012-13.

The economic forecasts by which Treasury predicts the surplus will be reached on target are not reassuring. Treasury now concedes that despite all the rebuilding, business investment has grown just 4.5 per cent in 2010-11, not the 8 per cent it forecast six months ago, and that private spending overall grew just 3 per cent, a far cry from its 4.75 per cent forecast.

Some of us would interpret that as evidence that the headwinds facing the economy are much stronger than Treasury and even more, the Reserve Bank will admit. We would trim our forecasts. They, however, are bumping theirs even higher. Treasury now forecasts that business investment, already at record levels, will soar by a third over the next two years: 16 per cent next year, and a further 14.5 per cent in 2012-13, lifting GDP growth to 4 per cent. If it's wrong, the surplus could be in trouble.

But how could the budget be in any trouble, with record numbers of us in jobs, earning record amounts, producing more than we have ever produced before, and with two of our biggest sectors recording sky-high profits?

Some will tell you it's too much spending, but it isn't. Between 2000 and 2008, the Howard government on average spent 24.1 per cent of Australia's GDP. Next year, Treasury estimates, Labor will spend 24.5 per cent, and then an average of 23.7 per cent over the next three years of skinny surpluses. Spending was certainly part of the problem in the past three years, but not in the period we're moving into.

No, the enduring problem is revenue. In the years of plenty from 2000 to 2008, Howard and Costello took 25.3 per cent of Australia's GDP in taxes and other revenue. This year that slumped to just 21.9 per cent, a shortfall of $47 billion. That's almost the entire budget deficit.

What about the new financial year? Revenue is forecast to rise to 23.2 per cent of GDP, still a shortfall of $31 billion. Over the next three years after that, it is forecast to average 24.2 per cent, a cut of $17 billion a year from the Howard/Costello average. If we had normal revenues, we would be in surplus in 2011-12, with cushy surpluses thereafter.

Then why is revenue so sick? There is no one reason, there are five of them. The global financial crisis and generous tax laws have left companies with almost $300 billion of tax losses, which they will use up slowly to hold down their taxes for years ahead. The weak stockmarket has slashed collections from capital gains tax, companies other than banks and mining are doing it tough and, let's face it, we never could afford the income tax cuts both sides offered us in 2007.

The worst blow is that the record mining profits are not lifting us into surplus, as they did in the past. Generous tax breaks allow miners to quickly write off against their tax bills the cost of developing new mines. They're investing so much that they're not paying much tax either. One day they will, but that day is still years away.