Wednesday, May 9, 2012

It's a political budget, a fake budget

THERE comes a point in the lives of governments when they cross a line that is indistinct yet crucial. The ideals and policy goals that they wanted to promote in power start to matter less to them than the desire to just stay in power, whatever it takes.

The Gillard government is now past that point. Yesterday's budget is not about economics, but politics. It sets out to turn a deficit of $44.4 billion into a surplus of $1.5 billion. At face value, that's equivalent to taking 3 per cent of the Australian economy out of circulation. You don't do that for economic reasons particularly when most of the economy is struggling against the effects of a dollar at record highs and interest rates appropriate to boom times. You do it because, in better times, you once promised it and having lost half a million votes through breaking one promise, you don't want to break another. It's all politics.

The measure that best sums up this budget is its biggest one: the $4.75 billion promised to business over four years as a company tax cut will now be taken away, and given to parents. Why? Employers don't vote for Labor. Parents might.

The government had trumpeted the company tax cut as a way to spread around the wealth created by the resources boom. Now it's gone, and this budget offers nothing else to tackle our biggest economic problem: the slump of growth in jobs and output in most of the economy, above all in the south-east, where most Australians live.

The budget's only initiative for Victoria is to take away the money promised to duplicate the Western Highway beyond Ballarat, and spend it instead on a freight terminal in western Sydney. Perhaps Western Sydney has more Labor seats than the Western District.

At first sight, it's hard to see how this budget makes the numbers fit. It seems to be splashing money around, yet it estimates that spending will actually shrink by $7 billion something that last happened when World War II ended. From 25.1 per cent of GDP, on these figures, spending would plunge to 23.5 per cent in 2012-13, and more or less stay there in future. That's on a par with the cuts of Keating and Walsh in the 1980s, and Howard and Costello in the 1990s.

Yet revenue is forecast to increase from 22.3 per cent of GDP to 23.8 per cent. That would be the steepest tax/revenue rise since the double-digit inflation and bracket creep of the Whitlam years. Put them together and the bottom line would go from a deficit of 3 per cent of GDP to a surplus of 0.1 per cent. The last time we saw anything like that was 60 years ago in the original "horror budget", which was designed specifically to slow down an overheated economy.

Where's the austerity? Mostly tucked away in places where it will cost few votes. The four main savings are to cut defence spending ($5.4 billion over four years), scrap the company tax cut ($4.75 billion), slow the expansion of foreign aid ($2.9 billion) and reduce superannuation tax breaks for the super-rich and over-50s ($2.4 billion).

There are some good moves to raise revenue: phasing out the pointless tax break for mature-aged workers, capping tax breaks for medical expenses, and starting to inject some sense into superannuation tax breaks. But there are other savings to regret, backward steps such as scrapping the standard tax deduction proposed by the Henry review, which is the key to freeing ordinary taxpayers from the complexity of tax returns, as well as scrapping the proposed tax break on interest income. Business and investors do badly in this budget.

But in general, this budget is less austere than the dramatic bottom line suggests. That's largely because, as the Coalition points out, many of the "savings" are fiddles, which shift spending out of 2012-13 into 2011-12. We already had lots of them locked in such as carbon tax compensation delivered in May or June when the carbon tax starts in July and this budget has added two more: the first July payment of the Schoolkids Bonus will come in June, as will the 2012-13 grants to local government. As much as $9 billion of spending has been transferred from 2012-13 to 2011-12 to create this budget surplus.

This is important. First, it means the surplus, if it happens, would be a fake, created simply by shuffling payments. But second, it means the budget cuts are less severe than they seem. If the shift is really from a deficit of $35.5 billion to one of $7.5 billion, and if some of it will be replaced by us saving less to spend more, then the real impact on the economy is more like taking out $20 billion.

But that is still a big hit to a weak economy. It makes the budget forecast of 3.25 per cent growth in 2012-13 implausible. And if the economy stays becalmed, even a fake budget surplus will remain out of reach.