Thursday, May 19, 2011

Gillard and Swan:  meet the fiscal incredibles

Treasurer Wayne Swan claims to have cut some $22 billion out of the federal budget.  Well actually that's not quite right -- he claims to have found savings of some $22 billion.  Over four years.

Then we discover that some of those savings are actually tax increases.  Not to mention the whole heap of new spending initiatives.  No wonder people are confused and the budget hasn't been well received.

To be fair -- a tax increase is a ''saving'' to the Commonwealth budget in some accounting sense but it is not a saving to the taxpayer.  So in the very first instance the Government has a framing problem.  They have framed their budget as an ''us versus the taxpayer'' document and it is no wonder they have been accused of class warfare.  Being proud of their ''Labor budget'' doesn't help either.

The blunt reality is that the Government's spending cuts are simply not credible.  There are actually some good spending cuts proposed in the budget yet good policy doesn't sell itself and this government has proven to be incapable of selling anything.

While strictly speaking not counted as a spending cut the move to ''reform'' the Disability Support Pension highlights the communication problem this government faces.  It is a good idea to get people on the disability pension to work more -- if they can.  But this should not be framed in the context of labour force participation.  Getting disabled people to work is never going to solve any so-called skill shortages.

Rather this should be undertaken as a social inclusion policy.  That means that policy is likely to be expensive.  Ideas here would be to exempt disabled employees from payroll tax -- that means the Commonwealth would have to compensate states -- or to refund their income tax payments to provide them with greater incentive to participate and so on.

The cuts to family payments, designed to save some $2 billion over four years, are incoherent.  That isn't to say they are bad policy.  The economic narrative the Government has pursued in justifying those cuts is incoherent.

The Government have been unable to settle on a sensible description of the economy.  On the one hand, we're told Australian economic growth is the envy of the developed world, our net debt is low, unemployment is below 5 per cent, terms of trade are the highest since whenever, and so on.  Yet, we're also being told about the need for frugality, and the two-speed economy, and how the Government understands that families are doing it tough.

Of course, the Government is simply reflecting the uncertainty of current economic conditions but it hardly surprising that average Australians are experiencing some angst over that uncertainty.  Winding back the social safety net would be difficult at the best of times -- but it is much harder when people feel insecure.

Where the Government is struggling is in defining middle-class and middle-income.  Almost everyone conflates the two definitions, but of course they are very different.  The middle class is much larger than middle-income earners.  Households with an income of $150,000 are not rich but they are well above the middle-income.

Any crack-down on middle-class welfare will require these households to effectively pay more tax or consume fewer public goods.  As yet the Government has made no argument why this should occur, apart from vague references to ''fairness'' and ''labor values''.  True, the prime minister did say on radio recently that ''high-income earners like you and me do get asked to look after ourselves'.  She earns an income far in advance of $150,000 and has few household expenses.

The lack of a coherent narrative isn't the only problem the Government faces.  Some of their cuts are lazy policy.  The efficiency dividend will cut a mere $1 billion over four years.  Sure everybody wants to have an efficient government, but the amount is trivial in the face of deliberate waste on pink batts and economic aid budget increases by almost $2.5 billion over four years.  So while public servants scrimp and scrap to provide Australians with services the Government will be splashing out on foreigners.  Does that make sense to anyone?

To place the ''$22 billion over four years'' spending cuts in perspective, think about the total spend of some $362 billion -- spell that out to three hundred and sixty-two thousand million dollars to get some idea of the magnitude.  Next financial year alone, that amount is some $22.6 billion short of revenue.

Swan's savings over four years are simply not enough.  To make matters worse he is incapable of articulating why the budget needs to be in surplus and how best to achieve that goal.  In an open globalised economy government is going to have less control over revenues and spending control is the only mechanism government has to ensure fiscal responsibility.

In 2007 Kevin Rudd stated, ''this reckless spending must stop''.  He was right then; he would be even more right now.  This budget does have some good ideas in it, but not enough and those good ideas will wither on the vine unless the Government gets out there to articulate why fiscal responsibility sooner rather than later is good economic policy.

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