Wednesday, April 14, 2010

Wednesday column: Where Australia's Treasurer gets his ideas

Last April, right at the pointy end of preparing the most difficult budget since World War II, Wayne Swan skipped the country.

He flew to Washington to represent Australia at two days of meetings of the G20 and the IMF, reading budget briefing papers on the way.

It seemed like the action of a man unable to delegate, trying to do many things when he should have been doing one thing well.

But there was clear thinking behind his sudden inconvenient absence. There will be another such absence late next week, a mere fortnight before the budget has to fall into place.

He knew that in the past his meetings with overseas counterparts had served him well.

Heading into his first budget, in 2008, Swan and axe-man Lindsay Tanner were planning "tough decisions" and "pain" in order to strip back what they saw as years of waste and overspending in Howard and Costello budgets.

Then Swan went overseas...

In talking to counterparts including then US Treasury secretary Hank Paulson and Federal Reserve chairman Ben Bernanke, he was persuaded that things were precarious in the world's biggest economy and returned determined to make his budget more cautious.

In October, just days after the collapse of Lehman Brothers, Swan found himself in Washington again while his colleagues in Canberra scrambled to react.

"Historians have written about the tension-filled atmosphere that engulfed the Scullin government in the days after the Wall Street collapse of 1929," he later said. "That Government was swamped by events it could neither understand nor control.

"Sitting around that cabinet table in October and by teleconference from DC, we were determined that history would not repeat itself. We were determined to respond with immediacy, purpose and effect."

With Swan on one side of the world and Kevin Rudd, Tanner and Julia Gillard on the other, they extended government guarantees to banks and threw $10 billion at pensioners and families with children to make sure they would spend at Christmas.

By budget time the stimulus packages climbed to $83 billion as Swan carried back with him news from Washington that much of the world faced an abyss. Global growth would contract 1.3 per cent, the most since the Great Depression. Advanced economies would contract an unprecedented 3.8 per cent.

Unable to wind back spending and derided by commentators on The 7.30 Report on budget night for forecasting a colossal turnaround "which I don't think is credible at all", all Swan could promise was to get the budget back into order when things returned to normal.

The forecast turnaround turned out to be highly credible, in part because of the stimulus measures Swan put in place after being spooked and in part because of the measures China put in place after being spooked.

This budget is the one for when things return to normal. Although we don't quite yet know what type of normal it will be. Swan's trip to Washington will help.

Normal will mean donning four self-designed straitjackets:

Every bit of extra revenue that comes the government's way as the economy improves has to be banked rather than spent.

Every new spending measure has to be paid for by cutting an old one.

Total spending has to grow by no more than an inflation-adjusted 2 per cent per year until the budget returns to surplus.

Total tax as a proportion of gross domestic product (GDP) has to stay at or below the level inherited from the Coalition.

These would be tough disciplines in the best of times. In an election year it's impossible to think of a precedent. Swan and Tanner are at the Cabinet table at 8.30 most mornings going through spending and saving submissions one after another.

But some things will help.

One of the government's most popular budget moves is almost cost free. The Henry review recommends abolishing the need for most taxpayers to fill in tax returns. It will win votes without straining the straitjacket.

The flood of income set to sweep into Australia as new, higher resource prices fall into place will push the budget back into surplus much sooner than previously forecast, releasing Swan and Tanner from the spending cap within three years instead of the six previously forecast.

And the sharply improved forecasts themselves will be an electoral plus. On budget night last year Swan famously refused to mouth the words "$57 billion deficit". He'll never need to. After having worked so hard to make big deficit and debt numbers seem bad the Coalition will be forced into conceding that things will now be only half or a third as bad as they expected. Their debt truck had "$315 billion" written on the side. One forecast has it peaking nearer $100 billion.

Tanner thinks we are ready for austerity.

"In the 2007 election campaign when Kevin Rudd stood and said the spending spree has got to stop and the commitments he made would be less than 25 per cent of the commitments Howard made, I felt then, and I still feel it, that was the time when we won that election," he said later.

But one of the most timely and arguably responsible budget measures possible runs the risk of being strangled by the straitjacket.

Ken Henry has recommended a resource rent tax that would push up the headline rate facing coal and iron ore miners from 30 to 40 per cent. In return they would be freed from state royalty payments and would pay no tax until their profits exceeded a predetermined level.

Had it applied in last financial year it would have made Swan's budget an extra $7 billion to $8 billion, about enough to fund Australia's universities all over again.

But it would appear to be caught by the straitjacket that limits the ratio of tax to GDP to the ratio that Swan inherited.

Unless he promised to cut other taxes at the same time, big time.

I can see the makings of an election strategy. Or perhaps not.

It might depend on the vibes he picks up in Washington.

Published in today's SMH and Age

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