Saturday, April 30, 2011

Budget 2011/12. We are about to find out what Swan and Wong are made of.

If next Tuesday week’s budget delivers nothing else, it might get us quieter roads.

For weeks in the lead-up to the end of the fringe benefits tax year on March 31 middle-ranking executives have been driving their company-funded cars up and down hills and backwards and forwards on freeways needlessly burning fuel in order to cut tax.

Accountancy firms such as Deloitte spell out the maths to clients each year in advice with headings such as “Drive your benefits further”.

“Many employees may be on the cusp of the next kilometre threshold used to calculate FBT using the statutory formula method,” one such set of advice says.

“For example, an employee who has a car valued at $35,000 and drove 24,000 km during the FBT year would have an FBT liability of $6,720. Increasing the number of kilometres driven to more than 25,000 km would reduce that liability to just $3,696 – a saving of more than $3,000.”
It’s advice drivers follow. A truly shocking graph in the Henry Tax Review shows an enormous peak in the number of cars driven just beyond 25,000 km each year.

“It is totally perverse. We are encouraging people to use less fossil fuels, but at the same time encouraging some to keep driving until they reach a magic number,” says Greens MP Adam Bandt who has had Treasury cost a change that would tax all personal travel in employer-funded cars at the one rate.

It’d save the budget almost $1 billion over four years and clear the roads and get executives back to work.

The only thing odd about the idea is that it hasn’t been tried already.

Wayne Swan must have known about the problem when he drafted his first budget four years ago in 2008. He certainly knew about it when his drafted his most recent budget with a copy of the Henry Review in his hands.

“It’s a phenomenon,” says former Finance Department deputy secretary Stephen Bartos.

“Every time you introduce a program - no matter how silly - it develops adherents, in this case the car industry. It is far easier to put a program in place than to ever take one away.”

A severe and unexpected shortage of funds has forced Wayne Swan and finance minister Penny Wong to this year examine options that would have once been unthinkable...

Company tax collections are running a shocking 10 per cent below last year’s budget forecasts. Those forecasts assumed an exchange rate of 90 US cents to the dollar for years to come. It’s now around 110 US cents and climbing. Away from the mining industry, exporting firms and firms that compete with imports are struggling. Financial firms are suffering for a different reason - Australians aren’t borrowing at the usual rate and are paying off debt. Even mining firms are failing to deliver the rivers of tax expected because they are expanding and investing in new mines rather than letting their profits accumulate.

Many mines haven’t been able to export. The floods have probably knocked $9 billion off the economy. At the same time the government has to spend an extra $5 billion on rebuilding and compensation for the floods barely funded by an inadequate levy and measures that won’t come good for years.

This year’s budget deficit looks like topping $50 billion instead of the forecast $41 billion.

In time much of this will come right. Mining companies are set to deliver gigantic profits when they stop expanding (and from mid next year enhanced government revenues thanks to the new mineral resources rent tax). But Swan and Wong can’t wait. They have locked themselves into a promise to deliver a budget surplus in 2012-13 no matter what. Neither floods nor cyclone nor weak tax collections can be allowed to stand in the way.

Their most recent published forecasts had a budget deficit of $12.3 billion for the coming financial year (which they will now find hard to meet) and a paper-thin surplus of $3.1 billion in 2012-13 (which they will try to better).

Almost all their decisions have now been taken. Insiders say 99 per cent of what’s planned is already in the public arena. By the standards of earlier crisis budgets this one has been orderly. Swan and Wong will spend the next 10 days casting their eyes over a document already largely prepared.

Not every leaked measure will see the light of day. A prostate cancer survivor, Swan says he owes his life to medical research and has strongly hinted it won’t be cut back as leaked. A plan to means test the 50 per cent childcare rebate may have also been dropped. It is widely acknowledged that the present system is a mess. Professor Alan Duncan of the National Centre for Social and Economic Modelling amused delegates at a recent conference when he used a three dimensional diagram to describe the interaction between the means tested childcare benefit and untested rebate saying it was so complex he couldn’t follow it even with his PhD in economics.

Other measures are locked in. The budget will close a loophole that allows family trusts to pay income to untaxed children. It will make it harder to get on to the disability pension and harder still to stay on the unemployment benefit.

And an array of measures will be hidden. The little-understood “efficiency dividend” is designed to usher in a raft of cuts that while not immediately apparent may later be felt in longer queues for government services, poorer government decision making and a virtual drying up of government jobs.

Normally set at 1 per cent per year, the efficiency dividend dictates the amount by which each portfolio’s budget falls short of what’s required to allow it to keep employing and spending as it did the year before.

In the election prime minister Gillard promised to lift it to 1.25 per cent for one year only. On Easter eve Penny Wong trumped her announcing a painful 1.5 per cent for two years followed by 1.25 for another two.

The political plus of steadily starving the bureaucracy is that the politicians don’t need to decide or announce where the cuts should be. They delegate the anguish of making those decisions to each department and hope they pass unnoticed. When they are noticed, as some eventually will be because the cuts are cumulative, politicians can claim disingenuously that it’s not their doing.

It’s been an appalling Easter for departmental officials who have been made to offer up further cuts on top of cuts they have already made, knowing they will have to offer still more in each of the following three years.

A standing rule that new programs are generally funded out of existing departmental budgets makes things worse.

It’s tempting for officials to make cuts where they will be noticed in order to ferment a backlash and gain relief. To guard against this the proposed cuts have to be run past government ministers who get to veto the politically sensitive ones and send their officials back to try again.

It’ll mean bleak employment prospects in Canberra after years of plenty and a thriving business for the consultants who’ll be called in when the officials realise they have cut too far and need help to carry out their functions.

Former Finance deputy secretary Stephen Bartos now with the consulting firm LECG can’t see a problem, “provided - and it’s a big proviso - ministers are happy to forgo regulations and services”.

Asked where cuts could be made without trouble, Bartos points to the ballooning public relations sections of departments, guards at every building entrance, and continuing high travel spending.

“The public service is bigger than it has ever been, and yet it should be easier not harder to do what it does using new technology.”

Swan and Wong will be hoping that’s how things turn out. During the election their colleagues ridiculed Tony Abbott’s plan for a 2 per cent efficiency dividend arguing it was unworkable.

An awful unfairness to be revealed on budget night is that while some recipients of government welfare suffer others will escape without a scratch.

In March the prime minister succumbed to a lobbying campaign and boosted the ongoing grant to the Australian War Memorial by $8 million per year. Her commitment to cut the company tax rate will cost $3.5 billion over four years, $3 billion of it going to big business.”

Bandt wants the gift to big companies reexamined before jobless Australians are made to suffer.

“We are being told we are in exceptional circumstances, that the high dollar and natural disasters have put things up for grabs. The government should be prepared to be as tough on corporate welfare as it is on the welfare of someone earning $240 a week,” he says.

More than most budgets this one won’t please anyone. The Treasurer has said that all of the 250 promises made during the election campaign are safe.

The decisions made elsewhere will require courage and common sense. Tuesday week we will get an idea of how much of those qualities Swan and Wong have.

Published in today's SMH and Age

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