Tuesday, April 03, 2012

What to look for in Budget 2012. Pain, deception...

Tuesday column

If @SwannyDPM pulls this off, he really will deserve to be called the world’s greatest Treasurer.

Few Treasurers anywhere in the world (and certainly none in Australia) have ever managed to turn a $40 billion deficit into a $3 billion surplus in the space of a year -- not without a massive surge in tax revenue, which we certainly don’t have. If you were running a company with a budget as big as Swan’s you could do it by sacking 1 in every 10 of your workers and hoping your income held up. To do it while the economy held up would be an extraordinary achievement since the cuts not only amount to 10 per cent of Commonwealth government spending, but around 2.6 per cent of Australia’s entire national spending.

Unless you used creative accounting. And for Swan, just as for any chief financial officer given a near-impossible task, the incentive is there.

As well as the handbook. Last week the International Monetary Fund released “Accounting Devices and Fiscal Illusions” - a sort of how-to guide for Treasurers “tempted to replace genuine spending cuts or tax increases with accounting devices that give the illusion of change without its substance”.

It lists five tricks - all of them familiar in Australia, and some being tried out on us by Wayne Swan and finance minister Penny Wong right now.

Deferred Spending. The Australian variant is brought-forward spending. In mid-May the two million or so families on Family Tax Benefits A and B will get a lump-sum gift - a prepayment of one year’s worth of carbon tax compensation payments brought forward to just before the financial year in which the carbon tax will actually start. At the end of May pensioners will get three quarters of their first year’s compensation payments paid upfront. In mid June Australians on Newstart and Austudy will get their own one year’s worth of prepayment, notwithstanding Newstart’s intended role as a temporary payment until someone gets a job.

It’s happening in order to move spending out of the financial year in which Swan is gunning for a surplus into the preceding year in which he is not. It’s mostly harmless, certainly a lot less harmful to the economy than would be actually cutting spending, for which we may turn out to be grateful.

International examples proffered by the IMF include postponing a military payday by a single day, which the US government did in the 1980s... and leasing instead of buying equipment rather than buying equipment, even when the eventual payments are more expensive.

Disappearing government. It’s what our own government doing with the National Broadband Network. Swan’s wholly owned NBNCo will spend $36 billion over ten years pushing cables into offices and houses. But most of it won’t show up in Swan’s budget. NBNCo is borrowing to do the building (at much higher interest rates than Swan himself could get) and so the spending won’t be in Swan’s books. Its a neat (and expensive) trick, but it least it won’t damage the economy in the same way as withdrawing the spending actually would.

The IMF says Greece tried a similar trick, treating government-owned bus and railway companies as if they did not belong to the government when in fact they did.

Disinvestment. The Hawke and Keating Labor governments sold off chunks of Qantas and the Commonwealth Bank and then booked the proceeds as revenue, the same sort they might have made from collecting tax, conveniently ignoring the decades of future dividends Qantas and the Commonwealth would no longer give them. These days Australian budget standards don’t permit that sort of trickery, but that did stop the Coalition in the 2010 election from (probably inadvertently) counting as revenue the proceeds of its planned sale of Medibank Private without counting as lost revenue the dividends it would no longer receive.

The IMF says Greece tried it selling future lottery proceeds and air-traffic control fees, Belgium sold future tax revenues.

Hidden borrowing. A loophole in Australia’s budget standards allows the sale of buildings (but not companies) as a way of gaining revenue without having to take account of the ongoing costs of paying rent. In the late 1990s the Howard government booked billions from selling government buildings including the purpose-built Foreign Affairs HQ, despite a warning from consultants Access Economics it would get “done”. Spurned, Access advised the Motor Traders Association to buy the building and its been pushing up the rent ever since.

Forgone investment. NSW premier Bob Carr and his successors simply didn’t invest in anything much once the Olympics was out of the way. Hospitals ran down and roads were left to decay unless they were “private” which meant the construction costs were off the government’s books, even if unpublicised side deals meant future governments would have to out handsomely if the toll-paying commuters stayed away. The IMF gives Australia’s toll roads a special mention.

Swan’s anguish is that these sort of tricks have already been tried. He’ll need billions more in real cuts. My money is on defence. In the incoming minister's brief presented to Senator Wong after the election her department listed options. The first was to “re-assess the strategic posture and funding of defence”.

In today's Sydney Morning Herald and Age

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