Whether that's wise or not
Good news will be scarce on budget night, but there will be something - at least for smokers.
Wayne Swan and Penny Wong had been considering a further 25 per cent rise in the tobacco excise that would have raised an extra $1.25 billion a year. Recommended by their National Preventative Health Taskforce it would have pushed the price of a pack of 30s above $20. But the government that famously took on big tobacco late last year in a war over plain packaging got cold feet. In the leadup to the budget it decided it had offended smokers enough, some of whom might still vote for it.
That means there won’t be another run of the infamous headline: “Beer up, Cigs up,” in part because the government has also rejected a plea from the Foundation for Alcohol Research and Education for a flat tax on alcohol that would have raised an extra $1.5 billion per year.
Just about everything that is in the budget will hurt, except perhaps for the lower interest rates that will almost inevitably flow from a raft of unpopular decisions.
A decade ago John Howard launched a reelection campaign from a lectern that read “Keeping Interest Rates Low”. He won, despite starting behind in the polls.
“Keeping interest rates low” is about the only slogan left for Swan and Wong as they try to sell Tuesday night’s budget. There will be no money for handouts (in fact they are grabbing money back) and they won’t be able to promise a surplus, at least not until the final year of their four-year set of financial projections.
But they will be able to promise a set of conditions that will as good as guarantee a further rate cut and perhaps a series of further cuts well into the life of the next government.
The banks will most likely get into the act themselves by cutting off their own bat, just as they did shortly after the last Coalition government was elected in 1996. They did it then not because they liked the change of government (although they probably did) but because upstart competitors such as Aussie Home Loans were stealing their customers by offering cheaper deals. The global financial crisis removed Aussie and its ilk (it is now owned by the Commonwealth Bank) but the conditions are ripe for new competitors to attack the banks again. The Reserve Bank believes they are charging more than they need to. As soon as a competitor comes in with something better, they will cut in order to compete without waiting for the Reserve. As a sign this is getting close on Friday the ANZ cut its standard mortgage rate by 0.27 points, more than the Reserve Bank’s 0.25 point cut. That hasn’t happened in years.
The Reserve Bank itself believes the resource investment boom is about to peak. “Once it has passed, the decline in mining investment – and the effect of the still high level of the exchange rate and ongoing fiscal consolidation – will weigh on economic growth,” its assistant governor Christopher Kent said recently.
The Reserve is desperate to find something, anything that will take the place of resource investment in driving growth and providing jobs. The high dollar has been making it hard for non-mining businesses to take up the slack.
That’s where “ongoing fiscal consolidation” comes in. It’s code for budget cuts. Dr Kent says it will “weigh on economic growth.”
The Bank has only one lever to boost the economy when something weighs on economic growth and it’s ready to use it.
That’ll be even further good news for the one-third of Australian households with mortgages. When Labor came to power the typical standard variable mortgage rate was 8.30 per cent. It’s now 6.20 per cent making a householder on a $300,000 mortgage an extraordinary $456 per month better off. Two more interest rate cuts in the months ahead would push the total gain well north of $500 per month.
It’s not the easiest of ways to sell a budget full of pain but Swan and Wong will try.
Never in living memory has a government gone into an election flourishing a bipartisan agreement to lift a tax. Tuesday’s budget will lift the Medicare levy from 1.5 per cent to 2 per cent of income from July 2014 with the grudging support of the opposition. The National Disability Insurance Scheme was to have been funded out of higher general tax revenues, but they are increasing nowhere near as fast as they would need to.
The increase will raise $3.3 billion per year, nowhere near enough to fund the $6 billion or more the scheme will cost the Commonwealth, and possibly a good deal more over time, but it’s a start.
It’ll cost an Australian on an average income an extra $250 per year, but only from mid-next year.
The missing FTB boost
From mid this year the government had been planning to boost the Family Tax Benefit Part A by up to $300 for families with one child and $600 for families with two or more. It was to be part of a $3.6 billion“Spreading the Benefits of the Boom” package funded by the mining tax.
It will be be withdrawn now that it is clear the mining tax isn’t raising anything like what was expected...
The government is hoping the 1.5 million families the withdrawal will hurt don’t miss what they never quite got, but they will be left with less to spend than they otherwise would have, a prospect that led Myer boss Bernie Brookes to dub the proposed hike in the Medicare levy “not good for our customers,” an epithet for which he later apologised.
But this measure will hit his customers one year earlier.
The missing tax cut
The carbon tax might have hurt, but many Australians were handsomely compensated. From or before July 2012 pensions were boosted, income tax was cut, family tax benefits and the tax-free threshold were lifted and extra payments were directed to low-income Australians.
A bit extra was due in 2015 to when the tax-free threshold was to climb further to compensate Australians for an expected increase in the price of carbon as the scheme linked to Europe’s
But European carbon price has collapsed. Instead of the expected $29 a tonne it is now less than $5, meaning there is unlikely to be an increase to compensate Australians for.
We’ll miss out on the extra $1.59 a week from 2015. But in return the carbon component of our electricity prices will fall.
And the Coalition wasn’t going to give it to us anyway. It has promised to scrap the carbon price and all of the compensation that isn’t set in stone within months of taking office.
It won’t be enough. Swan and Wong will need to cut still further to make room for the National Disability Insurance Scheme and Gonski education reforms and contain the deficit. Not all of the unpleasant news is out there.
We do know about a tightening of so-called thin capitalisation rules will limit the ability of multinationals to borrow in Australia to in order to make more lightly taxed profits overseas. It’ll net Swan and Wong a bit over a billion per year.
The baby bonus and the child care rebate may also be back for another trim. A year ago Mr Swan announced that second and third children would only attract a bonus of $3000, instead of $5000. Complaints quickly died down despite the opposition's unfortunate reference to China's one-child policy.
Also in the gun are the generosity of Medicare and the Medicare Safety Net, and the public service which is certain to be slugged with another “efficiency dividend”.
The changes already announced to Superannuation were and the government says it will go no further. It is also giving every sign it will keep the Schoolkids Bonus although logic would suggest it should go because it was partly funded by the mining tax, and the Coalition plans to remove it anyway.
An ever-receding surplus
A year ago Wayne Swan rose to his feet declaring “the four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies”.
He won’t be saying that this year. The money’s not there. Whether it hurts the economy or not we are about to pay the price.
In today's Canberra Times, Sun Herald and Age
Swan’s vanishing surplus. How he’ll share the pain:
From mid 2013
A planned boost to Family Tax Benefit A axed. A family earning up to up to $78,000 with two children under 12 would lose $600.
From mid 2014
An extra Medicare levy lifting the total from 1.5% to 2%. An Australian on $50,000 would pay an extra $250.
From mid 2015
A planned boost to the tax free-threshold axed. It was to have been worth $83 for incomes up to $65,000.
Also at risk
. Tax rules for multinationals
. Access to the Medicare Safety Net
. Access to the Baby Bonus
. A public service “efficiency dividend”
Wayne Swan will deliver his sixth budget at 7.30 pm Tuesday night
. Budget 2013. Bad for shape-shfting multinationals, smokers...
. Why it'll be a near $10 billion deficit, with lots of small cuts
. Budget 2013. What if our prime minister gave a really good speech?
. Grattan: Why we're facing a decade of deficits