Tuesday, May 12, 2015

It's a Swan of a budget: Hockey channels Labor

Joe Hockey is turning into Wayne Swan and then some.

Whereas Swan allowed small businesses to write off spending on equipment up to $6500, Hockey is allowing them to instantly write off spending up to $20,000. And to do it again and again. There's no limit on the number of times small businesses can get the Tax Office to fund a big chunk of $20,000 right through until July 2017.

He is turning into Swan because that's what treasurers do when businesses aren't investing. Non-mining firms (as well as miners) have been telling the Bureau of Statistics they plan to actually cut investment spending in the year ahead.

And you forecast a pickup in the economy, which is doubly useful because it allows you to forecast steadily shrinking deficits.

If things turn out much worse than you forecast, you can always say you were blown off course. For both treasurers, it's true. The iron ore price dived far further than they could have reasonably expected. It has halved in the past year. Hockey is forecasting a further fall in the year ahead, but perhaps not enough of a fall. He is forecasting a quicker lift in the economy than is the Reserve Bank. The budget measure of economic growth is languishing at 2.5 per cent. The Reserve is picking an unchanged 2.5 per cent for the financial year ahead. Hockey and Treasury are picking 2.75 per cent. It's a small enough difference to be believable (honest estimates can reasonably differ) but big enough to make his budget numbers look better.

And you hope.

You talk about seeing the "glass half full" as Hockey did in the budget lockup, but you act as if it's nearly empty. This budget and the measures leading to it since December will push an extra $2.153 billion into the economy in 2015-16. They'll add $2.153 billion to the budget deficit. It's not what you do if you think the economy is going to be strong. In subsequent years the balance changes and they remove money from the economy, but not much. By 2018-19 they will have removed only $1.605 billion.

An attack on the deficit, delivering "a surplus for every year of our first term" as Hockey once promised in opposition, could drain the glass.

Several of the longer acting measures in last year's budget that were scheduled to bring about a surplus by the end of the decade are missing from this one. Pensions will now be indexed by the highest of wage increases or prices each six months rather than simply prices, meaning they won't steadily shrink the deficit. But remarkably Hockey still forecasts a return to surplus at about the same time.

The trick is lower interest rates. The government's borrowing rate has collapsed since the last budget, hitting an all-time low of 2.4 per cent last month, although it's been climbing since. Plug in that lower rate and the cost of the annual interest payments on debt scarcely climbs even while the debt balloons. That's why the Treasurer was able to claim that he is now paying just $96 million a day in interest on debt, down from $133 million under Labor. It isn't because he has shrunk the debt. It's because, like all of us, he is finding it easier to manage.

But the debt itself shows no sign of leaving. Whereas last year Hockey was able to claim his government would be free of net debt by 2024, this year he is unable to claim it'll ever be debt-free. The line on the graph remains high well into the 2030s, further than the eye can see.

There's one respect in which Hockey isn't Swan. For all the talk about spending big on infrastructure (which would certainly be a good thing) he is offering next to nothing new. The biggest spend is $142 million on offshore resettlement facilities for asylum seekers. It won't even be spent here.  

In The Age and Sydney Morning Herald

The Zombies that make the numbers look good

The coalition's second budget is propped up by "zombie measures" from its first. Announced in a year ago but not yet passed in the Senate, they are politically dead but not yet formally abandoned, meaning the income or savings they would have raised can be used to dress up the second lot of budget forecasts regardless of reality.

The biggest are the cuts the funding formulas for state hospitals and schools. Due in 2018-19 but unlikely to ever be legislated, they were to save the Commonwealth $80 billion over 10 years. There's not a mention of them in the second Hockey budget, but they are there nevertheless.

The budget totals for grants to states for hospitals and schools are noticeably lighter in 2018-19, the last year for which there are detailed forward projections, and the broad brush graph of the budget balance that goes beyond that gets a lift from then on.

It means that trying to come to grips with the deficit projections is like wrestling with ghosts. Even it dead, they live on in the projections until they are formally renounced.

One that has been renounced is the Medicare copayment and the associated cut in payments to doctors. It is indeed dead and no longer propping up the budget.

But others linger on. The Coaltion's first budget lifted co-payments on prescriptions and made it harder to take advantage of the pharmaceutical benefits safety net. It's politically dead, unlikely to ever be approved by the Senate, but it's dressing up the numbers.

University graduates will no longer be charged an above-inflation interest rate on student. The government has confirmed that, and it's not in this budget. But silently left in the budget is the requirement to start the repayments earlier and the 20 per cent cut to university funding, even though they'll most likely never happen. They are improving the budget forecasts without seeing the light of day.

Last budget the government tried to limit Family Tax Benefit B to families with children under 6. The Senate wouldn't let it do it, although now there's a least a chance it might as part of a trade off to get Scott Morrison's childcare package. It lives on in the numbers nevertheless.

And the big cuts to Newstart that would have made young people wait six months before getting the dole live on as well, although in a scaled-back form. They'll now only have to wait one month. It may never get through the Senate, but it's in the budget.

In The Age and Sydney Morning Herald