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Tuesday, May 12, 2015

The timid budget. Why they'll merely make do tonight

There's been something odd about the lead-up to tonight's budget.

Time and time again Joe Hockey has floated ideas only to have them knocked down. He suggested what he would soon be doing about negative gearing only to have Morrison and Abbott slap him down. He suggested he would look at super tax concessions, only to have just about the entire party slap him down.

Tony Abbott, not Hockey, chaired every one of the expenditure review committee meetings. The last time around he let Hockey deputise for him when he was away. Scott Morrison, not Hockey has been fronting budget press conferences. One of the cruelest photos on The Age's website shows Hockey posing for pre-budget photos in his inner office while in the outer one Scott Morrison is on the TV announcing the childcare package.

And the usual post-budget salesmen are ducking for cover. I know of two instances in which government MPs have turned down invitations to speak at post-budget functions, saying they would rather leave it to others to defend the budget.

The new Treasury boss John Fraser has abandoned a 20-year tradition in which his predecessors have fronted up to business economists in Sydney on the Tuesday after the budget.

Instead he will appear on Friday in Melbourne at the newspaper-unfriendly time of 6.30pm "in conversation" with John Daley of the Grattan Institute. He'll face questions, but it won't be a grilling.

The nervousness may have to do with the impossibility of the task...

The government wants to cut the deficit. It has said so often enough. Abbott once declared a "budget emergency". Hockey held out the prospect of delivering surpluses "in each year of the first term of a Coalition government".

However, the deficit keeps rising. Labor forecast $18 billion for 2013-14, the Coalition forecast almost $30 billion for 2014-15, and tonight it'll forecast something north of $40 billion for 2015-16. That's because the price of the stuff Australia sells keeps sliding. When Labor drew up its last budget iron ore was $US124 ($157) a tonne. A year later it was $US102 a tonne. This morning it's about $US61 a tonne.

The Treasurer says every $US10 that the iron ore price falls adds about $2.8 billion to the deficit, a rule of thumb which would suggest that, all other things being equal, the government has lost $17 billion since the last budget as iron ore exporters pay it less tax. However, all other things are not equal. The dollar has slid from US93¢ to US79¢. Meanwhile, iron ore exporters churn out more product, and the net effect has been to drain the budget of revenue.

From the comfort of opposition it's easy to say that the right approach is to slash government spending or at least wind back its growth, and that's exactly what Hockey et al said. But in government it's wise to consider the consequences of taking money out of an economy that's already losing billions.

A year ago Hockey said he didn't want to do anything to dent confidence (which was actually climbing in the lead-up to the budget). Now confidence is genuinely weak. It's not only mining companies that are scaling back their investment plans, it's also non-mining companies, which were meant to take up where mining left off. Non-mining firms plan to invest 9 per cent less in the next financial year than in this one, mining companies 21 per cent less. The much talked about transition from mining investment to something else is "virtually non-existent" in the words a market analyst. The firms the Reserve Bank regularly talks to say they are reluctant to invest until they see a durable pickup in consumer spending. It has been picking up, but it isn't durable.

If last year was the wrong time to dent confidence, this year is worse. Both of Australia's leading private sector budget forecasters are talking quietly about the need to prepare a game plan to prevent the economy sliding into into recession.

The Reserve Bank reported on Friday that public spending was unchanged throughout 2014. That means the Australian government did nothing to boost the economy as unemployment climbed, but at least >the government didn't harm it.

Doing no harm is now the top priority.

The Treasurer says the budget will be only "mildly contractionary", although he said that some time ago and might have since been overruled.

The big themes of the budget will be families, taxation and jobs. Although many of the families and taxation measures are known, the jobs measures are not. What is known is that they cannot cost much money. Even if it has made a deliberate decision to go slow on cutting the deficit in order to protect the economy, the government most certainly won't have decided to allow the deficit to blow out in order to boost the economy.

Measures that would have helped the budget long-term such as more slowly lifting the age pension are now off the table. They were too unpopular and couldn't get through the Senate.

Measures such as attacking negative gearing and withdrawing superannuation tax concessions won't even make it to the table. They stand the best chance of winding back the budget deficit over time (the cost of the super contributions tax concession will climb from $16.3 billion to $19 billion over three years and the cost of the super earnings concession will climb from $13.4 billion to $26.8 billion) but the government has decided to retain them in order to create a point of difference with Labor.

Tonight we will get a budget that will do little in net terms, even though it could. Its authors are hoping it's enough.

In The Age and Sydney Morning Herald