Wednesday, May 09, 2007

A budget reaching for greatness, and missing

The shame about this year's effort is there's $70 billion that could have been spent really well.

PETER COSTELLO has delivered a budget for the times. Not only is Australia's Treasurer rolling in money due to an extraordinary windfall of more than $70 billion over four years but last night he didn't do what he and each of his predecessors have done in almost every budget since Federation: promise that his largesse was going to create jobs.

In fact, he tried to dress up the largesse as something more high-minded.
His departmental head, Ken Henry, has told him bluntly, and in an unexpectedly public way through a leaked speech, that in the current environment electoral giveaways will almost certainly not create jobs. They will merely move jobs from one employer to another...

As Dr Henry caustically entreated his staff, "The next time any of you get an opportunity to write a coordination comment on a cabinet submission that proposes a taxpayer-funded handout for some stunning new investment proposition and I predict that some of you won't have to wait very long for such an opportunity I suggest you draw attention to the submission's failure to identify the businesses that will lose labour, and be forced to reduce output, if the proposal is agreed to".

He added that "ignoring transitional cost issues, there is nothing inherently bad about job destruction, but the more important point is that there is nothing inherently `good' about job creation either, unless it opens up an economic opportunity for someone who would otherwise not have a job or is associated with higher income than the job it replaces".

The Labor Party has unwisely not paid particularly close attention to Henry. For example, it has promoted its policy of low-interest loans for households to install energy saving devices as a measure that will benefit tradespeople. (Tradespeople! As if they weren't run off their feet as it is.)

Peter Costello has paid very close attention. Almost every one of his $70 billion worth of giveaways is dressed up as a measure to expand the nation's productive capacity.

We need to be educated to expand the nation's productive capacity, so there are grants to bring up to scratch children who fall behind in maths and reading.

We need more workers, so there are improved child-care arrangements to make it easy for parents to work and even more generous tax arrangements for retirees who work. We need healthy and fit workers so there are measures to improve dental health and fight obesity. We need to prepare for climate change and so on.

(The strangest measure, which I still can't get my head around, is the $5 billion higher education endowment fund, set up to do the sort of things that the Government should be doing anyway. Individuals will be invited to add to the fund by sending in gifts. Not since the Second World War have Australians been asked to voluntarily help the Government out with extra tax.)

Peter Costello's rhetoric will please Ken Henry. And it marks a seachange for Australian budgets. Even the obligatory tax cuts were this year sold not as electorally attractive bribes, but as the last and least important of a suite of measures designed to address measures of national importance.

As the Treasurer put it, "Our tax system exists to fund the decent services in health, education, aged care, and other services that Australians legitimately expect and are entitled to receive. If, after we provide for those services, invest for the future, and balance our budget, we can reduce the tax burden, we should do so."

It has to be said that, in talking this way, Costello is also at last following the advice of the opinion polls that for a decade or more now have consistently said that people value spending on health and education over tax cuts. They want the Government to concentrate on what matters.

But it also has to be said that the detail of much of what the Treasurer has announced probably fails the Ken Henry test. Solar panels will remain uneconomic for most households, even with a rebate of up to $8000 each time. The grants are probably electorally attractive but a waste of money when it comes to enhancing productivity, even if they create more work for already overstretched tradespeople.

The section in the speech headed "meeting the challenge of climate change" does no such thing, and the Treasurer and his colleagues doubtless know it. That might be why the Environment Minister, Malcolm Turnbull, looked so uncomfortable at the Press Club last week and it might be because the Government's real response to the question of the challenge of climate change is to come, next month after the release of the report of the emissions trading taskforce.

The section entitled "Rewarding older Australians" reads much more like a bribe than a nation-building measure, and the one-off nature of the bonus payments for seniors and carers (conveniently paid during the current financial year rather than the next so as not to come off its surplus) makes the bribe element all the more obvious.

The Treasury Secretary may well be breathing a sigh of relief that the "investment in land transport infrastructure" announced in the budget does not include the foreshadowed a money-losing "steel Mississippi" railroad snaking through just about every marginal electorate in Queensland.

It's the language that's changed, and for that we can be grateful. At times the language is as misleading as ever. The budget overview asserts that "productivity is expected to increase in 2007-08". True enough on the forecasts, but it neglects to mention that those same forecasts imply that productivity will increase not at all throughout 2006-07, a deeply disturbing development and one that honest budget papers would clearly address.

In order to even find the productivity forecasts in the budget documents during the journalists' lock-up I had to ask three Treasury officials. The third conceded that they were included nowhere in the budget papers but told me how to do a rough calculation from figures that were published to draw them out.

By the standards of budgets past, including Mr Costello's , this budget is a good one, especially given the electorally charged atmosphere. But it is not a great one. Which is a pity given $70 billion that could have been spent really well.


The Treasurer is to give away an unprecedented $70 billion over four years in tax cuts and extra spending.

He has found it from an economy which has boomed beyond all expectations.

This financial year Mr Costello will take in $4 billion more than he forecast at the time of its budget. He will also be paying out $3 billion less. A booming economy cuts the need to spend on welfare and the like as well as increasing revenue.

In the financial year about to begin he’ll take in $13 billion more than he last forecast at the time of the last budget, and need to pay out almost $5 billion less. In future years the revisions are even more extreme. He’ll be $22 billion better off that he had thought in 2008-09 and $25 billion better off in 2009-10.

The extra money is no longer all company tax flowing in as a result of the mining boom. The budget documents show that it is now also coming in from individuals, as employment climbs (particularly full-time employment) and wages grow faster than the Treasury had expected.

It would be tempting to believe that the process has become self-sustaining. The more of us who are employed, the more we spend and the more employment grows.

But the Treasury doesn’t believe this. Although it has revised upwards its previous forecasts of employment growth it still expects that growth to slow. Around 250,000 extra jobs will have been created this financial year, almost all of them full-time. Next financial year it’s tipping only about 150,000. It believes that employment growth will slow because we are running low on workers. We will hit a brick wall, but slowly. It says employers recognise the danger and are employing workers full-time where they can.

Not only will employment growth slow but next year the unemployment rate will climb.

This is because the government’s welfare to work measures - now fully in effect - will force into the employment market people on disability pensions and parenting payments who are likely to be less acceptable to employers.

Australia’s unemployment rate is expected to average 4.75 per cent this financial year. By the end of the next financial year the Treasury says it climb to 5.25 per cent.

The economy is expected to grow more strongly in the year ahead in part because of an expected end to the drought. Farm GDP is expected to have fallen 20 per cent this financial year. Next year ahead it is expected to rebound 18 per cent (if the drought does end) helping push Australia-wide GDP growth up from 2.4 per cent to 3.75 per cent.

The Treasury expects this combination of a slide in employment growth and a weather-assisted boost in economic growth to return Australia to productivity growth.

Its figures suggest that productivity grew not at all in the current financial year, the worst performance since the 1980’s. It expects growth of 2 per cent or more in the financial year ahead.

Household spending is expected to continue to climb at its present strong rate of 3.5 per cent per annum and the housing market is expected to pick up somewhat.

Completing the very pleasant set of budget forecasts, inflation is expected to remain broadly steady in the centre of the Reserve Bank’s target band and Australia’s trade deficit is expected to narrow as exports pick up.
Rarely has a Treasurer been blessed with so many things apparently going right and so much unforeseen revenue.

Peter Costello believes he has spent it wisely.