Wednesday, May 14, 2008

Budget 08: The commentators weigh in.

Here are the big ones:

Ross Gittins: 'If Wayne Swan is Robin Hood, I'm the Sheriff of Nottingham.'

KEVIN RUDD has failed to grasp the nettle. In his effort to demonstrate Labor's credentials as a good economic manager he is off to a disappointing start.

The budget could have been worse - as it almost certainly would have had John Howard been re-elected - but it could have been much, much better. By better, of course, I mean more unpleasant.

By all the rules of politics and economics, this budget should have been a stinker. It isn't. If you think that's good news you may live to repent your error. It's pleasure now at the risk of pain later.

Mr Rudd needed to seize the unrepeatable opportunity of his first budget to cut hard at his predecessor's profligate spending programs. He did a bit, but not nearly enough. At his first test, he has failed to live up to his rhetoric.

This budget is not as "tough as all hell" because it hasn't "taken the axe to irresponsible spending"...

We were told the budget would "exert maximum downward pressure on inflation and interest rates".

It doesn't. Wayne Swan has cut government spending, but not sufficiently to counter the effect of his $11 billion tax cut from July 1. The budget will therefore do little to reduce the need for any further increase in interest rates. So the claim that the budget gives relief to hard-pressed "working families" is a sham.

It's temporary relief that could well come at the cost of additional pain in coming months. Even if further interest-rate increases don't prove necessary, the budget does nothing to bring forward the day when the Reserve Bank is able to start cutting rates. The good news in the budget is that Mr Rudd has broken the mould of politicians feeling free to go back on their promises.

The bad news is that most of the promises he has insisted on keeping were weak, vote-buying policies and now quite inappropriate to the present economic circumstances. The Government seems to have been working under the belief it could come up with a popular tough budget. Not surprisingly, such a contradiction wasn't possible.

This budget won't be particularly unpopular, simply because it isn't sufficiently tough. The plain truth is that working families constitute too much of the economy for them to be protected in any budget tough enough to take pressure off interest rates. It is Mr Rudd's misguided desire to shield middle-income households that has rendered the budget inadequate to protect their interests in the longer term.

Mr Swan has laboured hard to create the impression that the budget achieves the required savings largely at the expense of high-income earners. Don't be taken in. There aren't enough of them to make a big difference to the budget's bottom line and, in any case, they've been thrashed with a feather.

The alleged means tests have been set at such high incomes they apply to few people and will save surprisingly small amounts. The withdrawal of family tax benefit part B from families earning more than $150,000 a year, for instance, won't spending on family assistance by 0.4 per cent.

And while Mr Swan has been taking from the well-off with one hand, he's been giving with the other. Whereas "working families" will get combined tax cuts of between $20 and $30 a week, individuals earning $180,000 a year or more will get $50 a week.

From July 2009, working families will get a combined tax cut of less than $9 a week, whereas high-income individuals will get more than $40 a week. High-income earners will gain from the new unmeans-tested first-home buyers' saving scheme and better-off families will do well from the decision to raise the unmeans-tested child-care rebate from 30 to 50 per cent.

So if Wayne Swan is Robin Hood, I'm the Sheriff of Nottingham.

With the economy expected to slow, that was all the more reason to bring down a much tougher budget and thereby take the pressure off interest rates. That didn't happen. Perhaps Mr Rudd is too nice a guy to make an outstanding economic manager.

Tim Colebatch: 'No priority beyond that of don't offend anyone who might vote for us.'

This is not an exciting budget, but it is not a bad one. It is cautious. It takes no risks. Despite pages and pages of changes, it really changes very little. That is its strength, and its limitation.

Is it economically responsible? You bet. Visionary? Not really. Will it cut through the knots to solve any of Australia's problems? No.

Like last week's Victorian budget, this is a political document. It is about placating an extremely diverse range of interests, by giving something to everyone. There is no clear sense of direction, no absolute priorities other than the electoral one: don't offend anyone who might vote for us.

Yet even those of us who love to see political daring have to admit that this is not a good time for it. The economic problem facing Australia is inflation. This budget had to be contractionary, and it is — a little bit on its own numbers, but probably a lot more by the time the real numbers unfold.

Treasury predicts the budget surplus for 2008-09 at $21.7 billion, or 1.8% of GDP. Only a net $2 billion of that was due to the Labor Party, which, roughly speaking, saved $7 billion by raising taxes or cutting spending, and spent $5 billion in new spending and tax cuts.

But Treasury always underestimates. I forecast that — assuming that all revenue windfalls are added to the surplus, as Labor has promised — the surplus will end up between $25 billion and $30 billion, possibly even more. If I am wrong, I will donate $100 to the charity of Treasury secretary Ken Henry's choice. If I am right, I invite him to do the same.

Two things make this budget unusual to draft, and unusually difficult to sell. The first is that it comes after an election campaign featuring huge spending by both sides, paid for by the resources boom. Six months ago, Australians were promised mega billions of new spending, mega billions of tax cuts — and that, at a time when, we now know, inflation was already accelerating to the highest levels since the 1990-91 recession.

Politically, the problem for Kevin Rudd and Wayne Swan is that they have already reaped the credit for all that — six months ago, when Australians voted them in.

This budget is essentially about delivering on those promises. And it's a bit hard to claim new credit for doing what you told us you would.

To win new credit from voters would mean offering them something new. And that brings us to Labor's second problem. Tucked away in Treasury's economic overview is a forecast that GDP in current dollars will accelerate next year by 9.25%. In plain words, that means that Australians next year will have 9.25% more money to spend. At a time when inflation is already running hot, that's the biggest growth in nominal income for 20 years. Not what the doctor ordered.

That might seem odd when GDP in volume terms is forecast to rise just 2.75%. The gap between them is explained partly by domestic inflation, which is expected to be 3.5% over 2008-09, and partly by soaring prices for the 20% of our output that is exported. The ratio of export prices to import prices is tipped to leap 16%. That alone would add $35 billion to $40 billion to our national income, and about $10 billion to budget revenue.

Frankly, to deliver that new spending and tax cuts in this environment is economically irresponsible. But not to deliver them would be politically irresponsible, and cost Labor votes. Rudd is not into things that cost him votes, so the economic imperatives had to give way. And to compensate, this budget offers very little in new goodies other than those promised in the election campaign.

Its net changes add $1.93 billion to revenue and subtract $64 million from spending. Of $7.3 billion in gross savings, only $295 million will come from "soak the rich" stuff: the luxury car tax hike, and cutting off the richest Australians from family benefits and the Baby Bonus.

The biggest savings in 2008-09 come from lifting the tax on alcopops ($640 million), scrapping the OPEL broadband network in the bush ($634 million), imposing the crude oil levy on condensate ($564 million), cutting departmental spending across the board by 3.25% ($412 million), and scrapping the Howard government's Access Card ($310 million).

Many of Labor's savings are only temporary. It will still have to roll out broadband to the bush one day. It will still need some form of ID card for welfare recipients, it will still need to widen Constitution Avenue in Canberra (the one city that was singled out for serious spending cuts in what the Canberra Times dubbed "capital punishment" — Canberra always votes Labor, so it can be punished without fear of reprisal).

This budget even has the nerve to claim bringing in another 37,500 migrants as a savings measure, because they will increase revenue. Yes, but they will also add to the nation's desperate housing shortage, on which Labor has offered nothing new since the election campaign. So OK, bring in these people — but, for Pete's sake, this time can you try to find some migrants who know how to build houses?

Shane Wright: 'If telling people earning $150,000 that they don’t deserve a handout was tough then he simply wasn’t trying.'

Wayne Swan has not saved Australian mortgage holders from another interest rate rise with his first budget.

Despite all the rhetoric ahead of it, about this budget being a key part of the war on inflation, Mr Swan and the rest of the Rudd Government razor gang have done the easy yards – not the hard ones.

To paraphrase the Treasurer, the hunt for spending cuts was more like a turkey shoot where the blokes with the shotguns went home empty-handed.

The raw figures are startling.

Despite the turmoil on global financial markets and share markets, Commonwealth tax revenues will still grow the best part of $10 billion.

Company tax receipts are expected to grow more than 10 per cent to $73 billion.

Mr Swan has tried to argue total savings equate to $35 billion over the forward estimates, starting with $7.1 billion this financial year.

But these "savings" include a fair whack of extra tax (for instance, the alco-pop tax increase, the axing of condensate excise exemptions for the North-West Shelf), an efficiency dividend on the public service ($1.8 billion over four years), ending the Access Card ($1.2 billion) and abandoning the OPEL broadband contract.

Real savings are either small or highly targeted, such as means testing the baby bonus and Family Tax Benefit B which will improve the bottom line by about $1.2 billion.

Indeed, Mr Swan said the hardest decision was to means test both benefits.

If telling people earning $150,000 a year that they don’t deserve a government handout was his toughest budget decision, then he simply wasn’t trying.

The Treasurer has a point that to cut too deeply could put in jeopardy the entire economy.

"It would be nonsense to have made much more substantial spending cuts. You would have hit the brakes so hard that you might have had a negative impact on the economy," he said.

There are doubts over the US economy, financial markets are still clogged, and the commodities boom must end some day.

But if the world economy picks-up, as most pundits expect, by the end of this year, and the worst of the global credit crunch is over, then the savings of this budget seem small beer.

The Reserve Bank would be happy that at least this new Government didn’t find more ways to hand back the proceeds of the commodities boom to taxpayers like the last guys did.

On that count, they have saved mortgage holders from a lot more pain.

The various enormous cookie jars for infrastructure, health and education do provide the basis for long-term funding for key productive parts of the economy.

However, there is still so much spending, so many handouts, in an economy where inflation is well above the target band, unemployment is at generational lows and the terms of trade lifting to 50 year highs.

Ultimately, Mr Swan has to be judged on his pre-budget rhetoric, what he delivers, and what the Reserve Bank does next.

The Reserve knows its job hasn’t been made harder with Wayne Swan’s first budget. But it hasn’t been made any easier.

George Megalogenis: 'The budget is meant to be read two ways, because it tries to have it both ways.'

It is a change-of-government budget in the most mundane sense of the term, because its main transaction for 2008-09 is $5.7 billion in new revenue measures and spending cuts to pay for $5.3 billion in election promises.

No prizes for originality here, unless you count the absence of broken promises as something new.

What is different about this budget is the surplus. It won’t go into Peter Costello’s Future Fund because that fund is full. Instead, it will be divided three ways, between infrastructure, health and education investments.

How and when the money will be spent will be up to the Government. This is a piggy bank like no other.

Wayne Swan has $40 billion set aside for these three policy areas. It is the sum of just two surpluses—2007-08 and 2008-09. There will be more top-ups before the next election.

The Treasurer hasn’t said yet what he will do with his initial war chest of $40 billion, but he hasreserved the right to spend the capital as well as the fund earnings.

This is where the real budget story lies, in Labor’s flexibility to spend up on infrastructure for the next election and beyond.

Mr Swan is the first treasurer in history with no commonwealth debt to cover.

There is no borrowing to pay off, or public service super liability to meet. Just a surplus that has to be returned to voters at some point.

This is, indeed, a revolution. Labor has the luxury of thinking long-term because the budget itinherited from the Coalition allows it to.

The budget cuts are not as grand as they seem.

The simplest way to unpack the numbers is to see where the budget would have been if Labor wanted to break every one of its election promises apart from the tax cuts.

The figure is a surplus $19.7 billion for 2008-09, which, incidentally, is a surplus that would have met Kevin Rudd’s January target of 1.5 per cent of gross domestic product.

But Labor implemented every promise because it could. The bill for staying sweet with voters was $5.3 billion in 2008-09. This was offset by $5.7 billion in new savings. A further $1.6 billion in savings had already been flagged at the last election, bringing the total cuts to $7.3 billion.

Now subtract the savings of $7.3 billion from the promises of $5.3 billion and you have a $2 billion addition to the surplus, to $21.7 billion.

If this looks like small beer, it is. The real budget headline was the $40 billion that Labor has set aside for itself.

There is a back story which Mr Swan tried to tell last night.

These huge surpluses are also a function of the Coalition’s withdrawal from the real economy. Mr Costello, remember, used to complain about infrastructure bottlenecks, but gave the states no spare change to clear them.

He forced the states to borrow, then accused them of bad management.

Mr Swan will have to share his fighting fund with the states.

A budget that can pitch to the long-term may be a new concept to get used to.

But what would really change the way we look at these documents is when the money can be shown to have gone to a productive, as opposed to a political, purpose.

Alan Wood: 'As for Swan's promise of a new era of economic management...'

IT was Kevin Rudd who declared war on inflation as his Government's primary economic policy objective - and the federal budget surplus as its weapon of choice - so it can hardly object if its first budget is judged against this benchmark.

So how well has it met the challenge? The short answer is not well enough to relieve the pressure on monetary policy.

According to Wayne Swan, Reserve Bank governor Glenn Stevens will be happy with the outcome.

Stevens is unlikely to contradict him, certainly not publicly, and in any case would probably agree with Swan's description of the fiscal stance of his first budget as "a mild tightening".

The rule-of-thumb test of a budget's impact on the economy is the change in the cash surplus asa percentage of GDP from year to year.

According to the budget estimates, the surplus will be 1.5 per cent of GDP in 2007-08, while the surplus in 2008-09 will be 1.8 per cent, a contractionary swing of 0.3percentage points of GDP.

The cynicism born of many budget lock-ups says that this is a remarkably convenient pattern of surpluses, and the surplus drops back to 1.5 per cent in 2009-10.

Even if we put this suspicion to one side, it is not going to do much to make the RBA's task easier.
However, it is also true that it could have been much worse, and on its track record in its final years, under the Howard government it would have been.

By quarantining the revenue windfall, as it promised, the Government has allowed the budget's economic stabilisers to work.

But as far as the fight against inflation goes, the budget's contribution is pretty neutral.

The Government has beaten itsown estimates that it would cutspending by $3-4billion in 2008-09, with total cuts of $7.3billion. It also spent $5.2billion, leaving net savings of $2billion, which is what matters in the war against inflation

Given this, it is hard to see why Treasury's inflation forecasts are more optimistic than the Reserve Bank's, although the difference admittedly is not great.

In both monetary and fiscal policy, it is always a decision about the balance of risks.

There is no argument with Swan's claim that he is facing a complex web of conflicting economic forces, with booming terms of trade, tax cuts and rising world prices for oil and food boosting demand on the one side, and weaker world growth and signs of a domestic slowdown on the other.

But if the Government was serious about making a real push against inflation and for lower interest rates, it should have biased its risks on the downside, that is, weaker than forecast economic growth.

As it is, Stevens is still the one with the responsibility for doing the heavy lifting on inflation.

The RBA thinks, or more accurately hopes, it may have done enough with interest rates, but its own inflation forecasts stretch the limits of policy credibility, with inflation only coming back with its 2 to 3 per cent target band in late 2010.

To get away with this, the economy will need to show clear signs of slowing sharply this year, or there is a real risk of having to put up interest rates gain.

There are various indicators that when we get the GDP figures for the March quarter next month there will be drop in growth, from 4 per cent in the year to December to less than 3 per cent.

This could help contain wage demands.

But what really matters is what happens after June, when the big boost in our terms of trade from higher coal and iron ore prices and tax cuts deliver a sharp lift to incomes. This is why it would have been prudent to have a tougher budget, despite the risks and extra political pain,

As for Swan's promise of a new era of economic management, the budget is heading in the right direction, but it will take more than one budget before we can sensibly make a judgement on how successfully it will be delivered.

There is many a slip between the budget cup and politician's lips.

Alan Kohler: 'More Tanner’s budget than Swan’s or Rudd’s.

There are no new spending measures, only new savings, and remarkably the Finance Minister has found $2 billion more in savings than Swan and Rudd are spending.

The first Swan/Tanner budget actually reconciles the irreconcilable: the need for fiscal restraint to fight inflation while fulfilling the Government’s election promises and not crunching the economy so hard that it risks exacerbating the coming slowdown.

And it had been done simply by carving into middle-class welfare and cutting out the fat left by John Howard’s profligacy.

When the former Treasurer Peter Costello said at a remarkable doorstop press conference this morning that Wayne Swan is the luckiest new Treasurer in history, he was absolutely right – but not for the reason he meant. It’s because there was so much fat left in Government expenditures that could be painlessly cut away.

The Government, meanwhile, is playing down the centrepiece of its first budget. It is not mentioned at all in Wayne Swan’s budget speech; he just sums up all the nice things that have previously been announced.

The core of the budget – what it’s really all about - is contained at the back of budget paper No.2 - from page 361 to p.427. Here you will find 66 pages detailing 134 new savings measures, on top of the 46 cuts announced during the election campaign, totalling $1.6 billion in 2008-09.

The new savings total $5.7 billion in 2008-09, 11 dozen of them – big ones, small ones: nip cut slash.

The big picture of this budget is that the Rudd Government has announced $5.3 billion worth of new spending for 2008-09 leading up to it, and has now announced savings of $7.3 billion, increasing the surplus by $2 billion.

In addition to that there are a total of $5.4 billion in unexpected increases in tax receipts and other windfalls since the pre-election fiscal outlook (PEFO) that was issued by Treasury during the election campaign last year.

As a result the $14.3 billion surplus forecast in the PEFO has now turned into a $21.7 billion surplus ($14.3 billion plus $2 billion plus $5.4 billion).

So whereas the Howard Government spent every cent of the commodities boom windfall, the new Government has so far put it all into the bank, and added another $2 billion to it by cancelling some of its predecessor’s spending.

Even Kevin Rudd’s tax cuts actually represent a saving. The PEFO surplus estimate of $14.3 billion included the tax cuts announced by Howard Government; Rudd announced identical tax cuts but dropped them after 2009-10 for people earning more than $180,000.

That produces no savings in 2008-09 against PEFO, but provides $5.3 billion in savings over the following three years.

One of the big savings measures is a bit of a fiddle though. The cancellation of the $959 million “Australia Connected” fund that was awarded to Singtel Optus and Elders has been counted as a saving, but the $4.7 billion National Broadband Network amount that replaces it is not counted as an expense because it hasn’t been spent yet and is not detailed in the forward estimates.

But on the whole this budget is a remarkable achievement. The Government’s net financial worth goes from -$25.8 billion to -$3.6 billion in one year, with the unfunded superannuation liability of $112 billion now almost entirely offset by investments.

Sometime in 2009-10 the Government will have a positive net worth, probably for the first time.

Alan Mitchell: 'The time for a much tighter budget was last year.'

Quality in the budget is not so much in the coming cuts as the change in direction.
After adjusting for the Rudd and Howard governments' accounting fiddles, the budget last night represents, at most, a modest tightening of fiscal policy.

The budget therefore will make little difference to inflation and interest rates in the coming year. As in the past, the heavy lifting will have to be done by the Reserve Bank. There will be no significant change in the mix of fiscal and monetary policies.

Of course, Treasurer Wayne Swan might say that things would have been much worse had the government not had the courage to cut spending inherited from the previous government.

But, in truth, the Rudd government's spending cuts have been pretty limited. Federal spending has grown by $40 billion since the start of the decade as revenue from the resources boom has flooded into the government's coffers.

The new government's expenditure review committee could find spending cuts of only $5.3 billion, and these have been offset by its own new spending.

Net "savings" from the tax and spending decisions announced in this budget amount to only $2 billion. And that, of course, will be totally swamped by Kevin Rudd's election campaign decision to adopt the Howard government's promise of a $7 billion tax cut on July 1.

The quality in this budget is not so much in the coming year's cuts as the general change in direction.

The government has made a decision to "bank" rather than spend the windfall gains in revenue. It has budgeted to cut real growth in spending from an average of 4 per cent a year over the past four years to 1.1 per cent in 2008-09. If that is achieved, it will be the lowest spending growth rate in almost a decade.

The forward estimates promise a continuation of this new spirit of restraint, although they do not include the inevitable increase in spending associated with the reform of federal-state financial relations.

The budget also lays some important foundations for the new reform agenda, adopted with the states, to increase productivity growth by investing in infrastructure and "human capital" in the form of increased skills and better health. As part of that strategy, there is an interesting initiative to control the rate of federal and state infrastructure spending in the interests of macro-economic stability.

Heavy spending by the states to make up for past underinvestment on infrastructure is contributing to inflation pressures.

The Rudd government now proposes that the federal-state Loan Council will in future advise the governments on whether their proposed capital spending can be achieved without prejudicing the government's inflation target.

But despite the promise of future quality decisions, it is likely the Rudd government's first budget will receive poor reviews, mainly because of its failure to cut deeper into spending and to do more to take the pressure off inflation and interest rates.

On a charge of wimping out of the fight against inflation, the government's most likely plea is that the economy is slowing, and risks associated with a more vigorous tightening of fiscal policy would have been too great. Not everyone will accept that argument. But critics may take some consolation from the thought that the conduct of monetary policy will be less complicated as a result of the government's decision.

Had the Rudd government tightened fiscal policy more sharply, the political and popular pressure on the Reserve Bank to cut interest rates would have been immense.

And yet, with the economy about to be hit by a large increase in the terms of trade, it is even possible the RBA could have found itself wanting to raise rates after a contractionary budget.

The present "mix" of monetary and fiscal policies may not be ideal. But the argument for tighter fiscal policy has weakened with the economy. The time for a much tighter budget was last year.