Monday, May 12, 2008

Budget 08 - What to look out for tonight

The documents themselves will be here, at 7.30pm eastern time.

This site will have a good summary at that time.

Below the fold is the reading guide prepared by Shane Wright of the West Australian.

And below that is mine.


Wayne Swan is about to sit the toughest test of his political career. And you, voters and taxpayers, will be marking his examination paper.

Tomorrow’s Federal Budget is the first to be handed down by a Labor treasurer since Ralph Willis announced the then Keating government’s decision to sell its majority shareholding in the Commonwealth Bank on May 9, 1995.

A lot of tax dollars have flowed under the bridge since then — most of them handed back as bribes, handouts and incentive payments over the years (and part of the inflation problem we now have).

The Federal Budget itself is a daunting proposition. It weighs in a little over 3kg, contains more than 1000 pages (and more numbers than you’d find in the New York white pages), comes with who-knows how many ministerial press releases and “information” packages, and then there’s the associated statements and comments from various lobby groups.

But I’ll let you in on a little secret.

To suss out the Budget, and this Budget in particular, this economics reporter will be focusing upon a few tables and figures that should cut through the pages upon pages of black ink like a hot knife through butter.

Perhaps the most important issue will appear under the obtuse title of “effect of parameter and other variations”.

This is where the Government reveals just how much of the Budget is built upon the commodities boom, spending cuts and largesse.

For instance, in last year’s Budget, the revenue upside on the parameter changes was a whopping $9.6 billion. It was characterised as the impact of a stronger jobs market and better-than-expected corporate profits, but it is really the commodities boom now driving the WA, Queensland, South Australian and NT economies.

It also showed expenses were $3.1 billion less than expected (because some programs were put back, and because of the stronger economy).

That almost $13 billion in extra income, however, was blown on government policy decisions. Over the four years from 2006-07 to 2009-10, the former government planned to spend $52 billion extra in this area, leaving just $800 million over from a $53 billion increase in the “parameter” variations.

When economists talk about the Howard-Costello government spending away the proceeds of the commodities boom, this is exactly what they’re talking about.
The test for Mr Swan here is to have a lot more left over from any parameter variations than he and the rest of the new ALP crew manage to spend.

Which takes me to the next table that will be of great interest — the spending cuts. I’m not talking specifically about the cuts outlined before the election by the ALP (although it will be important to check the Rudd Government honours the pledges of the Rudd Opposition), but new spending cuts.

We’re getting into means testing of various welfare programs, cutting into programs that might be important to particular voting groups but achieve little for the overall welfare of the nation.

Indeed, the argument over the baby bonus has highlighted just how vapid some political arguments in defence of welfare largesse have become.

Brendan Nelson’s argument that “every baby is equal”, so a family struggling on $40,000 a year should get the same handout as a couple on $300,000 a year, may be one of the worst contributions to policy debate this decade. (If you must know, the private health insurance 30 per cent rebate was the worst policy decision of the Howard government.)

Closely connected to the spending cuts are any new spending initiatives. On this point, the Government has already made promises upward of $11 billion, from the election to new decisions since taking office. And there’s also the little case of starting its $31 billion in tax cuts program.

If Mr Swan and his PM are true economic conservatives, we will need to see real justification for any new spending — and the figures to back them up.

It also means some spending plans may need to be ditched or sidelined for a while. Which takes us to what this whole Budget is about — getting inflation under control.

Table one in the chapter in the Budget’s economic outlook section contains domestic economy forecasts. If the figures for the consumer price index do not show inflation falling, then all this jawboning about price pressures will have been all for nought.

Last year’s Budget, and its mid-year update, predicted inflation would average 2.5 per cent over the 2007-08 financial year. It’s going to be closer to 4 per cent.

While on this table, have a look at the wage price index, the forecasts for unemployment (which last year was forecast to rise to 5 per cent, but instead fell to 4 per cent), household consumption, GDP, business investment and private final demand. All are key indicators in assessing the extent to which the economy will slow.

And, with any Budget, you can’t go past the size of the surplus.

All the previous figures are tossed together to give you this one figure of just how much money the Government is going to take out of the economy to help it slow down.

That’s why Mr Swan has been talking about at least 1.5 per cent of gross domestic product (I’m expecting a figure much higher).

The bigger the surplus, the more cash is being withdrawn from the economy. That’s the crux of the fight against inflation. The less money there is about to bid up prices, the harder it is to bid up those prices.

There are plenty of other issues in play. Oil prices, global financial meltdown, the health of the Australian economy, micro-economic reform, indigenous welfare, education, housing prices . . . the list goes on.

But Mr Swan will ultimately be tested on what he does on the five key issues I’ve outlined.

Voters, get out your red markers.


It will weigh 3 kilograms, usher in a record surplus and contain 649 separate decisions.

It’s author, the Treasurer Wayne Swan, told the Labor caucus yesterday that the budget he is to deliver tonight makes him “proud”.

The first Labor budget since 1995, it both fulfills its election promises and is “economically responsible”.

It also “looks to the future”, according to the Treasurer. (Which is apparently a Labor theme - the ACT’s John Stanhope used it last week.)

Here’s what to expect and the sort of things to look for when you make your own judgment tonight:

First, the surplus. Expect $20 billion, perhaps more.

Before the election the Treasury said the budget was on track for a surplus of 1.2 per cent of GDP in the coming financial year – around $14 billion.

In January the Prime Minister promised extra cuts that would boost the surplus to at least 1.5 per cent of GDP – around $18 billion.

The Finance Minister Lindsay Tanner says he has succeeded in finding the extra $3 billion to $4 billion needed to get to $18 billion.

But the surplus to be delivered tonight will be bigger than that because of an extra promise – that any unforeseen revenue coming in because of better than expected economic circumstances (and the benefit of any less spending going out) will be added to the surplus target, not considered a means of achieving it.

In the last few budgets the previous Treasurer Peter Costello was deluged with unforeseen revenue.

In the final one he was presented with an unforeen $9.6 billion as well as $3.1 billion freed up as a result of the stronger economy cutting the need for spending on unemployment benefits and the like.

He spent almost every cent.

This time the windfall will be much smaller. The Treasurer has hinted that $2 billion is in prospect. It won’t be spent and it will push the surplus up to around $20 billion.

Where have Tanner and Swan found the billions they need? They’ve told us they’ve done it by hacking into the payments and concessions enjoyed by the rich.

Tonight’s budget will ensure that Family Tax Benefit Part B is no longer paid to millionaires’ wives. It will ensure that expecting parents such as Mr and Mrs James Packer are no longer eligible for the $5,000 baby bonus. And it’ll boost the sales tax applying to luxury cars.

They are measures that will sound good and be electorally popular - “a Labor budget” as Kevin Rudd told his caucus yesterday – but they may be more symbolic than substantive.

Labor has promised to cut off the family benefit payment when a family’s income reaches $250,000 – a figure that looks a little high. It will be worth watching to see whether tonight’s budget cuts the cut-off to $150,000. If it does, it will be a good sign.

The extra duty on luxury cars may be a diversion.

It would be better to end the rort by which cars provided to employees in lieu of salary are taxed at a lower rate than the salary would have been. And (unhelpfully) the tax rate gets lower the more the pointless kilometres the car clocks up.

It would be better too to end the tax concession enjoyed by the buyers of gas-guzzling four-wheel drives. Thanks to the Coalition, they pay an import duty of only 5 per cent instead of the 10 per cent paid by the rest of us, apparently because some four-wheel drives are used by farmers.

Many of Labor’s own programs to be funded tonight unjustifiably skew payments toward the rich. Labor’s First Home Saver scheme as presently drafted puts more money into the accounts of high income earners than low income ones.

It simply can’t survive in that form. If it does the Treasurer will become a laughing stock at his pre-budget media lockup press conference before he even rises to his feet.

If he was really serious about hacking into high-income welfare he would means-testing the 30 per cent Child Care Tax Rebate. Instead he is planning to lift it to 50 per cent.

Tanner and Swan have also found savings by hacking into the public service. Some cuts may turn out to be inspired. Merging the back office functions of Centrelink and Medicare is one.

But others are the equivalent of blowing out brains. Right now we need the information provided by the Australian Bureau of Statistics more than ever. We don’t need the accuracy of its surveys cut by 15 per cent as it says it will have to do.

The $20 billion Building Australia Fund to be created form the surplus is a good idea, but only if it is spent wisely and not when it will force up inflation and interest rates.

We will get an idea at 7.30 tonight.