Saturday, May 10, 2008

Saturday Forum: The pages of the Budget are being glued together

The pages of the Budget are being printed and glued together. The hard work is over. Saturday is usually the deadline for printing and binding the budget papers. The printers say that if they don’t start by then, the glue won’t be dry by Tuesday night.

It’ll be a thicker book than usual. This one contains an extraordinary 649 spending decisions, nearly all of them spending cuts.

In contrast by last year’s final Howard-Costello budget virtually none of the measures – a mere 1.5 per cent –saved money.

A Treasury count suggests that a decade earlier when Howard and Costello took office a full one-third of their budget measures saved money - an indication both of how undisciplined they became and of how much flab has been offered up to the razor gang headed by Lindsay Tanner, Wayne Swan and Kevin Rudd to cut...

It isn’t only that the public service has ballooned.

Lindsay Tanner says that excluding Defence, the Australian Security and
Intelligence Organisation and the Australian Federal Police, public service
numbers have expanded 25 per cent since the start of the decade.

The number of senior public servants has soared 44 percent.

Programs have also ballooned.

The $1 billion per annum Baby Bonus of $4,187 per child, soon to climb to
$5,000, is widely regarded as a disaster in social policy terms. Even the
Coalition leader Brendan Nelson has said so.

Extraordinarily, it is handed out to some of the wealthiest people in the
country - as is the Family Tax Benefit part B, another Howard government

Before the election Labor promised to withdraw that benefit from women whose
partners earned more than $250,000 per annum.

The Expenditure Review Committee has considered a proposal that the Budget
go further and withdraw the payment from any woman whose partner earns more
than $150,000, which is where the top marginal tax rate kicks in.

It has also considered means-testing the baby bonus and the First Home
Owners Grant.

The language of the Committee’s Chairman Lindsay Tanner suggests that it has
taken those tough decisions.

"People at the upper end of the income scale will be receiving very healthy
income tax cuts and they are in a better position to cope with a bit of
Budget pain than people at the bottom of the scale," he said on Thursday.

Tanner, Swan and Rudd are buoyed in this approach by Treasury research
prepared at their request showing that families with an earner in the top 3
per cent have enjoyed an 85 per cent increase in their disposable incomes
since the Howard-Costello government came to power - around 1.7 times the
increase enjoyed by middle-income earners.

At the same time they have seen their average tax rate fall twice as far as
middle-income earners.

The process of going through every single government program line by line
has been exhausting for all concerned.

Or it was, up until a Cabinet meeting two weeks ago at which most of the big
decisions were agreed to.

Chatting to the Canberra Times the day after that meeting the Treasury
Secretary Ken Henry said that the process had been relentless in part
because the new Treasurer and Finance Minister wanted not only to implement
each of their own programs but also to examine every single program
introduced by the previous government.

Her said he had never been involved in another budget like it.

Facing each other across the lawns of Parkes Place the Treasury building and
the Finance building have been alive and lit until well into the night for
months now.

Parents working in the departments joke that they keep pictures of their
children by their desks so they remember what they look like.

Not that they are complaining. Too much.

The morning after Kevin Rudd was elected Prime Minister with Wayne Swan as
his anointed Treasurer in November a team from the Treasury flew to Brisbane
to brief them.

Awestruck, one of them has said that they were listened to more in those two
days than they had been by the previous Treasurer Peter Costello in two

A few months later the view in the department changed. They were getting so
many requests for information from the Treasurer that they began to wonder
whether they could meet them and still keep up the day-to-day running of the

Some of the calls began early in the morning.

The Treasurer may have helped impose an extra one-off 2 per cent efficiency
dividend on Australian government departments, but the Treasury hates it.
It is being asked to much more than before – probably more than its existing
staff can cope with – with fewer staff.

It has also found the economic forecasts in the budget among the most
difficult it has ever had to prepare.

Dr Ken Henry joined the Treasury in 1984 and moved to the office of the then
Treasurer Paul Keating in 1986, returning to the Treasury in 1991. Peter
Costello made him Treasury Secretary in 2001.

Dr Henry says that he has only been involved in one other budget in which
the forecasts proved as difficult – and that was the budget of 1989 in which
the forecasting process went okay, but the forecasts themselves turned out
to be completely wrong.

Instead of continuing to boom the economy headed south and the Treasury had
egg over its face.

This time it is the forecasts themselves that are difficult.

On one hand our economic growth is weakening, in part because of higher
interest rates and in part because of the share market collapse and
financial turmoil overseas.

Dr Henry says this is cutting into government revenue. Company tax receipts
are likely to be lower and capital gains tax collections could slide $5

But on the other hand Australia’s terms of trade were soaring. The terms of
trade is a measure of the prices received by Australians for the goods that
they sell overseas as a proportion of the prices Australians pay for the
goods they import from overseas.

Dr Henry said that in the last four years Australia’s terms of trade had
soared 40 per cent, an increase unprecedented since the Korean wool boom.

But price rises for coal, iron ore and other resources already announced or
in the pipeline pointed to an acceleration in Australia’s terms of trade
growth, which could give us to a 70 per cent increase over five years.

In the face of those developments it was harder than usual to forecast
inflation, harder than usual to forecast economic growth, and very difficult
to forecast what would happen to government revenue.

The Reserve Bank had a go in its Quarterly Statement on Friday released a
few days earlier than usual to get in ahead of the Budget.

Noting that “the net effect of these forces is quite uncertain” the Bank
said it expects economic growth to slow sharply during 2008 weighed down by
weak consumer confidence, big increases in petrol prices and much higher
interest rates before accelerating again in response to the surge in export
prices in 2009.

Inflation on the other hand will be well above the Reserve Bank’s target
band, climbing to 4.5 per cent by the end of 2008 before gradually slowing.
It won’t return to the Reserve Bank’s target band until December 2010.

It warns that there are risks to these forecasts in both directions.

The Treasurer Wayne Swan has been keen to emphasise the downside risks
warning last week that the indications that he was receiving were “simply
that the revenue boom that has been there in recent years is not going to be
there to that extent in this budget, and people should not assume it”.

Australia’s most experienced private-sector budget analyst Chris Richardson
of Access Economics thinks the Treasurer is wrong, and is deliberately
trying to lower expectations for the good economic news (and revenue
windfall) that he is sure will be revealed on budget night.

“Remember the negatives have been very newsworthy, which helps to explain
why they’ve dominated the front pages,” he told his clients in a Friday

“It may therefore be surprising to realise Australia’s economy and budget
have positives that are stronger than the rather better publicised

“For the coming year, Australia’s national income will benefit enormously
from huge amounts of money being handed to us on a platter for doing what we
already do: digging stuff up and growing stuff.”

“Strikingly large increases in coal and iron ore prices will soon send what
is already Australia’s biggest commodity price boom in half a century even
further into the stratosphere.”

“China’s strength is still the biggest single economic driver of Australia’s
2008-09. The Australian Budget comes with a ‘made in China’ stamp,” he told
his clients.

In one sense it doesn’t matter much for the make up for the budget whether
the government and the rest of us will be flooded with Chinese money in the
year ahead or whether the downturns in consumer confidence and the share
market will be more important.

Lindsay Tanner has pledged to hack $3 billion to $4 billion out of
government spending and tax giveaways no matter what.

If the government is flooded with an extra windfall from China it has
pledged not to spend it. Mr Tanner’s cuts are to be from existing, not
projected, spending. As he puts it, his commitment is to “bank” any upward
surprises to revenue.

Which raises the question of just where he would bank a budget surplus
likely to be as much as $20 billion.

Previous surpluses have been directed into the Future Fund set up by the
Coalition to accumulate money to superannuation benefits to public servants
in defined benefit superannuation schemes.

But with all public service defined benefit schemes other than military ones
closed to new members closed to new members the Future Fund now has close to
all the money it needs.

The previous government reacted by setting up a new Higher Education
Endowment Fund and granting it $5 billion of the surplus which it later
lifted to $6 billion.

On budget night Wayne Swan will announce a third fund: the Building
Australia Fund
, and quite possibly folding the Higher Education Endowment
Fund into it.

It’ll be used to kickstart the most important infrastructure projects
identified by the newly established advisory body Infrastructure Australia,
headed by business veteran Sir Rod Eddington.

The Prime Minister hinted at the new body in Western Australia on Wednesday
when he said that he wanted to ensure that “this extraordinary boom, and the
dividend from it, is invested into the state’s and the nation’s long-term
global competitiveness. That is the mission statement of the Government I

Canberra economist Fred Argy, himself a former advisor to several Prime
Ministers and Treasurers is a strong supporter of the idea.

He says that infrastructure projects are best started when the economy is
turning down. That’s when there isn’t inflationary competition for workers
or resources, and it’s when the labour market needs the work.

But turndowns can come quickly and that’s why the funds need to be built up
ahead of time and the right projects identified.

By setting up the fund and perhaps leaving room for it to have other
objectives – such as funding maternity leave or dealing with climate
change – the new government could beat the old government at its own game.

Peter Costello as Treasurer was able to have his surplus and appear to spend
it as well. He was applauded by educational institutions last May for
setting up the Higher Education Endowment Fund and at the same time
applauded by fiscal conservatives for bringing down a big surplus.

But Peter Costello and John Howard were never as keen on big surpluses as
are Wayne Swan, Lindsay Tanner and Kevin Rudd.

They are looking to create something really big. In five years the Building
Australia Fund could be worth $100 billion.

It will make Labor’s $4.7 billion broadband project and its planned $31
billion in tax cuts seem tiny.

And Wayne Swan will give birth to it on Tuesday night.