Tuesday, April 21, 2009

Focus: Three weeks until Budget night

...and not even Wayne Swan knows what'll be in it

Three weeks to go, and the excitement emanating from Canberra's Treasury building is palpable. The second Kevin Rudd and Wayne Swan Budget will be the most-watched such event in years, certainly far more important than any of the record 12 Budgets handed down by their predecessors John Howard and Peter Costello.

Partly that's a result of the most serious financial and economic crisis in a lifetime, and partly that's a result of the freedom and the imperative it has given Treasury officers and the Treasurer himself to come up with genuinely good ideas without the ususual regard to politics or convention.

Wayne Swan's first Budget, like most of Peter Costello's, was more of a management exercise, directed at responding to circumstances (in that case an avalanche of revenue) rather than changing them. It ticked off on delivering a series of election promises, many of them of doubtful economic worth, and invented a number of new funds in which to stash the growing surplus.

But it contained one element of genius. Wayne Swan had returned from a meeting with his United States counterparts shaken by what he had heard. Late in the day he decided to take out insurance against a collapse in the world's biggest economy by making the budget cuts more gentle than had been planned. The Treasurer's foresight helped delay the onset of Australia's recession.

This time it will be a matter of getting Australia out of recession. And just about every option is on the table...

Many of the small decisions have already been made, but the big ones are still up in the air, to be determined over the next fortnight with the economic forecasts indicating how bad things are likely to get and the financial forecasts indicating how little money there will be to play with.

Wayne Swan's second Budget won't be primarily a political document in the same way as was his first one which ticked off on election promises, and in the same way as were the recent Peter Costello budgets which distributed largess.

Its contents will be determined primarily by what's needed and by the most effective way to deploy limited resources, with any political measures relatively unimportant add-ons. Indeed many political measures, much of Labor's "program" is likely to be postponed. This will be partly because the government won't have the money to implement them, and partly because it won't have the thinking time.

Finance Minister Lindsay Tanner explained in an interview with The Age in February that the financial crisis had taught him there was limit to how many decisions the key economic ministers could make.

"When you are in Opposition you have virtually no resources and you are used to thinking of Government as infinite; its people, resources, its brain power, its capacity to dream up ideas, to get answers, provide briefing papers, get teams working on problems."

"One of the things you realise when you are in government is that they are not infinite. Because it's the same small group of people at the top who ultimately have to make the decisions - who have to be informed and make decisive calls - there's only so much capacity that those people have to absorb, to think, to toss around," he said.

The sidelining of politics and the awful economic environment make the government unusually receptive to good and bold economic ideas, giving the Department of the Treasury more influence than it has had in decades.

This isn't to say that the Treasury will dictate what it in the Budget. That isn't its role and both the Treasury and the Treasurer know it. But it does mean that the Treasury will be properly listened to and have its expertise used in a way that hasn't happened since the early Costello budgets.

Even before the crisis Treasury was finding things had changed. After visiting Rudd and Swan in Brisbane on the Sunday and Monday following the November 2007 election departmental officers joyously reported that they had been listened to more in those two days than Howard and Costello had listened to them in two years.

Even so, some measures can be ruled out of next month's Budget.

The already-legislated tax cuts due to take effect in July this year and July next year are unhelpful. Promised only in order to match the Coalition during the election campaign, much of them go to the people least likely to spend them.

Australians earning more than $80,000 will get a key tax rate cut from 40 per cent to 38 per cent and then to 37 per cent. Battlers earning less than that get no rate cuts, just some indexation of cut-in points.

Good policy would suggest abandoning this wasteful, expensive and permanent drain on government finances, but it won't happen because the changes are already law.

Nor are there likely to be further stimulus payments. The first ones weren't bad ideas. The government needed to money out of its doors quickly. But just about every major study has found that bonus payments and tax cuts are fairly ineffective ways to stimulate the economy and that direct government spending is better. As well there is growing discomfort with the payments, even among the recipients, as Rudd and Swan would know from monitoring radio talkback.

The best forms of stimulus are ones that achieve other goals, producing a double benefit.

The promised pension changes fall into this category, although it is likely that not all pensioners will welcome them. Bundled with a boost to the single-rate pension may be a tightening of the means and assets tests. The Howard government's increasing generosity meant that even the owners of multi million dollar homes could get a part pension. And when they had one - worth even as little as one dollar a week - they were entitled to every increase offered, meaning that unless the rules change a $30 per week increase in the single pension will deliver such a person a part-pension of $31 per week. The Harmer Review, in Wayne Swan's hands since March, canvasses changes.

It will be hard to boost the single pension without also boosting the NewStart unemployment benefit. Currently more than $50 per week below the single pension the government has described as inadequate, it is getting lower year by year because the different ways in which the two benefits are indexed. Unless the formulas are changed, by 2050 NewStart will be only one half the single pension, and by 2100 less than one-fifth of it.

The case for boosting NewStart is overwhelming, especially as the Employment Minister has declared that Australians are losing jobs though no fault of their own and other Ministers have conceded that they could not live on the higher single pension. The extra payment would be spent more completely than would any other.

But at this stage the economic ministers have made no decision to boost NewStart. That will either come later or they will wear the embarrassment of being asked on budget night whether they could live on an unchanged NewStart of $32.38 per day.

Mr Swan not only has before him the Harmer Pensions Review, but also the first report of the Henry Tax Review which deals with superannuation. While the Review was instructed not to touch tax-free payouts for the over 60s, it was given a free hand to recommend other changes. Mr Swan might tighten up on some of the particularly brazen super tax loopholes as part of his pensions package, or he might wait until after releasing the report to reform superannuation properly.

Other bold measures open to the Treasurer include proposing that each state abolish payroll tax and offering them partial compensation. Payroll tax isn't bad in its own right - it is one of the few sources of income state governments have, but it is riddled with exemptions and inconsistencies. Australia's state governments add more by the month as they exempt employers in order to attract new projects. Abolishing payroll tax would give big employers breathing space, be seen as supporting employment, and make coping with the tax system simpler.

The money lost would have to be made up somewhere. A bold government would commit to doing it by increasing the GST in small increments once the economy began to recover, encouraging Australians to bring forward spending. Mr Swan and Mr Rudd might not be that bold, but if they were they would probably get away with it.

There is also much money the Budget can save by hacking into middle and upper class welfare. The uncapped Medicare Safety Net overwhelmingly goes to the well-off Australians who can afford to spend up big on medicine and to the specialists who put up their fees because it is there. Means-testing it would deny no-one access to medicine and would reign in an unlimited liability. The $1 billion-plus Private Health Insurance Rebate is apparently sacrosanct, but means-testing it would force Australians who can easily afford to pay for their private health insurance to do it themselves instead of taxing the rest of us. The $150,000 means test Labor imposed on Family Tax Benefit B is ridicously high. A $100,000 ceiling would do much more to reign in costs.

The Budget challenge is to boost the economy now ensuring that as things recover budget spending can be wound back.

It will almost certainly extend the First Home Owners boost due to expire in the middle of the year. But it it is clever it will do it by turning the payment into a loan, to be repaid. If it is very clever it will adopt that sort of thinking widely.

The Budget deficit is likely to be frighteningly big. One government figure is talking about $35 billion. But we are likely to accept that if we know it will be used to get us through the downturn and will disappear as things recover.

The Treasurer and the Treasury's challenge is to come up with measures that do both.

Building the Budget

What's certain:

. extending the First Home Owners boost

. boosting the single pension

. delivering scheduled tax cuts

What's likely:

. axing middle-class welfare

. tightening superannuation tax rules

. boosting unemployment benefits

What's not:

. a further round of bonus payments

. a small budget deficit

Wayne Swan will deliver the second Rudd Budget on May 12.