Monday, May 11, 2009

Budgetwatch: Let's abolish Defence

Access says that's the scale of the task 

Getting the Budget back into surplus will be not merely "tough" as the Treasurer claimed yesterday, it will be almost impossible in the view of Access Economics.

Australia's leading budget analysts, known as the "Treasury in exile" for their ability to closely track government finances say the deficit forecast to be announced on Budget night should be $59 billion - close to an all-time record as a proportion of GDP.

Even if the economy begins to recover in the following financial year as the Budget is tipped to forecast, the 2010-11 deficit will be little better.

But that's not what really worries Access. It's that even after the recovery is well entrenched, the government will still need to hack $25 billion to $30 billion from its annual budget in order to eliminate the deficit...

To put into perspective "how painful this would be" ," Access says in its pre-Budget monitor released this morning that the government would have to abolish the entire Department of Defence and its associated spending.

An alternative would be to abolish the age pension rather than raise it, or to abolish both the unemployment benefit and the disability pension.

Access Director Chris Richardson says another cut that would almost do the trick would be to abolish both Medicare and hospital funding.

Increasing the Goods and Services Tax to 15 per cent would also work so long as the government passed on "not an extra cent to the states or pensioners."

If the government wanted to use income tax to make up the shortfall it would have to raise the marginal rate on all income earned over $40,000 to 45 per cent.

"Eating the rich, that is raising their tax rates or cutting their superannuation tax breaks, simply won't do it," Mr Richardson told The Age.

"It won't happen until middle Australia feels plenty of pain."

Asked whether the Budget might remain in deficit until the 2020s rather than 1015-16 as the Budget will project, Mr Richardson said that was what would happen unless both both sides of politics became unusually courageous.

"Politicians on both sides still don't realise the size of the task," he said. "Even worse, some who do are daunted and frozen in the headlights."

Mr Richardson isn't suggesting cutbacks right now. Indeed he says while families and businesses are cutting their own spending in response to the recession it is entirely proper for the government "to help fill the gap with its own additional spending". Otherwise unemployment will climb even higher than the peak of around one million Access is expecting.

The problem is that when the economy does start to recover this government will find that the previous one left the tax cupboard pretty bare.

As it gave away more and more income tax revenue in successive tax cuts, the Coalition increasingly relied on the booming corporate and capital gains tax revenues that are now collapsing.

"Company tax takings are about to slide, the taxes paid by super funds are tanking and petroleum Resource Rent Tax will be a shadow of its former self," Mr Richardson said.

"Governments usually hold their policy fire to assist with fighting downturns. The previous one handed back the fiscal dividend of the good times in the good times, limiting our ability to fight recession now."