Wednesday, August 18, 2010

Wednesday column: Oh to be a fly on the wall Sunday morning...

...That's when Treasury chief Ken Henry, Finance boss David Tune and a handful of senior officers could arrive in Melbourne or Sydney for days of intense talks about the real state of the nation's finances and the real worth of the winning party's promises.

In 2007 the talks began in Brisbane Sunday morning and lasted two days.

By the time they were finished Kevin Rudd and his incoming Treasurer Wayne Swan would have got a fair idea that a number of their promises were duds.

Henry and Tune will carry with them one of two books, either the so-called "red book" routinely prepared for a new government, or the "blue book," routinely prepared for government's returning to office.

The most famous handover of a red book took place in the deserted bar of Canberra's Lakeside Hotel early Sunday morning in 1983 when Treasury Secretary John Stone explained to the incoming Prime Minister Bob Hawke and Treasurer Paul Keating that they faced a budget deficit far bigger than had been admitted by their predecessors and they would not be able to fund all their promises.

These days thanks to the Charter of Budget Honesty we already have a fair idea of what Gillard or Abbott is likely to be told about the state of the finances. What we don't know is what Treasury and Finance think of their promises.

So I'm going to guess.

First, Gillard's promises. In normal times Treasury and Finance would have already had their say about the promises of a reelected government - they would have helped draw them up.

But a series of slip-ups suggest these aren't normal times...

Gillard's $394 million "Cash For Clunkers" scheme was sent to Finance for costing during the campaign as part of what's normally a charade; Finance usually arrives at the same costings as the government because it prepared them before the campaign and gave them to the government at its direction.

In this case Finance came up with a different costing. It said the scheme would cost $429 million, which by the way is an unbelievably expensive way to cut greenhouse emissions by 1 million tonnes. The immediate point isn't that the scheme is a bad one (although it is hard to find anyone who will say good things about it) - it is that it looks as if Labor invented the policy on the run, without submitting it its experts for costings before the campaign began.

It's the same for the $2.1 billion Labor pledged for Sydney's Parramatta to Epping rail line. Gillard confirmed on the ABC's Q&A Monday night that she gave it the go-ahead during the campaign.

So given that unusually (and in contradistinction to her talk about proper process) Gillard has been creating policy on the run, how is her blue book likely to assess it?

The Treasury might have already reminded her that her $43 billion National Broadband Network is both unsupported by cost-benefit analysis and probably the biggest ever financial commitment entered into by an Australian government.

It'll now be able to add an insight into a finding by the Parliamentary Library that the government has under-funded it by $5.6 billion in first five years.

It might also observe that, although she conflated e-health and the NBN at her policy launch, there's no real connection. Long-distance specialist consultations and remote surgery do not need fibre to the home. Not at a world-beating cost of $5,000 per home to replace an existing service they don't.

Treasury might observe that the assumptions in the NBN's own financial modelling look dodgy, among them that the NBN will be able to increase the price it charges each year without losing customers to competing technologies whose prices will head in a more conventional direction.

It might ask her to consider alternative uses of $5,000 plus per household.

It might ask her why she plans to lift employers' compulsory contributions to 12 per cent of salary when the Henry Review found no such need and even suggested taxing super contributions as salary (which is what they are) so that incredibly well-paid Australians don't continue to get an incredible gift from the rest of us.

It might gently question the wisdom of extending the Education Tax Rebate to cover things such as school uniforms when in responding to the Henry Review the government committed itself to freeing taxpayers from the need to collect "a shoe box full of receipts".

The red book prepared for Tony Abbott may be more kind. For instance it'll most likely commend his parental leave scheme as being workable and properly funded.

But it'll have to ask him why he would voluntarily turn down $10.5 billion in extra mining tax revenue when the big three miners have signed on a dotted line saying they are prepared to pay it. Isn't he keen to return the Budget to surplus and keeping it there?

And it'll have to tell him that his commitment to freeze public service recruitment for two years is completely unworkable.

David Tune outlined the consequences before a Senate committee in May. The problem is highly-employable operationally-essential public servants would continue to leave and couldn't be replaced.

"There would be a reduced role in terms of advising government on its budget, there would be a reduced level of service to parliament and our capacity to project manage construction would be affected," he told the committee.

"The Finance Department loses 11 per cent of its employees each year. While the effect would not necessarily be immediate, losing an entire cadre of graduates would have an effect down the track." he said.

He might suggest that the Department of Finance would love to go through the public service with a knife, excising the positions, functions and people who actually weren't needed.

Did I mention knifes? He is likely to say there's an awful lot the incoming government should not be doing. Gangs and knifes are state, not Commonwealth responsibilities. If there has to be a National Violent Gangs Squad could it be located near an airport or something for which the Commonwealth is responsible instead of in western Sydney?

Published in today's Age

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