Saturday, May 09, 2015

Budget preview. 'Tastes nothing like the old one'

A few years back Coca-Cola decided to enter the energy drink market. It launched a product called Mother that was so bad eight out of 10 consumers said they hated the taste. Instead of deleting it Coca-Cola completely reformulated it and printed on the top of every can: "New. Tastes nothing like the old one".

Tuesday's budget is genuinely new. Two of the six-member expenditure review committee that put it together weren't there before – the new Social Services Minister Scott Morrison and the new Assistant Treasurer Josh Frydenberg. The three top bureaucrats who put it together are new in their jobs – Michael Thawley in prime minister and cabinet, John Fraser in treasury and Jane Halton in finance. 

This time the Prime Minister Tony Abbott chaired almost every meeting. The nominal Treasurer and deputy chair Joe Hockey played less of a role.

On Tuesday Abbott and Hockey took part in a contrived photo opportunity pretending to go over drafts. Hockey didn't make eye contact. He looked deflated and upset. He didn't look like the budget's author.

At the heart of the budget are measures pushed by Morrison and Frydenberg rather than Hockey. In place of the indexation measure in the last budget that would have silently stolen pensioners' pay rises, Morrison's new package increases payments to pensioners of modest means and removes or cuts the part pension of only the wealthiest retirees.

Morrison's childcare package, to be unveiled on Sunday, will replace the confusing and overlapping system of childcare benefits and rebates with one simple payment linked to the number of hours in work. He'll also announce an $800 million a year safety net to ensure disadvantaged families get childcare. The money will come from the ditched paid parental leave scheme that in its original form would have paid the most to high earners.

Frydenberg has secured an extension of the GST to overseas-based online retailers such as Netflix. It'll be sold as a fairness measure, putting overseas and Australian retailers of web-based services on an even footing. He is also cracking down on the rort that allows the employees of not-for-profit organisations to pay food and entertainment expenses out of untaxed income without limit. The new limit will be $5000, after which their employers will face fringe benefits tax.

Fairness was a concept missing from the Coalition's first budget. It would have pushed young unemployed Australians onto a payment even lower than the dole and made them wait six months. It would have imposed co-payments on bulk billing, clipped future pension increases, ripped $80 billion out of schools and hospitals and lumbered university graduates with ever-increasing debt repayments. 

So unfair were the measures that the usual table that explained the kind of households it hurt and the kind it helped was missing. An attempt to replicate it by the Australian National University showed unemployed 23-year-olds would lose 18.3 per cent of their income. A childless couple on $360,000 would lose nothing.

Most of those measures have been blocked by the Senate, and in most cases rather than trying again the new budget will emphasise the point that it's "nothing like the old one".

On health, rather than pursuing co-payments the new minister Sussan Ley is going to extract greater value from the Pharmaceutical Benefits Scheme and the government's deal with pharmacists. She is considering allowing pharmacists to discount prescriptions, and may remove cheap drugs such as paracetamol from the scheme altogether.

Small businesses will be treated to a tax cut of 1.5 percentage points. They will be given back accelerated depreciation, scrapped in last year's budget, allowing them to write off up to $10,000 per year as well as the cost of setting up a business.

Some of the unpopular measures in last year's budget will remain, at least on paper. They are 'zombie measures' – not actually alive, but included in the budget to dress up the deficit forecasts. One is the much lower grants to schools and hospitals due in 2018 after the expiry of the Coalition's promise to match Labor's pledges for four years. Another is the savings that would flow from cutting grants to universities and allowing them to charge higher fees.

It isn't only fairness that will make the new budget different. The 2014 budget was meant to drive "the biggest investment program in Australia's history". It hasn't happened, in part because one of the projects the Commonwealth insisted on funding, Melbourne's East West Link, wasn't wanted by the Victorian voters.

This budget will try again, devoting money to infrastructure and opening up new possibilities for Victoria to get money in different ways.

What about the emergency?

Abbott declared a "budget emergency" back in 2013 after Labor forecast a deficit of $18 billion. On Tuesday Hockey will announce a deficit closer to $45 billion. But the emergency will have vanished.

In the lead-up to the budget Hockey pointedly redefined success. It is no longer getting the dollar value of the deficit down; it is now reducing it as a proportion of GDP. In a growing economy that's possible even if the dollar value of the deficit doesn't fall. Which is just as well – the latest projections from Deloitte Access Economics have it scarcely falling at all in 2015-16 although falling thereafter.

What's changed is that the government no longer has the political strength to make big inroads into the deficit. Bruised by the reaction to its first budget and behind in the polls it will face an election next year. 

The other thing that's changed is the economy. It is worse on almost every measure than it was a year ago. Post-budget the iron ore price collapsed from $US100 to $US60. Economic growth slid from 3.2 per cent to 2.3 per cent. Unemployment climbed above 6 per cent. Private businesses are telling the Reserve Bank they are reluctant to invest until they see a durable pick-up in consumer spending. But spending, and the confidence that drives it, are fragile. Talk of a second tough budget could dent it. Some of the economists most worried about Australia's outlook are reluctant to even talk about their fears. Like the government, they don't want to dent confidence and make their prophecy self-fulfilling.

This time there are good economic as well as good political reasons for producing a budget completely different to the last one. And turnarounds can work. After Coca-Cola reformulated Mother in 2007 its sales soared to take it within striking distance of Red Bull.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald