The federal budget almost certainly moved into deficit this week — and nobody cared.
As the National Bureau of Economic Research (NBER) finally called the American recession, Kevin Rudd and Wayne Swan pumped $3.5 billion of extra federal funding into state public hospitals and schools after reaching agreement at the weekend’s Council of Australian Governments (COAG) meeting.
With Australia’s September quarter GDP growth figures out today, Rudd and Swan are trying to spend their way out of the crisis, propping up collapsing business investment and a downturn in consumer spending with billions of dollars from the Commonwealth’s disappearing surplus. After the weekend’s announcements, that surplus is now almost gone. Expect Wayne Swan to announce a deficit when he presents the next federal budget in May.
The total funding package added up to $15.2 billion over five years. $3.5 billion will go to schools, $7.7 billion to hospitals and healthcare and nearly $2 billion will go to address Indigenous disadvantage, the last a surprisingly positive outcome cautiously welcomed by ANU’s Dr Jon Altman. A further $846 million will be spent on affordable housing.
Rudd and Swan claim extra money for the states will create 133,000 jobs, but the real benefits of the spending are likely to be felt in the nation’s ailing public services, particularly Australia’s primary schools, where the dollars invested will likely reap a significant benefit in future productivity.
Also aimed at improving productivity was reform in the way the Commonwealth funds the states. $550 million has been allocated to help the states to cut their red tape overheads, and Lindsay Tanner’s staff have done some extremely hard yards in the past year in order to reform the complex Special Purpose Payments that have beset federal-state relations in Australia.
John Howard and Peter Costello loved these Special Purpose Payments because they could be tied to very specific outcomes — like a flagpole in a primary school. The states hated them, as they often cost more to administer than they delivered in funding. The new COAG agreement collapses more than 95 Special Purpose Paymentss into just five — an impressive reform.
COAG also went some way to addressing the drift in Commonwealth funding for expensive parts of state budgets, like public hospitals — as Tasmanian Premier David Bartlett told the ABC. Over the course of the Howard years, the share of Commonwealth funding for public hospitals shrank from the traditional 50 per cent split to less than 40 per cent. The result has been budget squeezes from harried hospital administrators.
As the Centre for Policy Development’s John Menadue points out, the extra health funding won’t necessarily solve our health problems. Our health system has archaic IT systems and workforce structures, and reforming it means taking on powerful interest groups like the AMA. Nonetheless, the extra funding will at least apply a band-aid until more radical surgery can be undertaken.
The effectiveness of the rest of the funding will be harder to determine. Critics argue that much of it will disappear into the maw of giant state bureaucracies before it ever reaches the hospital wards and the classrooms.
But that view, which was propagated by Costello and Howard (even while they ramped up staff levels in the federal bureaucracy), doesn’t necessarily fit the facts.
This is because the states have a notoriously weak budget position in Australia. The so-called vertical fiscal imbalance means the Commonwealth levies most of the taxes while the states deliver most of the services. As The Australian’s Steven Matchett wryly noted, "the Prime Minister patronised the premiers and they politely put up with it; what with them having the hospitals and him having the money."
To the extent that this year’s COAG addresses this imbalance, it’s welcome. Along with Rudd’s recent giveaway to Australia’s mayors, it fleshes out Labor’s strategy of using the financial crisis to reinvest in public services on the theory that cash-strapped councils and states will spend money now on fixing up dodgy pavements and decrepit classrooms.
By pumping billions into health, education and housing, this COAG represents one of the most important new injections of federal cash into those services in more than a decade. In return, the states pledged to work towards Canberra’s policy goals. It’s Rudd’s new "cooperative federalism" in action, and so far, it seems to be working.
Something that is also working for Labor is the ease with which it has maneuvered the Opposition away from the high ground on the issue of budget deficits. The last week has seen the Rudd Government entrench its lead over the Opposition in terms of its economic credentials. An early attack by Malcolm Turnbull and Julie Bishop on Labor’s looming deficit fizzled out quickly once they realised no-one was listening. A new scare tactic on border protection led by Sharman Stone was tried instead, to general Parliamentary derision. A blueblood Harvard MBA grad, Bishop looks the part but has proved brittle in the role of Shadow Treasurer; there’s now speculation she could be dumped.
Why are Turnbull and Bishop struggling? The answers are fairly simple. Firstly, they carry the baggage of their previous policies, like WorkChoices and border protection. WorkChoices was never a vote winner, while the scare tactics of Tampa have slowly lost potency over the years. The Coalition badly needs new policies that speak to the changed world we now live in.
The Opposition is also flailing because so far, the Rudd Government has shown itself to be savvy and hard-working in office. Labor has played a canny game with the deficit issue, aligning itself with the mainstream of economic opinion and seizing the opportunity offered by the downturn to play to its perceived strengths in health, education and industrial relations policy. For those who remember the dynamic of the Howard-Beazley contest, it is a classic wedge strategy.
A couple of months ago it was fashionable to argue that for all its frenetic activity, Kevin Rudd’s Government lacked a "narrative". Now the tables have been turned, as Malcolm Turnbull struggles to come up with a coherent line on budget deficits.
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