Budget 2009: A Gamble Posing As Prudence


This is a budget framed by one over-arching reality: the global financial crisis and the collapse in growth and government tax revenue that it has produced.

"Forged in the fire of the most challenging global economic conditions since the Great Depression," Wayne Swan has proclaimed a "nation building" budget. The old strictures of permanent surplus have been stripped away by the global financial crisis to reveal Kevin Rudd’s administration as a very "old-fashioned" Labor Government. As Swan was at pains to repeat in his speech’s conclusion, "we will support jobs today by building the infrastructure we need for tomorrow."

After the boom times of the Howard years, Wayne Swan has responded to the specter of recession with some old-fashioned deficit spending. Partly by good luck, but also by good management, Labor’s commitment to fiscal stimulus and debt-financed government spending has probably ensured the recession here is milder than it might have been, and much milder than it already is for many of our trading partners.

Swan and Rudd promised they would move "heaven and earth" to protect jobs, and in many respects they have actually delivered. One of the worst deficits in recent history is one of the best budgets. According to Swan, if we are to believe the figures, the stimulus packages worked.

The crisis has also given Labor an opportunity to invest in the sort of "nation building infrastructure" Kevin Rudd is so fond of. This budget finally announces the winning projects of the Government’s infrastructure process, allowing Swan to announce billions in new spending on "roads, rail, ports, jobs and unis" — $13 billion in new spending this budget alone, and that’s not counting the money being spent from money that has been socked away in the infrastructure and education funds. Labor’s spin doctors have put "Nation Building" bunting all over the budget documents and press conference podium, and these "shovel ready" projects give it much scope to rebut the Coalition’s sneers about the "cash splash".

And the budget even contained some surprises! Despite the countless strategic leaks in the lead-up to Swan’s speech, it still contained some big, risky announcements. The most notable of these was a fundamental reform to Australia’s age pension. Labor has made the once-in-a-hundred-years decision to raise the pension eligibility age to 67.

Not until 2023, mind you. There will be so many elections between then and now that it’s frankly ridiculous to call this a "reform".

Indeed, more than most, this budget is a statement of good intentions rather than actual commitments, if only because the commitments now are mainly about spending to stimulate the economy. That’s because Australia is in a recession, as the Treasury forecasts reveal, with unemployment set to hit 8.5 per cent before falling again in the longer-term.

And that’s where the political risk for Swan and Rudd lies. Australia’s Treasury is now in the red: an eye-popping $57 billion in the red, to be precise. Despite pruning tens of billions of dollars in "middle-class welfare" from the budget’s bottom line, the federal Treasury will still be running a $44 billion deficit in 2011. And that’s if Treasury’s rosy forecasts for above-trend growth figures of 4.5 per cent four years from now turn out to be correct. In the budget press conference, the ABC’s Stephen Long repeatedly probed Swan on whether these forecasts were overly optimistic. He’s got a point: if the recession lingers, both the deficit and unemployment could be much worse.

Labor’s election only 18 months ago must seem like a nostalgic idyll to Swan just now. Then, the boom times were fuelling a massive budget surplus which Labor was only too happy to put to good works. In retrospect, of course, we now know Labor inherited an economy on the brink of global crisis. Within a year of taking office, Swan was presiding over what he describes as the Australian economy’s "worst six months since the Great Depression".

The result was a $210 billion write-down in government revenue, which has punched a massive hole in the government’s coffers. It will take years for the bottom line to recover from the hit.

To understand why the deficit is so large, it’s worth exploring recent economic history. The sea of Commonwealth red is not just the result of the recession — and John Howard and Peter Costello’s policy of running up large tax transfers to families — as Swan claims. It’s also the fallout from Australia’s own case of the dreaded Dutch disease: the economic hangover after Australia’s long mining boom party of the early 2000s.

As the Treasury Department now realises — but apparently failed to at the time — the mining boom conferred a once-in-a-generation shift in Australia’s terms of trade, pumping up commodity prices, corporate profits and the corporate tax revenues that flowed from them.

Far from husbanding the proceeds, Howard and Costello used the money to finance a huge new social welfare system of family tax payments. According to the Treasury’s own paper, The Architecture of Australia’s Tax and Transfer System, "the value of tax expenditures like Family Tax Benefit A has more than doubled in the past 12 years or so, rising from an estimated $23.5 billion in 1996–97 to an estimated $50 billion in 2006–07". Tax payments to families represent $17 billion this year alone. On top of this, huge new tax cuts were given away across the spectrum, and particularly at the higher income end.

When he took over from Kim Beazley in 1996, Peter Costello made great mileage out of Labor’s supposedly crippling "$10 billion blackhole". He finally got his revenge on Labor this budget, by leaving Wayne Swan with an even bigger fiscal problem of his own making.

The result is that the Australian budget is in "structural deficit" — in other words, it won’t return to surplus even after the recession is over. This means the Government is borrowing on the bond market to fund its continued spending.

Of course, as I pointed out here on newmatilda.com last month, Australia’s deficit is small by international standards and will be relatively easy to service. Even so, Swan was at pains to point out he would eventually bring the budget back into the black. To do this, Swan hinted that he might have to cut savagely into future federal expenditures. But, in reality, he hasn’t actually cut to the quick. Instead he has opted to shave, prune and pare back various measures in a way that mainly affects those earning more than $150,000 a year. The Howard Government’s aversion to means-testing has helped him in this task, allowing the Treasurer to save billions by tightening measures like superannuation concessions, private health insurance rebates, company and trust taxation provisions, and family payments.

In fact, Swan could easily have cut more deeply and effectively. There is a swathe of obvious savings available to Swan and other future Treasurers, if they have the will. Capital Gains Tax concessions, tax breaks for family trusts, the $7000 First Home Owner’s Grant (as opposed to the extra $7000 the Government added last year as a "boost"), the rest of the Private Health Insurance rebate, and the vast array of superannuation concessions (valued at an astonishing $25 billion a year by the Treasury) are all ripe for future picking. And that’s before we even consider Australia’s ludicrous Defence White Paper commitments to expensive and unproven military hardware.

And that’s just the spending side. Swan has failed to do any meaningful work on tax reform, for instance in shifting the burden of Australia’s taxation system away from ordinary PAYG workers and further towards taxing social costs and harms like alcohol, tobacco, salty and sugary processed food, and pollution. There are easy gains of billions to be had here, as Malcolm Turnbull recognised in 2008.

The decision to increase the eligibility age of the pension is in a different category.

It is indeed an unpopular decision, and one which Swan and Rudd can not have made lightly. By announcing such a measure so far into the future, it postpones any pain until long after the life of this Government. But that doesn’t mean Labor won’t feel the heat. Demographic change and a commendable respect for our elders make pensioners and the aged the true sacred cows of Australian politics. By raising the issue of the sustainability of Australia’s pension arrangements, Swan really is making a courageous contribution. It can only hurt Labor in the short term, and in the long term this Government will have joined John Maynard Keynes in the here-after.

Pension reform is perhaps the best illustration of the way this budget’s political and economic risks are mismatched. With an ageing population, pension reform is fundamental and necessary to Australia’s future. But this very trend means more and more voters are elderly.

It’s the story of this budget in a nutshell: economically, it’s nearly as sound and responsible as Swan says it is. You could even argue it is straight out of the Keynesian text-book. Politically, it’s a gamble posing as prudence, and may put the first sustained dint in Labor’s poll standings.

Could the honeymoon be finally over? Time will tell. We’re now in the run-up to the election and the next budget will be an election budget. Then again, it’s never wise to bet against Kevin Rudd.


Ben Eltham is New Matilda's National Affairs Correspondent.