Now For The Hard Part


As I remarked on budget night, Wayne Swan’s second budget is full of political risks for the Government.

To its dismay, the Government was forced to deal with two nasty surprises yesterday. The first was an embarrassing mistake in the budget figures, with clumsy wording in a budget paper making it appear as though the Government misstated $11 billion in revenue. The issue appears fairly trivial, but it also illuminates the difficulty of any government making forecasts about the economy.

Indeed, one of Wayne Swan’s biggest problems with selling this budget has been the credibility of its forecasts. Right from the initial press conference on budget afternoon, journalists, politicians and economists have all questioned the budget’s rosy medium-term forecasts of 4 and 4.5 per cent growth.

So broad was the scepticism that on Tuesday, the Treasury secretary himself gave a speech defending the forecasts. This pointed intervention will be seen by some as political, but it could also be construed as a principled defence of the independence of the Treasury as an institution. However you read it, Ken Henry’s case was formidable. The growth path outlined by the Treasury could happen. There is a lot of slack in the economy and if demand picked up, output could expand quite quickly. Glenn Stevens admitted as much when he said the forecasts were not "crazily optimistic".

But what if the global recession grinds on? This longer and shallower recovery is the future predicted by the IMF in its latest growth forecasts. What if there is further major financial disruption, like another round of bank failures or the bond default of a medium-sized emerging economy? In such an environment, event horizons shrink to months and forecasts themselves lose much of their credibility.

Another sleeper issue is the crackdown on employee share schemes. This relatively brief budget announcement led to turmoil at a series of large listed corporations, spooked by the uncertainty of what amounts to a potentially significant new tax liability, who suspended their employee share schemes. Sky News reported that 4 million workers might be affected. By late Tuesday the Prime Minister was promising to consult on the issue.

If the Government is experiencing what Henry called "communications problems", the problem is partly of its own making.

Labor decided to sell a difficult double message. Part one was the "temporary deficit" — all $57 billion of it. Labor pegged the deficit as necessary spending on nation-building infrastructure. The Government was plunging the country into significant (but manageable) levels of debt, in order to alleviate the effects of the recession and finance investments in future prosperity.

The second part of the message was that Labor was also making "tough decisions" to bring the budget back into surplus in the medium term. Various government benefits, tax perks and superannuation and private health concessions were tweaked to save billions over the next four years. Even more ambitiously, the Government announced it was embarking on pension reform, committing to raise the eligibility age from 65 to 67 by the early 2020s.

This was always going to be a difficult message to sell. Labor is trying to soften the depths of a recession we’ve only just entered. At the same time, it is exerting all its rhetorical powers to convince us it has a plan to manage a completely hypothetical recovery. No wonder voters seem to be a little confused.

A recent Sydney Morning Herald/Neilson poll of 1400 voters found 38 per cent thought they would be worse off after the budget. In reality, this budget leaves nearly everyone who earns less than $150,000 per year better off.

Think about it: there’s the huge tax cuts promised 18 months ago in the federal election, plus the rise in the base pension rate, plus the "cash splash" stimulus spending, plus a rise in the Low Income Tax Offset, plus another six months of top-ups to the First Home Owners Grant, not to mention the various targeted increases in benefits for postgraduate students and the like. And this is before we discuss the macro-economic impact of Labor’s deficit spending, which has almost certainly meant that the recession we are only now entering is shallower and less painful than it would otherwise be.

As Ross Gittins has pointed out, Labor’s obsessive pre-budget leaking in 2009 has actually harmed the budget’s reception. Instead of leaking the unpopular decisions early and holding all its aces until budget night, Labor’s strategists put the media on a drip-feed of budget announcements which diluted the impact the statement might have had. This probably accounts for the prevailing view among the press gallery on budget night that Swan had ducked the tough decisions on cutting back "middle-class welfare".

The term "middle-class welfare" has been bandied about so often in the last fortnight that it has quickly become a meaningless cliché — if indeed it was ever anything else. As John Howard himself pointed out to David Spears on Sky News this weekend, the so-called "middle-class welfare" provisions introduced by the Howard government like the Family Tax Benefit and Maternity Payment were not merely welfare for the middle classes. No, they amounted to something much more grand: an ambitious new safety net that was universal in its scale.

This "welfare for everyone" model meant that taxpayers’ money was not just distributed to middle-class families in the suburbs, it was actually extended right out to the very wealthiest families in the land. In just a decade, the cost of family tax benefits has grown from nothing to $17 billion. Superannuation concessions amount to $25 billion. No wonder the budget is in "structural deficit".

The Government is also struggling to explain this structural deficit — or how to point out that Peter Costello’s surpluses weren’t really surpluses at all. The crux of the "structural deficit" point is pretty simple: Howard and Costello spent the proceeds of the boom on tax cuts and family tax benefits when they should have saved more. When the boom ended, all that extra spending meant the budget plunged quickly into the red — which is where we find ourselves now.

But the mixed messages have largely prevented the Government from getting this across. For instance, Rudd and Gillard are currently doing daily media stunts with hard hats to sell their infrastructure spending program. At the same time, Wayne Swan and Lindsay Tanner are claiming they are financially responsible by winding back health insurance rebates and raising the age of the pension. All this while the $900 stimulus cheques are still arriving in voters’ mailboxes.

In contrast, the Opposition’s message has been brutally simple: deficits and debt are bad. In a recession, as many of us struggle to keep up with our mortgage and credit card repayments, it’s a viscerally simple point that anyone can understand.

Of course, it’s essentially grandstanding — as a simple glance at the budget papers will reveal. The main cause of the deficit is the collapse in revenue, not Labor’s spending, as George Megalogenis observed this week. But opposition parties seldom need resort to logical argument. And whatever the Treasury says about the underlying figures, the fact remains that Peter Costello ran nominal surpluses, while Wayne Swan’s budgets are awash with red ink.

Perhaps this is why Kevin Rudd looked so testy on Lateline on Tuesday night. The normally urbane Prime Minister appeared to let Tony Jones get under his skin, snapping at the ABC host a number of times over the amount of debt his Government is running up.

The Opposition will no doubt feel some cause for hope. After months of drifting with barely a note of good news, optimistic types in the Coalition will now fancy they have finally found traction with the electorate. For the first time since Brendan Nelson’s petrol tax stunt, the Coalition has a message that seems to be "cutting through". Unlike many, I thought Malcolm Turnbull’s budget reply speech was a strong performance; it may even have saved his political future. Things will get tougher for Labor from here on in.

Ben Eltham is New Matilda's National Affairs Correspondent.