Budget 2010: What's In It For You?


The Rudd Government’s third budget has lived down to its carefully managed low expectations: it’s a restrained affair that delivers only a small amount of new spending and pays for it with hefty new taxes, including the foreshadowed increase in tobacco excise and the Resource Super Profits Tax.

The headline numbers are vast improvements over last year’s forecasts. The 2009 budget was framed in the dark days of the global financial crisis, when it looked as though Australia would follow the northern hemisphere into recession. At the time, many commentators (including me) questioned the Treasury forecasts, arguing that if a recession set in then Australia’s finances could suffer serious damage.

As things turned out, the Government’s Keynesian stimulus had a textbook effect on aggregate demand. Instead of contracting, as the Treasury forecast last year, the economy actually grew, with unemployment currently under 6 per cent instead of the 8.5 per cent that had been forecast. The Treasury expects this economic growth to continue, reaching 3.25 per cent next year and 4 per cent in 2011–12.

It’s true that the downturn, and the borrowing required to finance the stimulus, punched a significant hole in our public finances. As the budget’s Fiscal Strategy and Outlook observes, "While tax receipts have begun to improve in the period to 2012–13, they remain around $110 billion lower than had been expected at the time of the 2008–09 Budget."

However, because of the success of the stimulus, the deficit is much lower than expected, coming in at around $40 billion on revenues of $321 billion. The Government now expects to return a surplus in 2012–13, three years earlier than expected. As a result, government debt will peak at only 6 per cent of GDP — a tiny fraction of the debt woes faced by other industrialised nations.

Treasurer Wayne Swan made much of these economic fundamentals and of the "robustness" of the Australian economy in his budget speech. "We have more robust growth, lower debt and lower unemployment than our peers," he said.

The Treasurer attempted to frame the budget around "three key challenges": a return to full capacity in the "two-speed economy", climate change and superannuation — but the last two were far less prominent than the good news Swan highlighted in the first. On climate, there was a new $652 million renewable energy fund, obviously intended as a trade-off now that the CPRS has been wiped from the budget estimates. The super changes were those that had been announced a week ago in the Government’s response to the Henry Tax Review, including the Government top-up for low-income earners and the increase in the employer levy to 12 per cent.

The big winner of the budget was Health Minister Nicola Roxon. Her portfolio saw more than $7 billion in spending. $5 billion of this has been announced already in the National Health and Hospitals Network package, but on budget night there was an extra $2.2 billion for primary healthcare, including $355 million for more super GP clinics, $417 million to enhance after-hours GP services, $523 million to train nurses and $467 million in much-needed health IT measures, such as the introduction of individual electronic health records.

There was also money for training in a $661 million skills and training initiative. Around 39,000 new training places will be created, including 22,500 apprenticeships, especially in sectors of the economy facing skills shortages like infrastructure, resources and renewable energy. Other training initiatives include extending Fee-HELP to students of state vocational education and training programs at diploma level or above, extra money for a national VET regulator, $129 million in new funding to large registered training organisations, and $67 million for language, literacy and numeracy programs.

One aspect of this budget that hasn’t attracted much attention is the fact that it is still delivering the tax cuts promised by Peter Costello way back in 2007. These include shaving the marginal tax rate for middle-income earners and raising the bracket threshold. An important equity measure that builds on Swan’s proven record in delivering for low-income earners was an increase in the Low Income Tax Offset to $1500, meaning that the effective tax-free threshold is now an income of $16,000. This doesn’t sound like much of a tax break, but for those with very low incomes, it will be a welcome reform.

Other tax changes include the suite of company tax reforms announced as part of the Resource Super Profits Tax policy, such as lowering company tax to 28 per cent for small businesses and allowing a new provision to write off assets worth up to $5000. As foreshadowed in the Henry Review, the Government has also created a new tax break for cash investments like bank deposits: savers will gain a 50 per cent discount of up to $1000 on interest income, helping to redress some of the investment distortions caused by tax exemptions for other asset classes like property.

There was also a billion dollars here and there for defence and border security: an extra $1.2 billion for the war in Afghanistan, plus $1.135 billion, mainly in repurposed defence spending, for force protection measures, such as night-fighting goggles, body armour, enhanced vehicle armour, and even sniffer dogs. There was an extra $151 million for immigration detention facilities plus sundry millions for things like aviation security, northern waters surveillance and anti-people smuggling programs.

My favourite spending measure, however, was "$2.7 million over four years to continue support for five adventure playgrounds in Melbourne". It’s good to know the kids are being looked after.

On the revenue side of the budget, the Government reaped few genuine savings, with most extra expenditure being paid for by the big tax increases already announced — in tobacco excise (an extra $5 billion over the forward estimates) and the Resource Super Profits Tax ($12 billion). Tightening up the payouts to drug companies through the Pharmaceutical Benefits Scheme will yield $1.3 billion, a new ATO campaign to increase GST compliance will chip in $1.13 billion, and changes to the way foreign aid is calculated will bring in an extra billion.

The Government also repeated last year’s trick of shaving and tightening the way various superannuation tax breaks are calculated, netting an extra $829 million in revenue, while ethanol tax tweaks will bring in $275 million and new eligibility rules for the Disability Support Pension will deliver savings of $383.4 million.

The Resource Super Profits Tax will pay for the company tax reductions, as well as infrastructure. Proceeds from the RSPT will be used to create a new infrastructure fund, with estimated inflows of $5.6 billion over the next decade, beginning with $700 million next year. The Government also found $1 billion for the Australian Rail Track Corporation for rail infrastructure, extra money for ports like Port Botany, and it brought forward certain earmarked expenditures for certain roads and highways projects.

In such a dull budget, the changes in aid funding have attracted some attention. As part of Australia’s international commitments to increasing our level of foreign aid, the Government had previously pledged to commit a certain share of Australia’s Gross National Income (GNI) as overseas development aid. This necessitated a statistical exercise to calculate the current figure for our GNI. It turns out that the figure is higher than anyone realises, which meant that the Government would have spent an extra $1.025 billion in aid over the next four years. That money has now been "saved", making it appear as though the Government has cut back its aid budget. In fact, Wayne Swan points out that there is new spending for foreign aid in this budget. $178.2 million over two years in additional funding will go to the International Climate Change Adaptation Initiative, $56 million over two years is earmarked in additional funding for the International Forest Carbon Initiative, and there’s $106 million over four years for AusAID for partnerships with multilateral agencies to help partner countries transition to lower carbon growth.

Overall, the Government’s spending targets have largely been met. Spending growth has been kept at 2 per cent, and budget expenditure remains at around 25 per cent of GDP over the forward estimates, upsetting the Coalition’s claim that the Government has a spending addiction. In fact, by international standards, Australia remains a low taxing and low spending economy.

An intriguing and thoughtful part of the budget papers this year is a detailed examination of the economics and policy behind the RSPT. Entitled "Benefiting from our Mineral Resources: Opportunities, Challenges and Policy Settings", this section of Budget Paper 1 takes an in-depth look at the economics behind the mining boom, and what it means for the broader Australian economy. Pointing out that "Australia has received dramatically higher prices for its non-rural commodity exports since the early 2000s," the special section then goes on to look at key trends that flow from this terms-of-trade boom, and canvasses the economics literature on the resource curse, the "Dutch disease" and other policy challenges confronting the government of a country experiencing a resource boom. The section should be compulsory reading for the entire Canberra press gallery and underlines the vacuity of the mining industry’s resource tax scare campaign. But don’t hold your breath for a more nuanced coverage of the supposedly dire consequences of the RSPT for the resources sector.

In summary, Wayne Swan has delivered exactly the boring, no-nonsense budget he promised us. It should succeed in reframing expectations of an election spend-a-thon, but even the Treasurer himself admits it will be unlikely to have a significant impact on the polls.

Still, for those numerate enough to read a ledger column, this budget should confirm the key points that many in the media seem unable to grasp: the essential soundness of Australia’s public finances, and our increasingly rosy prospects for economic growth.


Ben Eltham is New Matilda's National Affairs Correspondent.