A Strong Budget, But Will It Bounce?


Wayne Swan’s fourth and Julia Gillard’s first budget is impressive — except in terms of politics. If we look at it in terms of the big picture balance sheet, or policy, or economically, it’s a success. 

Fiscally the budget will record a modest deficit of around $22 billion in cash terms, or about 1.5 per cent of GDP. To achieve this, Labor has made many small cuts in a number of programs, and a number of larger ones, including in renewable energy spending, in the defence department, and in family tax benefits. There is also an increase in the efficiency dividend of $1.5 billion, which puts the squeeze on the bureaucracy, particularly smaller departments. All up the government will spend about $362 billion in return for approximately $342 billion in tax receipts, including Future Fund earnings.

Much of the commentary last night and this morning has focused, as I predicted, on whether Swan’s budget was "tough" enough. This is nonsense. Across a budget this big, a deficit of $20-odd billion is a manageable deficit. With the solid growth forecast by Treasury, there is little doubt that Swan will achieve Labor’s cherished goal of a small surplus in 2012-13.

There was a lot of rhetoric in the lead up to the budget about middle class welfare, but Swan and Penny Wong have achieved some significant savings by paring back upper-class welfare. A tax offset for dependent spouses staying at home without children has been abolished, for instance. This was a notorious tax loophole that allowed high-income earners to claw back tax refunds simply because their spouses weren’t in the workforce. Another tax lurk which mainly benefited the rich was the ability of rich parents to gift some of their investment earnings to their children; this has been closed off, saving $740 million. The Family Tax Benefit thresholds have also been frozen at $150,000, and the indexation of the FTB supplement has been halted, saving approximately $2 billion in total merely by the workings of that old friend of the finance minister, bracket creep.

However, some cuts will hurt more.

Given the dire state of Australian housing affordability, the decision to save $345 million by slowing down the rollout of the National Rental Affordability Scheme is a particularly cruel one. $211 million has been saved in aged care spending through providing more care to the elderly in their homes — ignoring the fact that there is still a huge need for investment in aged care infrastructure. And some of the mental health initiatives have actually been paid for by winding back Medicare payments for mental health consultations, a strategy that looks contradictory.

But in the main, this is a responsible budget in terms of its taxing and spending, as no less an authority than Ross Gittins has stated.

In policy terms, this is a classic Labor budget. If we look at the policy priorities, they are the sorts of things that Chifley or Hawke would have welcomed, as Greg Jericho has also pointed out. The big ticket items are in mental health, in vocational education and training, in regional infrastructure, and in workforce participation initiatives such as employer subsidies to give the long-term unemployed a job. Foreign aid has also won increases, for instance in AusAID grants to NGOs and volunteers.

The participation initiatives are particularly important and they must be viewed in the context of the broader economy.

In Budget Paper 1, Treasury has some important and fascinating things to say about Australia’s "mining boom mark 2" and the rapidly transforming composition of our economy. Yes, the mining boom is important, Treasury writes. Even given this, "the current transition that Australia faces is much broader than the mining boom."

You can see the transformation in the graph below.

Employment change by industry

Australia’s workforce is changing fast, as we lose manufacturing jobs but gain employment in industries such as healthcare, mining, construction and the professions. As Treasury observes, "two-thirds of the 1.5 million [jobs]added to total employment over 2003-4 to 2009-10 are highly skilled."

For those interested in these things, Treasury has also included a fascinating footnote on the economic history of resource booms. It examines the famous example of the rapid inflation and manufacturing decline supposedly suffered by the Netherlands (the so-called "Dutch disease") after the discovery of oil in the North Sea, and argues that the effect was much less severe than first thought. In contrast to those, such as myself, who think the negative impacts of the mining boom will be significant, Treasury is optimistic, even about the manufacturing sector. "International evidence suggests that these concerns around Dutch disease tend not to apply to advanced countries," Treasury concludes. Wayne Swan will certainly be hoping they’re right.

Which brings us to the politics.

This was always going to be the sternest test for the government, particularly given the press gallery’s continuing economic illiteracy (exemplified in this woefully ignorant pre-budget article by Fairfax’s Peter Hartcher). Much of the commentary has of course focused on the deficit and whether Labor can indeed get back to surplus. There has also been a lot of ink spilled on the budget cuts, particularly to so-called middle-class welfare, and whether there were enough of them.

There seems little likelihood that Labor will get a "bounce" from this budget. But the longer-term effects may be subtly positive. With the 2011 budget, Wayne Swan has delivered a responsible, credible, progressive financial blueprint for the next three years of Julia Gillard’s minority government. This can only help with the intangibles, such as backbench morale and the general perception of the government’s credibility.

The Opposition’s performance in response has also been woeful: Joe Hockey in several interviews last night was at his blustering and arrogant worst. The Opposition’s one-dimensional tactics of single-minded opposition have certainly been effective so far, but they have been helped by a drifting and clueless government. This budget gives Labor something to rally around, and a coherent message to help carry forward the debate on the carbon tax. If Swan does indeed bring in a surplus next year, bedded down in a consolidated budget with the carbon tax, the Opposition’s empty policy cupboard will be that much more apparent.

It’s too early to see if the budget will staunch Labor’s haemorrhaging in the polls, but here at least is some precious clean air for the government.


Like this article? Register as a New Matilda user here. It’s free! We’ll send you a bi-weekly email keeping you up to date with new stories on the site.

Want more independent media? New Matilda stays online thanks to reader donations. To become a financial supporter, click here.

Ben Eltham is New Matilda's National Affairs Correspondent.