In my budget preview yesterday, I argued that Wayne Swan had two choices in framing last night’s budget.
One was to offer a series of micro-bribes, carefully targeted to various marginal constituencies: a tax cut here, a targeted spend there. In other words, a kind of election budget-lite. There was a little of this last night, but only a little.
The other option — and the one that the Treasurer eventually pursued — was to go for the biggest deficit reduction he could plausibly manage. Of course, really big deficit reductions could be achieved by attacking popular tax perks like negative gearing and Family Tax Benefit A and B — but given the political heat the Government has already taken on issues like the Resource Super Profits Tax, this was always unlikely.
This left Swan with little room to move when it came to announcing new spending. New money would have to be found from increased revenues or savings elsewhere in the budget. This is probably why the eventual shape of the budget was so dull. Most departments were given roughly what they got last year, and ministers touting ambitious new initiatives were told to go away.
But the upside of this strategy can be summed up in one word: "surplus". Even though this budget is in fact $40 billion in the red, Swan was able to announce a surplus was predicted for 2012–13. It also gives the Treasurer a neat framework for describing his response to the global financial crisis.
It’s worth repeating again in print — even if only for the benefit of those in the Coalition and media who don’t seem to be able to grasp it — the stimulus worked.
Buried in the "Economic Outlook" statement of Budget Paper 1 is a telling graph. It compares the size of the fiscal stimulus of various countries to their eventual growth performance last year. As the budget paper states, "those countries that enacted large and timely fiscal stimulus packages, including China, Korea and Australia, performed much better than expected. Those countries with smaller packages, such as the US, Germany, Canada and France, tended to perform broadly in line with expectations."
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As the Treasury boffins conclude, "the relationship shown is highly statistically significant." In other words, Labor really can claim to have saved Australia from a recession. And it’s because we avoided recession that our fiscal outlook is so rapidly improving. As another graph in the budget paper shows, we are returning to surplus much more quickly after this downturn than in previous episodes in the 1980s and 90s.
One option that Swan probably considered, but then abandoned, was a traditional election-year spend up, in the style of Peter Costello. This must have been tempting, particularly in light of Labor’s deteriorating position in the polls. The Government could have gone for any number of superficially appealing options, such as another round of "housing affordability" measures or yet more tax cuts for the middle class. That it resisted these temptations is in fact an achievement in itself. Spending growth has indeed been held to around 2 per cent and, despite what Joe Hockey is saying, expenditure has not blown out.
Having said that, Swan missed an opportunity in this budget and in his response to the Henry Tax Review to attack some of the really expensive and regressive expenditures embedded in Australia’s tax system. We’ve already mentioned negative gearing, but there are even bigger tax perks tied up in measures like the Capital Gains Tax exemption for the family home, in tax breaks on super that flow largely to the rich, and in areas like the preferential taxation of family trusts. Attacking these entitlements would not have been politically easy, but it could have represented the first step towards much-needed reform.
Politically, this budget will help, but it probably won’t be the circuit breaker most think Labor needs. The Treasurer has performed strongly, both in his speech last night and this morning in defending his budget to the media. The very fact that it gets the Prime Minister away from the spotlight for even a few days will help the Government, if only because Kevin Rudd has been travelling so badly recently. For example, on ABC 774 this morning with the combative John Faine, Swan was at his best, defending the stimulus and the schools building program, and explaining just why Labor needed to go into debt and why it’s now doing better than expected in keeping its fiscal discipline. The Government needs more of this just now, rather than the waffly talking points that the Prime Minister seems unable to abandon.
Selling this budget will be very important. Labor has not sold its policies well for some time now. The strategists inside the Prime Minister’s office should consider getting Rudd out of the media for the next few days, and allowing the Government’s highly competent team of Wayne Swan and Lindsay Tanner to sell the budget on its economic merits.
Even if this doesn’t happen, and a bored media move on to the next scandal, the budget has given Labor some clean air. At the very least, Swan has delivered on a number of Government promises. Given the disillusionment that had set in after the backflips on climate change, insulation and child-care centres, that’s perhaps the most important thing he could have done.
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