The Budget Bounce

hockey mugOh what a difference a budget makes. Prime Minister Tony Abbott is still tackling a Sisyphean fiscal deficit, but the spotlight has now been trained on Opposition Leader Bill Shorten’s deficit of ideas. Ever since Abbott’s Commission of Audit proposed major structural reforms to rein in Labor’s unsustainable and unfunded spending and to pay down its debt, Shorten has campaigned on a theme of the Coalition’s cruel cuts that were robbing the poor instead of plundering the prosperous.

Despite the fact that the government had imposed a deficit repair levy of 2 per cent on high-income earners and cut industry welfare, Shorten successfully imposed his Robin Hood narrative. In particular he mocked the government’s paid parental leave scheme, a six-month workplace entitlement, paid like sick leave and holiday pay at the worker’s wage.

Abbott had already abandoned the scheme in January, but thanks to a few small changes in his second budget, it is no longer possible for public servants and others who receive similarly generous parental leave from their employers to also claim the taxpayer-funded parental leave paid at the minimum wage. The move will save nearly $1 billion over four years, but that is just a bonus. The bigger pay-off is political. Suddenly, instead of attacking Abbott’s millionaire mums and their rolled-gold parental leave, Shorten has to defend double-dipping fat-cats and other well-heeled parents. The irony is as rich as the beneficiaries.

For the last twelve months, Shorten has milked the fairness debate for all it is worth. Now he finds himself wedged on the wrong side of it. The Public Sector Union, a key contributor to Labor’s coffers, has ensured that its members have one of the most generous parental leave schemes in the country, so Shorten has to defend the double-dippers even though it means calling for taxpayers to subsidise rather than soak the rich.

Axing the parental leave scheme has also freed up funds for childcare, a popular measure with young families on tight budgets, struggling to make ends meet and often living in marginal seats in the outer suburbs that are vital to winning elections. The new childcare scheme simplifies the existing architecture but, even more importantly from a political point of view, it leaves little room for the Opposition to attack it on the grounds of fairness. For example, the government is benchmarking prices so that it doesn’t subsidise the “BMW” childcare services with on-site chefs, organic food and $1800 handmade cots. It provides the greatest subsidies for the poorest and includes an activity test for both parents to ensure that it helps working families, not the idle rich.

All of this comes at a cost of almost $10 billion per annum, around $3 billion more than the current scheme. This is no piddling amount. The US states, with more than ten times Australia’s population, only provide about $US10 billion in childcare subsidies each year. The Opposition will have trouble attacking the additional spending, since it has spent the last eighteen months claiming there is no budget crisis and calling on the government to be more generous to the needy.

The other centrepiece of the budget is $5.5 billion in tax relief for small business, which has been widely welcomed, by the small businesses who received it and by the many big businesses that will benefit from increased purchases of capital assets. But the upside to the economy from this measure is only half the story. Small businesses—or “Tony’s tradies” as the Prime Minister calls them—are also a critical constituency in marginal seats where Australian elections are won or lost. Winning their support is critical.

Once again, the Opposition has been left struggling to find a line of attack. Shorten has said that he doesn’t like the “trickery” in the budget but Labor will have to support this stimulus even if they’d rather it was a government cash splash. The government’s critics on the Right have also welcomed a tax cut—difficult not to—even though many would have preferred it was for all businesses.

After twelve months of political pain, the government was determined to turn the tables on Labor and make fairness a centrepiece of the budget. A whole section of the budget papers is headed “Fairness in Tax and Benefits”. It sets out the fairness of the budget in everything from tackling tax evasion and multinational tax avoidance to cracking down on people working for not-for-profits who use tax concessions to subsidise weddings and cruises. The government is also investing in targeted strategies to reduce welfare fraud, which should deliver net savings of around $1.5 billion over four years.

While some have jested about Treasurer Joe Hockey’s visit from the “Fairness Fairy”, these measures are similar to some of the most popular policies adopted by David Cameron’s Conservative government in the UK. With Cameron’s unexpected victory, there has also been a subtle but discernible change in the political atmosphere in Australia. A Miliband victory would undoubtedly have put wind in Bill Shorten’s sails. But Labor may now fear that despite its long lead in the polls, Coalition support might be stronger than it seems. Miliband’s denial that Labour had overspent in office made him seem unfit to be trusted with the economy. Being seen as economically irresponsible is a threat to Shorten too, since he has preferred to indulge in the politics of class warfare rather than play a constructive role in dealing with the debt and deficit that Labor racked up.

Adding to Shorten’s troubles is the jostling on the Left of his party for a binding vote on gay marriage, which could split the party on an issue that does not resonate with mainstream voters. At the same time, the new Greens leader, Richard Di Natale, has said he wants to play a more constructive role in parliament, negotiating with the government. Di Natale wants to build on the Greens’ success in the New South Wales elections, where the party beat Labor in two inner-city electorates. So Shorten could find himself painted as Dr No by both the Greens and the government.

After predictions that the budget would be as scary as a Stephen King horror story, even the government’s critics have said that it was more like an Enid Blyton romp with the Famous Five.

The government’s narrative is that the pain and the heavy lifting are over and that it has now laid out a fair and credible path back to surplus based on conservative estimates. For example, the iron ore price is assumed to be $US48 a tonne, whereas it is currently trading at up to $US60 a tonne. A higher iron ore price will mean a lower deficit and an earlier return to surplus.

But the backbone of Abbott’s boring budget is bracket creep, the movement of taxpayers into higher income-tax brackets, not because they have received a pay increase in real terms but because their wages are simply keeping pace with inflation. Bracket creep is estimated to account for around 80 per cent of the increase in the budget’s tax revenue. What could be more boring than that? Yet for all its dullness, the impact is regressive—it hurts low- and middle-income workers more than high-income workers who are already in the top tax bracket and so can’t pay a greater percentage of their income in tax than they already do, though they too will pay more in absolute terms as their nominal income rises. The average wage of a full-time worker is around $78,000, only $2000 below the second-highest income-tax bracket, which is subject to a tax rate of 37 per cent.

Savings on the other hand will make a much smaller contribution to balancing the budget, and most of that will come not from cuts but from measures such as not indexing the rebate paid to GPs, which means payments will be 7 per cent lower by the end of the forward estimates.

Reductions in government payments as a percentage of GDP will contribute only 0.6 of a percentage point over the next four years to balancing the budget whereas revenue will rise by more than twice that—1.6 per cent—increasing revenue as a share of GDP to 25.2 per cent and reducing payments as a share of GDP to 25.3 per cent.

With revenue from company tax expected to fall, in part because of the dramatic fall in the price of iron ore, which is expected to reduce payments over the forward estimates by more than $20 billion, the heavy lifting is being done by individual taxpayers, with income tax as a percentage of direct taxes predicted to rise from 63 per cent to 69 per cent. But bracket creep, unlike new taxes, is often not noticed so much by workers and hence is often relied on by governments to deal with increased spending.

After its bruising stoushes last year, the government has deliberately walked away from fights. Instead, it will be a case of saving by a thousand cuts. In health care, for example, the government reversed a decision to reduce the rebate it paid to doctors by $5, which would have saved $2.9 billion over the forward estimates. Instead it plans to make savings of $962.8 million over five years by streamlining a range of health programs.

Contentious issues have been deliberately separated from the budget announcements. For example, it was widely expected that the government might make savings of up to $5 billion over the next five years by making a 5 per cent cut in the price the government would pay for key prescriptions and a saving of $400 million in payments to pharmacists. Medicines Australia and the Pharmacy Guild were both ready to wage a major public war. That battle has been delayed, with the budget papers simply saying that the government is in the final stages of negotiation on pricing reforms for pharmaceuticals.

Commonwealth public servants were also expecting swingeing cuts to departments but the government has again taken a softly, softly approach. It had already reduced the number of Commonwealth bodies by 286, saving $1.4 billion, and it has announced that another thirty-two would be abolished, with three others merged into one. The government will also make savings of $131 million and $106 million in the departments of education and health respectively and further savings will be announced in the mid-year economic and fiscal outlook update at the end of the year.

The budget has disappointed those who wanted more hairy-chested reforms and a credible path not just back to surplus but to paying off the debt. But the realists point out that it took former Liberal Prime Minister John Howard ten years in boom-time conditions to pay off Labor’s debt of $96 billion, and around half of it was retired through asset sales.

While many on the Right despair that government spending is too high, well-informed sources within the government say that the path to reducing it is not through headline cuts that have to be approved by a fractious and fractured Senate. The politically possible path is through reforms that will not meet head-on resistance. For example, the government has allocated over $250 million over four years for its digital transformation agenda aimed at allowing people to interact seamlessly with the government using the internet. This will not only make life easier for people in their dealings with government, it will save money.

To that end the government is investing $60 million to replace the existing welfare payment system. At the moment it takes over an hour to fill out sixty pages to apply for Family Tax Benefit, if you need to telephone for advice you wait on average sixteen minutes, and it takes several weeks to process a claim. The new system should allow parents to apply online in minutes and could reduce processing time to seconds.

Some of the livelier minds in the government want to go beyond this. They talk about making government data about education, health and welfare available for web developers to come up with apps to enhance productivity and revolutionise the way the government works.

Other reforms require the government to think more deeply about its commitment to reducing red tape and regulation. For example, instead of increasing the subsidies for childcare, which just drive up costs, the government needs to reduce regulations that strangle supply. At the moment it has accepted Labor’s and the unions’ quest to increase the qualifications needed to care for children—a foolish credentialism that reduces the number of available workers, drives up wages, and closes down opportunities for competent people. Planning restrictions also make it difficult to build childcare centres. Tackling these regulations would reduce the need for and the cost of childcare subsidies.

Similarly, Australian house prices are some of the highest in the world, largely due to government regulations that drive up the cost of construction and limit the supply of land. Relaxing these restrictions would increase housing affordability, reduce homelessness and ease pressure on the cost of living, reducing the overall demand for financial assistance for low- and middle-income workers.

But even without all these innovations, a budget that isn’t scary seems to have Labor spooked. Its greatest fear is that if the government gets a bounce in the polls it will go to an early election. The government has denied that and says it has more to do. It does not want to be seen as tricky and it knows that Australians dislike early polls. John Howard has strongly counselled against going to an early election.

It is far too early to reach a final judgment on this budget. There is no doubt that it will meet resistance and that there will be plenty more argy-bargy in the Senate. But there is also little doubt that whether or not the government gets a bounce, the budget has put a spring in the step of the Prime Minister and, at least for the time being, has put the Opposition on the back foot.

Rebecca Weisser is a journalist and editor. She wrote “Budgets, BoreCons and the Doctrine of Dullness” in the May issue.

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