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ESSA

2012-13 Federal Budget – Beyond Robin Hood and Carbon Tax Bribes


Sharon Lai

By

May 13th, 2012


On Tuesday May 8th, Treasurer Wayne Swan handed down his fifth budget to an eager and expectant crowd of media commentators following a significant lead-up of leaks and speculation.


It’s Budget time! On Tuesday May 8th, Treasurer Wayne Swan handed down his fifth budget to an eager and expectant crowd of media commentators following a significant lead-up of leaks and speculation. This crowd has since devoured the budget’s contents and embarked upon a reporting frenzy that has been nothing short of what’s expected. There has been tremendous coverage on the politics of this Budget, with the Government accused of playing the class warfare card to appeal to traditional Labor supporters. This political motive, it is claimed, has been shrouded in the carbon tax compensation payments and education support initiatives.  Notwithstanding the fascinating coverage on the politics, we are an Economics Student Society (of Australia), and so I shall attempt to provide some concrete economic analysis.

First, a brief digression to review some of those said political motives. In retrospect, Wayne Swan’s controversial essay on the “rising influence of vested interests” (read Dean’s thoughts on it here) was an ominous precursor to a budget that would see Labor return to its core values of equity and redistribution. For those earning over $300,000 per year, the tax rate on superannuation contributions has doubled from 15 to 30 per cent. A reduction in tax breaks for ‘golden handshakes’ has also occurred, as well as a reduction in tax concessions on living-away-from-home allowances and other benefits paid to senior executives. On the other end of the spectrum, increases to Family Tax Benefit A, a new Supplementary Allowance of up to $210 per year, and a School Kids Bonus ($820 for each high school student; $410 for each primary school student) are being delivered to some individuals and families. In my analysis of the Victorian Budget last week, I briefly mentioned how normative value judgements are inherent in policy-making and inevitably seep through the budget process. Swan is indeed making a values judgement with this Budget. Therefore, whilst the denigration or praise (depending on which camp you’re in) of these various distribution measures may yield some heated debates, they are unlikely to be productive. The bottom line is that we have a Labor Government delivering a Labor Budget, and who can blame a government for sticking to its values? As such, objective analysis of its merits should be centred on the potential economic impacts.

The economic intent of this budget is fairly clear. In line with Treasury forecasts of growth returning to trend, the aim is to return fiscal policy to its pre-GFC trajectory of repeated surpluses, leaving room for the Reserve Bank to stimulate the economy as needed. Swan is seeking to establish Australia’s position as amongst the first to change fiscal course in a deficit-laden world, and in the process vindicate his stimulus-filled response to the GFC. In a patchwork economy such as ours, the economic intuition behind this chosen policy mix is sensible. I have written previously about structural changes in the Australian economy, where the high Australian dollar instigated by the resources boom is causing subdued growth in trade-exposed sectors such as manufacturing. If the budget were to remain in deficit, the RBA would have less leeway to ease the cash rate. In turn, continued currency strength would be likely to accompany this alternative scenario, exacerbating the pain felt by trade-exposed sectors due to a loss in export competitiveness.

Fiscal surpluses are generally a sign of good economic times, and extensive tightening occurs when governments wish to curtail a booming economy. If we look strictly at the numbers, we can arrive at two immediate conclusions. Firstly, yes, we have a fiscal surplus of $1.5 billion forecast for the next financial year. Secondly, the Budget forecasts a very significant turnaround in its fiscal position from a deficit of $44.4 billion in 2011-12 to a surplus of $1.5 billion in 2012-13. If the aforementioned statements are correct, the numbers alone suggest that the Government is (foolishly) undertaking a severe fiscal tightening against the backdrop of unbalanced domestic growth and continued global uncertainty. Yet there appears to be a surprising absence of budget pain. Is the budget tough in anything but arithmetic?

Allow me to highlight several aspects of this particular surplus that will help us answer that question. The size of the fiscal turnaround is magnified by the shift in expenditure originally intended for the next financial year into the final weeks of the current financial year, including carbon tax compensation payments and the replacement for the education tax rebate. These shifts have swelled the forecast deficit number for this year. Moreover, we must consider exactly where the savings are being made. Enclosed within this Budget are decisions to defer both defence spending ($5 billion worth) and a commitment to lift foreign aid expenditure (to 0.5 percent of gross national income). The other key saving is in the reneging of a commitment to reduce the company tax rate. Finally, the surplus relies on an expected recovery in revenue growth underpinned by a return to trend growth in mining and associated taxes.

The results of the creative accounting activities culminate to imply that the contractionary impact on the economy is unlikely to be as profound as one would expect with a fiscal contraction of this size. In other words, this Budget is tough in arithmetic and in principle, but not in practice.  Certainly the cuts in defence and foreign aid are unlikely to significantly and immediately constrain growth. As such, fears about the restrictive impacts of this “austere” budget may ultimately be unfounded. By the same reasoning however, this juggling of budget components may prove to be at the detriment of the surplus goal itself. Somewhat troubling is that the achievement of the surplus hinges heavily on the realisation of uncertain revenue and growth forecasts. I have read at least one outright refutation of the Treasury’s growth forecasts, and several other commentators have alluded to the genuine possibility of these forecasts falling short of expectations. If the China boom retracts unexpectedly, or the United States strays from its course of economic recovery, the flow on revenue effects may be detrimental to our fiscal balance. However, Fitch Ratings have predicted that “even if the economy unexpectedly slows, it is likely that any deficit in the coming financial year would be small.” The ramifications of a deficit outcome are thus likely to be more political than economic.

We’ve now established that this Budget is unlikely to have any negative economic impacts, at least not immediately. But does it have any positive economic impacts apart from allowing potential interest rate relief and a waning of the dollar? The surplus figure in itself will help provide a buffer if economic conditions worsen, although some suggest that it is too small. On the other hand, there are long-term economic pressures that the budget does little to address. We are faced with an ageing and growing population, which will require more significant investments in services and infrastructure. Productivity has been relatively flat for at least a decade and may require targeted policy reform if we are to successfully lift it. Finally, the structural changes occurring in our economy necessitate policies to address skills shortages and to assist workers in transition.

One might wonder if this surplus is a classic case of “I said I would do it, so I have to stick to it”, an unconditional pledge that must be achieved regardless of the state of the economy. And so somehow despite my own pledge at the beginning of the article to stick to economic analysis, we inevitably return to the politics of this Budget. Perhaps that is a testament to how this Budget is based more on politics than economics. My final reading is that it provides benefits for some and losses to others, but will eventually have to play catch up to address the longer term economic issues.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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