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The economics behind the politics of the federal budget


Lachlan Walden

By

May 19th, 2013


The political smarts and motivations behind the Federal Budget explained.


The Federal Budget is fundamentally – perhaps with a bit of accounting incorporated – an economic conception, right? Wrong. While in an ideal world the political implications of fiscal budgetary processes would be disregarded, the reality is that politics ultimately determines the economics of all government budgets – albeit to various extents. Perhaps paradoxically, however, economics still trumps out in the end. How so? Because the use of economics is often the best way to explain the politics behind the economics.

While last year the use of accounting manipulations was the most demonstrable element of the Federal Budget assailable for extensive analysis, this year there are myriad of components. These will now be explored – largely within the context of the economic concept of private interest theory. This theory is essentially that politicians, including Wayne Swan when preparing the budget, will make rational choices based on their own objectives when in a decision-making position. The primary objective pertaining to the budget for Swan, and by extension the Gillard Government, would ostensibly have been to deliver a well-received budget that will maximise their chances of being re-elected (or at least minimise the number of seats they lose) on September 14.

Provide warning of changes

The major spending cuts and potentially controversial decisions were announced well in advance of the budget. The prime example of this would have to be superannuation reform which was outlined over a month before the budget to avoid speculation and an ongoing potentially relentless negative campaign from the superannuation industry. The rise in the Medicare levy was also signalled in advance. By giving people advanced notice of changes that many would inevitably determine to be ‘bad’ news, the government was able to soften the extent of negative commentary both before the budget and, perhaps to an even greater degree, at the time of the budget.

Make reasonably popular cuts

‘Signature cuts’ to big initiatives that most people agree are fiscal profligacy are politically favourable for two reasons. Firstly, the public does not complain as much about the cuts and, secondly, the government is potentially seen to be making the ‘hard’ decisions without actually angering the electorate too much. The scrapping of the baby bonus has gone down without too much animosity whilst the university cuts and associated education tax concession adjustments made to free up money for the Gonski reforms were received fairly well considering they totalled an economically significant $2.8 billion (the university sector is generally seen as a ‘soft’ target that will not result in too many lost votes given that young people and academics are generally on the left of the political spectrum).

Make ‘invisible’ cuts

The scrapping of spending initiatives that have yet to start is proclaimed as the ‘invisible’ cut. The budget did this by deferring tax cuts and also an increase to Family Tax Benefit A (both linked to the carbon tax as compensation) until the carbon price is greater than $25.40 a tonne. Perhaps another type of ‘invisible’ cut is the delaying of the commencement date for spending programs. This has been done for a second time with foreign aid: there will be a deferred increase in the aid budget to 0.5 per cent of Australia’s gross national income and this adjustment will save $1.9 billion.

Spend big somewhere

While the 2013 Federal Budget is unusual for an election year budget given that it does not contain tax cuts or blatant vote buying spending initiatives, it does still include funding allocations to big signature programs such as the National Disability Insurance Scheme (now being rebranded from NDIS to DisabilityCare) and also the Gonski education reforms (the latter being something that Abbott has confirmed he likely will not match). Infrastructure was also featured in the budget with the inclusion of a $100 billion nationwide infrastructure blueprint.

Use indexation favourably

Selected spending programs in the budget do not get indexed to inflation whilst most taxes do. To illustrate this, the government announced the freezing of the top income thresholds for three more years of family payments and supplements, whilst also signalling an increase of tobacco taxes at more than the rate of inflation (average wages will now be used as the benchmark).

Attempt to ‘corner’ the opposition

The inclusion of funding initiatives that differ to the opposition has been widely seen as an attempt to ‘corner’ them. The Melbourne Metro proposal for instance was allocated $3 billion in the budget whilst nothing was specifically set aside for the East West Link. In contrast, Tony Abbott has committed no funding to the Melbourne Metro whilst flagging that an incoming Coalition government would allocate $1.5 billion to the East West Link. This difference in infrastructure priorities is being seen as something the Gillard Government wants to campaign on in Victoria given that Abbott has suggested funding roads would be his priority in government and not urban rail.

The legacy

The Labor party knows that they are unlikely to be re-elected. Consequently, this was a budget that attempted to create a legacy of sorts. Gillard and Swan aspire to be remembered for comprehensive education reform and the introduction of DisabilityCare whilst managing the economy responsibly given the economic conditions they were dealing with. History will be the judge.

Follow me on Twitter: @lachlanwalden

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.

  • ben wadham

    Indeed history WILL be the judge but ?whose version of history! The prebudget and budget management offer a great example political astuteness – which may make the outcome of the election a close-call defeat rather than a rout for Labour.
    Amittedly I’m biassed but L.W. could have a promising career as an economics journalist!

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