Rudd and Swan fudged paltry spending cuts
Ross Gittins
SMH
May 19, 2008
The more closely you study last week's budget the less impressive it is. Despite all the chest-beating and issuing of dire warnings, the spending cuts Kevin Rudd and Wayne Swan managed to produce were not so much weak as pathetic.
A government's first budget is the only chance it gets throughout its life to make savage spending cuts with political impunity. The huge real growth in spending over the Howard government's last five years mean there must have been oodles of fat to cut.
And yet, after all the noise they made, all the expectations they raised, our fearless Labor duo wimped it. Why? I suspect they intended to cut hard but, once they saw the extent of the revenue windfall from the latest leap in commodity prices, they decided they didn't have to bother.
If you think this judgment harsh, let me demonstrate how weak their attack on wasteful spending was. There's less than meets the eye, in that the quality of the cuts they did make was poor.
Mr Swan keeps boasting that "every single cent of new spending for the coming year has been more than met by savings elsewhere in the budget". But this is a highly misleading statement.
For a start, it ignores the cost to revenue of the tax cuts to take effect in July, which will be about $11 billion for the financial year. (This is possible because - the tax cuts having been purloined from the Liberals - their cost was incorporated into the budget's "forward estimates" on Peter Costello's watch.)
Mr Swan's boast is that he has come up with savings worth $7.3 billion in the coming financial year, whereas his new spending totals only $5.3 billion. That's true, but the $7.3 billion in "savings" includes $1.9 billion in tax increases.
The tax measures involve the increased excise on alcopops, the increased luxury-car tax, removal of the exemption from oil excise for Woodside's petrol condensate, tightening of the fringe benefits tax and an increase in the airport passenger tax.
So Mr Swan's total spending cuts only just cover the cost of his new spending, and only in the first year. In the following year they fall well short of covering it.
In which case, how did Mr Swan manage to come up with a budget surplus for the coming year as high as his target of at least 1.5 per cent of gross domestic product, without relying on the $3 billion increase in expected tax collections since the previous estimate was made during the election campaign?
By falling back on no less than $2.4 billion in
non-tax "parameter and other variations" since the election. This is mainly a big increase in the dividend received from the Reserve Bank.
The point is that, given the assist from tax increases and changes in non-tax parameters, Mr Swan was able to achieve his 1.5 per cent target without bothering to cut spending by more than needed to just cover his new spending plans.
That's how hard these guys tried. What's more, the target they set themselves - 1.5 per cent of GDP - was never going to be a stretch. The budget outcome hasn't fallen below 1.5 per cent for the past four years.
Believing their rhetoric, I had assumed the emphasis in their target of at least 1.5 per cent was on "at least". In fact, they got above 1.5 per cent only by means of the $3 billion upward revision in their estimate of tax receipts. With that assist they got to 1.8 per cent of GDP - hardly a stratospheric figure. That's how hard they tried.
When you look through the list of their spending cuts you find a few big ones but thousands of rats and mice. They got a lot of their savings through their imposition of a 2 per cent efficiency dividend on government departments, their decisions not to proceed with the Howard government's Access Card and to cancel the Libs' Opel contract for rolling out broadband (while not yet having any cost to include for the contract that will replace it).
Now get this: their spending cuts have been pumped up to look good in 2008-09, but fall back sharply in the following years.
Next financial year, tax increases account for a quarter of their total "savings" of $7.3 billion. By three years later, however, the tax increases account for almost half the total savings. The tax increases grow while the spending cuts contract.
In the budget papers' list of their savings measures, spending cuts too minor to list separately total $2.4 billion, or almost half their total spending cuts. By the following year, however, the $2.4 billion has collapsed to just $800 million.
Why? Because so many of the cuts are once-only measures. Consider this list, starting with a once-only "special dividend" from Australia Post of $150 million. (This is a non-tax revenue measure, not a spending cut, but even so it was a decision of the razor gang.)
They save $100 million in the budget year by deferring to the following year a measure to align the pay-as-you-go instalments of certain firms.
The decision to raise the Medicare levy surcharge's thresholds will save $230 million in the budget year in reduced health insurance rebate, but the $200 million cost of lost surcharge payments doesn't hit until the following year.
In Defence, they'll make a once-off saving of $370 million in the budget year because of a decision to establish an operations reserve. They'll save $190 million in the budget year because of "provisioning for future defence requirements", but this will increase their costs in subsequent years.
They'll save $300 million in the budget year by reallocating funding of the Higher Education Endowment Fund to the following year. They'll save $50 million in the budget year by pushing into the following year spending on starting an inland rail corridor.
They'll make a one-off saving of $290 million in the budget year by recovering from the states' overpayment of compensation for small businesses' GST payment arrangements.
Then there are other indications that savings will diminish in subsequent years. Estimates of the net saving to the budget from raising the thresholds on the Medicare levy surcharge allow for people giving up their private insurance, but don't allow for the subsequent cost to the budget when the health funds raise their premiums to compensate.
More significantly, the budget should have included the increased cost to the feds arising from renegotiation of the five-year hospital agreement and other funding agreements with the states. But these deals have been delayed for a year as part of the revamp of federal-state relations - which won't be cheap.
Finally there's the supposed $400 million-a-year saving from imposition of a special 2 per cent "efficiency dividend" on government departments. This would have to be the laziest, most inefficient and ineffective way to try to cut spending in the politicians' handbook.
You don't identify inefficiencies yourself, but pass the buck to department heads, each of whom swears there are no inefficiencies to cut. The almost inevitable result is that they either try to screw you politically by cutting high-profile services (for example, the Bureau of Statistics' plan to cut surveys and sample sizes) or they stop replacing junior clerical staff, so highly paid staff have to do their own photocopying.
Labor ministers say their media strategy is to under-promise and then over-deliver. From the viewpoint of punters fearing nastiness, that's what they did with the budget.
From the viewpoint of people seeking to judge Labor's performance as an economic manager, however, they did the opposite - which can hardly be smart.
Ross Gittins is the Herald's Economics Editor.
Now I can't speak for all those miners currently on $150k or whatever, but the bulk of the real unionists I deal with daily on wages well above non organised competitors are happy to share the wealth with those less well off.
