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Budget is good in some of its details, but can hardly be called 'tough' overall

By Saul Eslake - posted Wednesday, 11 May 2011

Wayne Swan hasn't been as lucky as his predecessor, Peter Costello, in the hand that the global macro-economic gods have dealt him. But he's been a lot luckier than his counterparts in other 'advanced' Western economies. Most of them, struggling with unsustainable levels of public debt against a background of sluggish economic growth and near-record levels of unemployment, would give their right arm to be able to produce a set of budget figures like Mr Swan did last night – with a 'bottom line' returning to surplus in two years (with virtually no net effort on his part), and with net debt disappearing altogether by the end of the decade after peaking at a single-digit percentage of GDP within the next twelve months.

And so it should be. Australia's economic position is, as the Budget Papers make clear, almost literally half a world away from that of the countries with which we've traditionally compared ourselves. Having dodged the worst of the global financial crisis, Australia is almost uniquely poised to convert what the Treasury's 'special feature' in this year's Budget Papers describes as the 'shift in the world's economic activity from west to east' into 'lasting prosperity'.

As the Treasury goes on to say, the 'critical determinant for success … is whether we embrace the need for change, or attempt to resist the economic forces at work'.


This Budget makes a determined effort to embrace the need for structural change, both by enhancing people's ability to adapt to structural change and cushioning some of the adverse consequences that structural change will bring to some people, some regions and some industries. From a micro-economic perspective, there is a lot to applaud in it.

There are worthwhile investments in skills formation and economic infrastructure, measures designed to increase participation in the labour force among groups who have been disengaged from the world of work for prolonged periods, and increased spending on mental health (although much of that is back-loaded into 2014-15 and 2015-16). There are 'quality' saving measures as well, including tighter targeting of assistance to families, changes to the fringe benefits tax rules for employer-provided cars which had the perverse effect of rewarding those who drove longer distances, phasing out the dependent spouse tax offset and removing the low income tax offset for property income received by children (who usually derive it directly or indirectly from their parents).

Inevitably, there are some 'lower-quality' decisions as well. For example, the $1.3 billion 'saved' over four years by 'reprogramming' defence capital expenditures results not from a decision to spend less on defence equipment, but rather from the inability of defence industries to supply that equipment to the previously envisaged timetable: in budget-speak, it is merely converting a 'parameter variation' into a 'policy decision'. But, for the most part, the Treasurer is right to describe his 'saves' as 'structural' – that is, ones which will contribute to on-going improvements in the budget bottom line.

But precisely because the Government has spent virtually all that it has saved, it is simply not credible to describe this Budget as a 'tough' one from a macro-economic perspective. By my re-jigging of the fiscal arithmetic, the Budget cuts spending by $17.3 billion over four years with one hand, and increases spending (in other areas) by $17.2 billion over four years with the other. It also increases tax revenues (or, more strictly, cuts 'tax expenditures') by $4.9 billion over four years, and then reduces tax revenues (or increases 'tax expenditures) by $1.7bn (although $1.3bn of this is 'once-off' in its effect). The net impact of all of the 'policy decisions' announced over the eight months up to an including last night's Budget is actually to increase the deficit by an average of $2.2bn per annum in 2010-11 and 2011-12 (some of that in response to natural disasters), and to increase the surplus in prospect for 2012-13 and 2013-14 by an average of less than $1.7 billion – equivalent to just 0.1 pc of GDP in each of those years.

There was in fact no net reduction in government spending (abstracting from the $2 bn that the Government pulled out of its 'Contingency Reserve'); and the slight increases in the Budget surpluses in prospect for 2012-13 and 2013-14 are entirely attributable to tax increases.

Put differently, if the Treasurer and his colleagues had taken no decisions at all since the release of last year's Mid-Year Budget Review, there would still have been a Budget surplus in 2012-13, and the following year; all of the decisions which have been taken have served to increase those surpluses by a an amount that's considerably smaller than the usual margin of error in estimates of the 'bottom line'.


Nor does the Budget provide any real comfort about the Government's longer-term fiscal strategy. The Budget Papers re-affirm the Government's commit to keep real growth in government spending to less than 2% per annum, and to divert any unanticipated revenue gains to improving the 'bottom line', only until the surplus reaches 1% of GDP – which according to longer-term projections in this year's Budget Papers will be in 2016-17. That implies that, from then on, the Government (if it is still in office then) will be making the same mistakes as the Howard Government did in its last term in office – 'giving away' any revenues which would otherwise result in surpluses of more than 1% of GDP in tax cuts or increased spending in ways that will put upward pressure on demand, inflation and interest rates.

Hence, despite its micro-economic virtues, Wayne Swan's fourth budget does nothing to alleviate the upward pressures on interest rates, in either the near or medium term, that the Reserve Bank pointed to last Friday.

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This article was first published in the business pages of the Melbourne Age newspaper, and in the online edition of the Sydney Morning Herald, on Wednesday May 11, 2011.

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About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

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