2011 Commonwealth Budget
I suspect Swan is on the way to being acknowledged as being as serious an economic manager as Costello.
The strongest achievement of the budget is the attack on middle-class privilege. It has been indefensible that fringe benefits tax has compensated long distance car travel, creating an incentive for people to drive to Cairns to maximise their benefit. With Swan’s reforms – and I hear he took a keen interest in this one – one is now rewarded if one drives fewer kilometres. Good fiscal sense and good environmental sense.
As Paul Clitheroe noted at the NAB budget breakfast in Sydney, “There is a bit more in the budget than you realise.” This was taken up by Ross Gittins in the Sydney Morning Herald:
Whatever the voters’ immediate reaction, I suspect in time there will be a grudging recognition that Gillard has guts…
…[T]he faster Swan can get the budget back to surplus and keep it growing (paying off the public debt in the process), the more the budget acts as a counterweight to the booming private economy, thus easing inflation pressure as the economy starts running out of production capacity.
This will reduce the need for the Reserve Bank to apply its own brakes: higher interest rates.
I instanced the fringe benefit treatment of car travel, but the same sensible instinct was there in the reforms of the taxation treatment of minors in family trusts. For God’s sake, why should such benefits be lavished on people with the capacity to set up trusts, but be denied to PAYE taxpayers? The same realistic approach to middle-class welfare can be seen in Swan’s scrapping of the tax break for dependent spouses under 40 and halving of the 20 per cent discount for families able to pay their university fees up-front. The budget’s freezing of inflation-linked increases in the baby bonus and paid parental leave also showed discipline.
Tom Dusevic in The Australian delivers a decent sermon on political economy characterising middle-class welfare as “The legacy of Howardism.” He analyses how Labor has now unwound “the entitlement mentality of those people who should be able to look after themselves: middle manages, suburban lawyers and ‘tradie entrepreneurs’ who are the Coalition’s heart land.”
He acknowledges the political cleverness of freezing indexation of the upper limits and thresholds for family payments and the baby bonus. So that as incomes pass the threshold over the next few years, eligibility is opened to fewer families. Further, there’s a phasing out of the dependent spouse tax offset which will hit the asset and income rich. Would Abbot and Hockey be prepared to roll these measures in parliament or to reintroduce them if the attain government asks Dusevic? Question answers itself.
Like Gittins, Paul Clitheroe is a commentator I respect. At the NAB breakfast today he listed some of the things he frets about when he looks at Australia’s position, even though the terms of trade have not been as good for Australia since the 1880s:
- The ageing population: one in three people aged 55 will live to be 100. How will our tax free treatment of superannuation continue to be affordable?
- The cost of medicine: he referred to his father-in-law who is surviving because of a drug currently being trialled. The cost of the drug is $10 000 a month. Clitheroe said the real cost of the Medicare levy would be six per cent (compared to 1.5 per cent) were it to cover the real cost of our drugs and medical care.
- The number of Australian’s receiving disability support: currently close to 800 000. In an attempt to slow its growing impact on government spending, the Treasurer brought forward stricter work tests, a tighter test of incapacity and provided more wage subsidies while allowing more hours to be worked before payments are suspended. Very welcome reforms.
Unlike most commentators Clitheroe is honest enough to advance his own alternatives. In his case he argues for a 15 per cent GST, which would have the effect of more comprehensively taxing money when it is spent and funding lower personal tax rates as an incentive to work. He adds the qualifier that such a hike would have to include protection for pensioners and other social security recipients.
Add another long term anxiety – the steady growth in Commonwealth government outlays. The graphs tell the story. We were saved from the GFC partly by a boost in fiscal outlays. But that increase has not been pegged back in this budget. But then again this is the oldest problem in government: how to reign in spending. And it’s not a problem only for the Labor side of politics. Last week’s Victorian budget was based on simply borrowing more. I will take bets that the first budget of the O’Farrell government will follow. Indeed he’s promised to do it. To borrow more. Just what Australia needs. Where is the reform in that?
In this context, the prize for the silliest comment on the budget goes to Joe Hockey who lamented it was the first budget in nine years without tax cuts. Yes, Joe, we’re in deficit.
The Coalition is in the hands of economic populists. By comparison, Labor is the party of economic reform.