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2011 Commonwealth Budget

May 11, 2011

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.

12 Comments
  1. May 11, 2011 3:41 pm

    Nice analysis Bob. It would be good to see more guts from Gillard on other matters too. At least with the budget Labor doesn’t seem to be in a muddle, unlike refugee policy, carbon tax details, gar marriage among others.

  2. Richie Gun permalink
    May 11, 2011 4:05 pm

    Well said. However the ALP government must tackle the superannuation problem created by Costello. (Costello is testament to Noam Chomsky’s comment that the purpose of government is to transfer money from the poor to the rich.)

    As for getting people off the disability support pension, I don’t think it can be done. I discussed the matter a few years ago with a UK academic who was involved in the UK government attempt to address the problem of the increasing number of people on disability pension – they failed. The Australian government tried a few years ago to tighten the medical guidelines defining disability, with a similar result.

  3. May 11, 2011 11:08 pm

    Agree with all your sentiments, Mr. Carr. The Gillard government has put out a very economically responsible budget, one that focuses on the economy rather than the politics. And oh, Joe Hockey, his follow up on the ABC after the budget had to be one of the most ridiculous criticisms ever; not one bit of substance at all.

  4. May 12, 2011 10:39 am

    How will our tax free treatment of superannuation continue to be affordable?

    By cutting spending? I don’t belong to either of the predominant economic schools. However I do see Adam Smith’s point that if a government charges less it ends up becoming more prosperous. If you tax superannuation that means retired people will have less money. It seems to me that if the generation in their 50s and below live en mass to be 100 then they will need that money. Take it away from them and they will be poorer.

    You must offset this I guess against public health spending which will increase with an ageing population. But still hasn’t a retired person after decades of work already paid for that?

    Agree about middle-class welfare. Howard might have spruiked classical economics but that particular pork barrel was a social engineering that gifted people with a sense of entitlement to a cushy life and drove the price of housing thru the roof. Whether you’re Keynsian or Neo-liberal this is bad policy.

    Generally speaking, despite News Ltd’s howling to the contrary, this is a good budget. I only wish the spending of the Rudd government had been more wisely managed. There was a lot of roads to nowhere and we’ll be paying the bill quite a while.

  5. Doug permalink
    May 12, 2011 4:05 pm

    As a quintessential Anglo-Saxon middle-class man, I recognise that I and those like me are the cause of all that is wrong in the world. An Aborigine sniffs petrol in Alice Springs? An Anglo-Saxon middle-class man on Sydney’s north shore is obviously to blame. An illegal immigrant slashes himself in a detention centre? An Anglo-Saxon middle-class man in Sutherland Shire must be at fault.

    The federal budget cannot be balanced? Slash so-called middle-class welfare.

    So-called middle-class welfare usually arises because a particular welfare programme is not means-tested. Means tests are evil. They encourage people to lie and cheat. They encourage people to arrange their affairs in an artificial way in order to qualify for a benefit. They are horrendously expensive to administer (I know from personal experience as a former NSW public servant).

    If the government wants to assist children at school, the government should pay a benefit to ALL parents of school-aged children. Administration is easy. You have a child? If yes, you get the benefit. If no, you don’t get the benefit.

    Excluding the middle class from benefits amounts, in many cases, to excluding people who have exercised thrift, self-restraint and forethought. The reverse is also true: paying benefits on the basis of a means test often means paying a benefit to a person who has been profligrant, self-indulgent and living only for the present moment.

    Either a benefit should not exist or, if it does exist, it should be paid to all who are eligible for it on the basis of a simple objective test such as: do you have chilren? do you live more than 10 kilometres from a reticulated water supply? are you over 70 years of age? And so on.

    I repeat: means tests are evil.

  6. May 12, 2011 10:27 pm

    Winding back middleclass welfare is an admirable objective, likewise building skills and getting unemployed people into work. These projects will have to be managed more effectively than most of the initiatives that we have seen to date.

    However there are some danger signs in this budget, and in the projections for the future surplus.

    The deficit has increased (so we are still going backwards) and very modest spending cuts have been projected without taking into account some of the factors that are impacting already (the blowout in the cost of refugees), and the cost of plans in the pipeline like the carbon tax and the NBN. There will also be inreasing problems arising from the re-regulation of the labour market and other regulatory burdens that are being imposed to achieve uniform standards in OHS.

  7. Harquebus permalink
    May 13, 2011 10:38 am

    “Fiscal” is American english and is only used in Australia by wannabe economic eggspurts. “Financial” is Australian english.
    Food, whisky and cigarettes will be the next currency.

  8. Harquebus permalink
    May 13, 2011 10:43 am

    Actually, Wayne Swan thinks it is business as usual which, it ain’t. Peak oil mate, peak oil. The era of economic growth is over and the budget is nothing more than toilet paper.
    What we should be doing is depopulating, consuming less and planting lots and lots of trees.

  9. May 13, 2011 2:56 pm

    These projects will have to be managed more effectively than most of the initiatives that we have seen to date.

    Indeed.

  10. thejackalscodex permalink
    May 13, 2011 3:16 pm

    Well said, Mr Carr! I can only some imagine some Sir Humphrey Appleby standing by Wayne Swan and telling him how courageous it would be to cut middle-class welfare when cost of living issues are hot on the minds of the electorate. And then Wayne Swan goes ahead and does it anyway because it makes for excellent economic policy. It puts that boxing heavyweight and intellectual lightweight Tony Abbott to shame.

    And Harquebus, ‘fiscal’ is not the same word as ‘financial’. ‘Fiscal’ means government choosing to spend or not spend money in order to guide the economy along. Fiscal policies are about the Budget. When one refers to a Government’s ” financial policies”, one usually means policies regarding accounting and about financial markets. The two are different words, and when you assume they’re the same word then very bad and confusing things happen to good people.

    • Harquebus permalink
      May 14, 2011 1:07 am

      Have consulted my trusty dictionary and have egg on my face. Thanks.

    • Harquebus permalink
      May 15, 2011 10:06 am

      Explains why we don’t have a Minister for Fisc.

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