EDITORIAL : THE AUSTRALIAN, AUSTRALIA

Budget is a triumph of hope over experience

An illustration by Peter Nicholson. Source: The Australian

THE Gillard government has ducked the challenge.

The Treasurer's claim to have delivered a tough budget looks hollow when he struggles to name anyone who will feel any pain

THE hidden pain in the Gillard government's first budget will be felt by working families. They will suffer most of the collateral damage from Wayne Swan's lax fiscal discipline, which makes it more likely that home loan interest rates will rise. And it is clear the Treasurer is calculating that more working Australians will be forced into higher tax brackets, where they will face a double hit: higher tax and lost benefits. Mr Swan has shirked the task required of him and left the heavy lifting to the board of the Reserve Bank.

To achieve his promised surplus by 2012-13, Mr Swan has speculated on the mining bonanza, gambling that the historic resources windfall, underpinned by record terms of trade, will continue. He has paid lip-service to the downside risks that could threaten this formula. Last night's budget did not do enough to insure us against the danger that China's growth might stall, triggering a collapse in demand and a fall in historically high mineral prices.

The Australian has repeatedly warned that the government needs to make substantial cuts to spending to build a structural surplus into the budget. We need a budget where the country earns as much as it spends, even when our export income is at normal levels. Otherwise we pin our nation's economic future inextricably to the fortunes of the resources boom and bust cycle, which history tells us is dangerous bet to place. Mr Swan has taken the path of least resistance; as a result, his budget fails the important test.

It takes a certain kind of audacity to frame a budget that realises a $49.3 billion deficit this year and forecasts one of $22.6bn next year around the phrase "back in the black". Yet this is where the Treasurer says the budget will take us. Mr Swan argues that he is setting up Australia for a $3.5bn surplus "on time" in 2012-13. This "on time" is, of course, the time of the government's own choosing, and we must all share the hope that he makes good on this pledge. However, it is impossible to assess these forecasts for two future budget outcomes without noting that this year's deficit is almost 20 per cent higher than was forecast, and next year's predicted shortfall is already almost double what the Treasurer forecast a year ago. It is in every sense the triumph of hope over experience. We are asked to take a leap of faith that this time the reality will match the forecasts. Even then, it is all predicated on the record resources boom continuing unabated. Given Treasury's record in crystal ball gazing, this is a significant gamble.

The government will fool no one with its boast of $22bn in cuts over the next three years. Behind this burst of self-congratulation, the stark reality is that these supposed savings are almost matched by new spending. There are swings and roundabouts, winners and losers, but the net effect of this massive budgetary churn is savings over the forward estimates of less than $1bn.

So the question remains: just how does Mr Swan plan to return the budget to surplus?

The answer is increased taxation. Over the next four years, almost $95bnn extra will be raised through income tax. This accounts for the vast bulk of government's increased revenues, greatly outweighing the growth in company tax collections or the revenue from the new mining tax. By not adjusting income tax thresholds, the government is relying on bracket-creep to push more Australians on to higher tax rates. Instead of some of the mining boom being returned to Australians through lower taxation or indexed adjustments to the thresholds, more of us will pay higher amounts of income tax. It is that simple. Rather than trimming its own sails, the government is planning to pocket more income from Australians in coming years.

With the top rate kicking in and a range of benefits and concessions disappearing at incomes of $150,000 a year, it is clear this is the income at which the Treasurer believes people are rich enough to pay extra. In Wayne's world, a family earning $150,000 and repaying a mortgage is sitting comfortably. This theory is likely to be tested at the ballot box by voters who can expect tough times over the next few years.

Most of the budget spending initiatives focus on workforce participation, health, education and taxation support for low-income families. Of these, the extra spending on mental health programs is most welcome. There is broad acceptance across the nation that this is a field that requires urgent attention. Programs to improve workforce skills, support the transition to work for the long-term unemployed, improve literacy and numeracy for potential workers, and provide more skilled migrants for regional areas are all welcome.

We are deeply sceptical about one savings measure dressed up as a workforce participation initiative -- the phasing out of the dependent spouse rebate. The government believes this is an anachronism designed to keep women at home and out of the workforce. The Australian believes the rebate was a small but important tax break increasing the opportunity for families without children to make their own lifestyle choices. It saves $755 million over four years, taking it directly from families' disposable incomes.

Other cuts are found in defence, an efficiency dividend across government, the previously announced abolition of the green car fund and carbon capture and storage program, deferral of some infrastructure spending and, of course, the extra fundraising of the flood levy.

The budget's jobs initiatives cover a comprehensive range of policy approaches, including more than $2bn for industry and vocational training initiatives. Mentoring for apprentices will help to increase completion rates, which are below 50 per cent, while disadvantaged jobseekers will be assisted with access to apprenticeships, and others will have their trade training accelerated if they meet certain proficiencies. Tougher assessments for disability pensioners will aim to nudge more of them into work, and as a quid pro quo they will be able to take on more work before losing their pension. An extra 6000 skilled migrant places will be made available for regional areas, a move we particularly support, although the intake could be even higher. Mr Swan's "jobs, jobs, jobs," pitch for the budget is bound to ease industry concerns about skills shortages.

Yet the budget numbers show unemployment will fall to 4.5 per cent next year before returning to more than 5 per cent in the out years, suggesting more is needed. If jobs are to be the government's prime focus, it must work harder to keep unemployment as low as possible. To that end, our economy is virtually begging for leadership bold enough to increase labour market flexibility and truly unlock the economy's potential.

In more benign times, this might have been seen as a traditional Labor budget because instead of handing back the proceeds of the boom to taxpayers, the government is spending the extra revenue. But these are not benevolent times and we have learned all too dramatically about the peaks and troughs of the modern global economy. Our current resources boom, eight times greater than the Howard government boom, presents a once in a generation opportunity to repair the budget. Instead, seemingly paralyzed by its reliance on the Greens and independents, the Gillard government has delivered a budget that ducks the challenge, and avoids the hard job of curtailing expenditure. Australians need to hope the resources boom and our stellar terms of trade last long enough to lift the burden of deficit from the economy, and that one day we get a treasurer who is up to the challenge of significant reform to reduce ongoing expenditure and put the budget into structural surplus.

Mr Swan's fourth budget, his first under Ms Gillard's leadership, is his most unconvincing to date. Finance Minister Penny Wong, new to the job, must also share the blame for this missed opportunity. It is finance ministers, after all, who are supposed to keep the governments spending instincts in check.

Mr Swan blames his woes on the lag in revenues post-GFC, yet this financial year he'll still be building school halls as part of the stimulus package from two years ago. He verbals the opposition, saying they would have done nothing to tackle the GFC. In the end, however, the Treasurer's claim to have delivered a tough budget looks hollow when he struggles to name anyone who will feel any pain and he has revealed a $300m scheme to deliver and install set top boxes for pensioners. The budget mentions, but does not include, Australia's largest public infrastructure project, the National Broadband Network. Mr Swan is pulling back on spending one moment and shoveling out the sugar with another. The reality is Malcolm Turnbull's 2009 prescription to spend at least $20bn less, more carefully, might have had us back in surplus this budget.