What out of ten for the Budget?

Heather Ridout was asked to give the Budget a mark out of ten on the radio today. She gave it 8/10.  As I said to some colleagues today, I’d like to have been in her class. The two most long-standing governments since Menzies absolutely ripped into outlays in their first budgets – and raised a bit of tax. In fact strong fiscal contraction was more clearly what the doctor ordered in this budget than certainly in Howard’s first budget and arguably in Hawke’s, though with hindsight the latter worked out very well. (With hindsight Howard’s first budget was too tight.)

I think this government may rue the day it didn’t cut harder. That’s if things don’t turn out well – which is to say if the economy keeps booming and rates keep rising, it would have been better to have cut harder. The additional benefit of cutting harder is not just the dollars that it puts in the bank, but the added cred that you bank, and the way in which old habits are blown away and a new set of expectations hastily cobbled together by the assembled mendicants.

Still, beggars can’t be choosers. I am still reminding myself how bad the last lot were. That’s not an ideological statement I hasten to add. It’s a professional one. The last lot had given up on the substance some time ago – was it when the ever reliable Arthur Sinodinus left the PM’s office?  When Peter Costello noticed that we had managed to get an economy with twelve noughts in its annual GDP and that, accordingly it had become a ‘formula one’ racing car that only he could drive?

Here was I thinking I’d reached some middle of the ideological road, being equally irritated by excesses of left and right, when an old bit of Labor propaganda crept up on me, and I couldn’t deny its apparent truth. Though there’ve been some exceptions, the Liberals don’t seem to give much of a bugger about good policy.  That’s certainly the impression given towards the end.

Anyway, Alan Kohler helped me remember all that and put it in perspective – From yesterday’s Crikey! over the fold. My guess is that he’s a 7/10 man:

This is more Lindsay Tanners budget than Wayne Swans or Kevin Rudds.

There are no new spending measures, only new savings, and remarkably the Finance Minister has found $2 billion more in savings than Swan and Rudd are spending.

The first Swan/Tanner budget actually reconciles the irreconcilable: the need for fiscal restraint to fight inflation while fulfilling the Governments election promises and not crunching the economy so hard that it risks exacerbating the coming slowdown.

And it had been done simply by carving into middle-class welfare and cutting out the fat left by John Howards profligacy.

When the former Treasurer Peter Costello said at a remarkable doorstop press conference this morning that Wayne Swan is the luckiest new Treasurer in history, he was absolutely right but not for the reason he meant. Its because there was so much fat left in Government expenditures that could be painlessly cut away.

The Government, meanwhile, is playing down the centrepiece of its first budget. It is not mentioned at all in Wayne Swans budget speech; he just sums up all the nice things that have previously been announced.

The core of the budget what its really all about – is contained at the back of budget paper No.2 – from page 361 to p.427. Here you will find 66 pages detailing 134 new savings measures, on top of the 46 cuts announced during the election campaign, totalling $1.6 billion in 2008-09.

The new savings total $5.7 billion in 2008-09, 11 dozen of them big ones, small ones: nip cut slash.

The big picture of this budget is that the Rudd Government has announced $5.3 billion worth of new spending for 2008-09 leading up to it, and has now announced savings of $7.3 billion, increasing the surplus by $2 billion.

In addition to that there are a total of $5.4 billion in unexpected increases in tax receipts and other windfalls since the pre-election fiscal outlook (PEFO) that was issued by Treasury during the election campaign last year.

As a result the $14.3 billion surplus forecast in the PEFO has now turned into a $21.7 billion surplus ($14.3 billion plus $2 billion plus $5.4 billion).

So whereas the Howard Government spent every cent of the commodities boom windfall, the new Government has so far put it all into the bank, and added another $2 billion to it by cancelling some of its predecessors spending.

Even Kevin Rudds tax cuts actually represent a saving. The PEFO surplus estimate of $14.3 billion included the tax cuts announced by Howard Government; Rudd announced identical tax cuts but dropped them after 2009-10 for people earning more than $180,000.

That produces no savings in 2008-09 against PEFO, but provides $5.3 billion in savings over the following three years.

One of the big savings measures is a bit of a fiddle though. The cancellation of the $959 million Australia Connected fund that was awarded to Singtel Optus and Elders has been counted as a saving, but the $4.7 billion National Broadband Network amount that replaces it is not counted as an expense because it hasnt been spent yet and is not detailed in the forward estimates.

But on the whole this budget is a remarkable achievement. The Governments net financial worth goes from -$25.8 billion to -$3.6 billion in one year, with the unfunded superannuation liability of $112 billion now almost entirely offset by investments.

Sometime in 2009-10 the Government will have a positive net worth, probably for the first time.

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15 Responses to What out of ten for the Budget?

  1. Patrick says:

    Sometime in 2009-10 the Government will have a positive net worth, probably for the first time.

    I don’t understand this. Does this include a net present value of future tax receipts as well as the NPV of the super (and any other) liabilities? What about the valuation of the ability to raise taxes????

    I would have thought that the Australian government would be worth an incredible amount.

  2. derrida derider says:

    Patrick has hit on one of my pet peeves – the very partial and biased nature of so-called “accrual accounting” that’s the rage in government budgets these days. What should be the biggest items in the balance sheet – the power to raise tax and the commitment to future spending after the Forward Estimates – simply don’t figure in it. Its not an arcane point at all because it radically affects a lot of decisions – for example, it tends to make privatisation of revenue-earning assets look unduly attractive.

    I really can’t see the economic case for the horror budget you’re pushing here other than masochism. Hawke had a good macroeconomic reason for it, but Howard’s 1996 motivation was was all politics and small-government philosophy, not macroeconomics (though I’ll concede that a Budget surplus was a handy thing to have in the Asian financial crisis a couple of years later. That wasn’t predictable in 1996 though). The economy is already slowing quite sharply (that GDP forecast is optimistic), and fiscal stance was already moderately tight. Why would you put you and your supporters through the political pain when a highly restrictive fiscal stance is at least as likely to turn out badly as well?

  3. Guy says:

    I think I would give it about a 7. Given the nature of the beast and the fairly unhelpful economic conditions for social democrats, one has to wonder whether it is even possible to deliver a 10/10 budget in any case.

  4. rog says:

    And what is a “10”?

  5. Patrick says:

    I am interested in the anwer to Rog’s question too! But I guess we’ve had some clues over the past few months.

    Why would you put you and your supporters through the political pain when a highly restrictive fiscal stance is at least as likely to turn out badly as well?

    This is the answer, I suspect:

    The additional benefit of cutting harder is not just the dollars that it puts in the bank, but the added cred that you bank, and the way in which old habits are blown away and a new set of expectations hastily cobbled together by the assembled mendicants.

    As is this:

    a Budget surplus was a handy thing to have in the Asian financial crisis a couple of years later. That wasnt predictable in 1996

    Presumably you can safely predict that the business cycle will turn.
    Not to mention the more to give away later (ie when there is an election).

  6. NPOV says:

    Is it fair to say budget spending as a percentage of GDP will drop?
    I gather spending only rose by 1.1% or something, and GDP by 3.5%, so on that basis for Turnbull to call it a “high spending” budget is pretty hard to justify.

  7. Robert says:

    The previous government treated the budget a bit like open day at Bronte House, or something. Inside, feasting all year, locked arms hoarding the spoils even from view of the gardener walking past a window – for one day of the year they have to have meet-and-greet the gatherers at the gate.

    You had a ‘it’s ours by right, leave it to us, go away’ thing going on all year with a one-off forced-grace kind of patriarchal benefactor ‘here you go’ handout.

    That attitude stank.

    Rudd has changed that, and I wonder if he considers that aspect of the budget to add any extra marks.

  8. NPOV says:

    BTW, does anyone know what was the spending outlay of the 1996 budget as a percentage of GDP, vs the previous year? If it did go down, it must be about the only time in Howard’s tenure that it did.

  9. Patrick says:

    I dunno Rob, depends if you can find anyone else who thinks that way.

    From today’s Fin, Nick, you (and Alan) are more in line with the business community than Heather Ridout. I don’t think being in her class would have helped you though, she saves her unalloyed love for whoever has control of Parliament at the time, it seems – wasn’t she workchoices biggest fan; and that shortly before coming Rudd’s keenest backer?

  10. Vee says:

    Well the AIG has always seemed a centrist business group to me and the ACCI has always seemed a right wing business group, so is it really any surprise the budget was given good marks?

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  12. Fred Argy says:

    Let’s leave the politics aside: it is hard to know how people will react – on ABC’s Australia Talks Back yesterday evening, there was not one positive comment. And letters to the Editor are lukewarm at best

    On economic grounds, I would give it a 7 out of 10 as it achieves a reasonable balance in the face of conflicting forces – neither too hot nor too cold, while at the same time having an investment fund to draw on in case things turned sour.

    I found it difficult to agree with Gittins and Martin on ABC yesterday that the Government should have been much much tougher on government spending. Not in this uncertain climate!

    On social grounds, it is a small step forward and I would also give it 7 out of 10.

    But in truth I have only just bought the Budget Papers so I have not studied it closely.

    As for the Opposition, they should have stuck to their earlier line – that the Budget istoo restrictive and could aggravate unemployment. Instead they are shamelessly taking a bet each way.

  13. derrida derider says:

    The additional benefit of cutting harder is not just the dollars that it puts in the bank, but the added cred that you bank, and the way in which old habits are blown away and a new set of expectations hastily cobbled together by the assembled mendicants.

    But the cold fact is that, unlike 1983 and 1996, we already have lots of money in the bank – probably too much, in fact.

    Fiscal policy has two purposes – one as short term demand management and one to affect long-term intergenerational consumption. On demand management, all the risks to the economy are now downside – it makes no sense to shrink demand further at the moment.

    On the long run issue, to the extent that it is possible to shift consumption between generations (a point of some dispute), then sustained budget surpluses reduce the living standards of the current generation to the benefit of future ones. But future ones are gonna be a lot richer than us, and anyway in Oz most intergenerational accounts show that we are already forgoing more consumption than we need to to stabilise the tax burden (which, BTW, is precisely why Treasury does not use an intergenerational accounting framework in its Intergenerational Report. When you’re arguing for fiscal discipline good news is unwelcome).

    I spent a lot of time in the 1980s defending Treasury’s “deficit fetishism” amongst my friends – we really did run too many big deficits in the 70s and early 80s. Now we’re running too many big surpluses; economists are fighting the battles of the last war.

    The size of the deficit/surplus is orthogonal to the spending priorities within the Budget – if you wanted to get rid of Howard’s mendicants, you could do so without affecting the balance between revenue and spending. Just give the money to your own mendicants, or give bigger tax cuts. But that’s politics not economics, and poor politics at that.

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  15. Temujin says:

    That is very bad analysis by Kohler.

    The budget papers are quite clear. The effect of ALP policy on the budget has been to increase revenue by $2.4b and increase spending by $1.3b. These are the government’s own statistics, so I don’t know why they are being ignored.

    There were other parameter variations which helped the budget… but these can’t be attributed to government decisions.

    The redeeming feature of this budget is that they increased tax/spending by less than the Liberals generally did. But given the first budget is generally the time to slash… it is a shame they were so timid.

    The bigger issue being ignored here is the low quality of economic commentary in Australia. Economic journalists (sic) seem to simply repeat government (or opposition) spin without understanding what’s going on.

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