No. 200

A HORROR BUDGET – FOR A FEW

STONE the crows! We are being sold tough times. Opinion leaders are wallowing in warnings the budget deficit is a disaster: “There is no doubt that Treasurer Joe Hockey has inherited a budgetary mess of epic proportions, in terms of debt and unfunded spending commitments. Sorting it out will require many canny and courageous decisions.” [i]

The Treasurer agrees, direly warning of a budget which, a month out, is being sold as scary: “The reality is that if we do not make the decisions that are necessary in the May budget and if we allow the budget to continue running deficits and increasing debt, Australia will have a lower quality of life, a lower standard of living than that which we’ve had in the past.” [ii]

It is an understandable argument given the trend in existing outlays is obviously unsustainable. As John Daley pointed out last year, we face ten years of finding $60bn per annum to balance the budget.[iii] And yes that is as bad as it sounds – it means for example, borrowing to pay for all but $4bn of Commonwealth health spending every year. [iv]

When the Australian Council of Social Services suggests considering a hike in the GST, as part of broad based tax reform, you know this is not the best of all possible budget worlds.[v]

The obvious solution is to increase, or change, the tax mix. For a start it is relatively politically saleable, at least compared to cuts. John Howard introduced the GST, first by making a case for change and then taking it to the people as a reform to the mix rather than an overall increase, in 1998.

As Gary Banks puts it, “While most members of the public may be ignorant about policy detail they are not oblivious to good process.” [vi] The obvious solution is to increase, or change, the tax mix. For a start it is relatively politically saleable, at least compared to cuts. John Howard introduced the GST, first by making a case for change and then taking it to the people as a reform to the mix rather than an overall increase, in 1998.

In any case, the people who decide elections do not pay much, if any, tax – at least on their incomes. In 2010-11, the top 10 per cent of income earners (those earning a relatively modest $105 000 and above) paid 46 per cent of PAYE tax. “High income earners have become a giant piñata that the majority can hit for extra money to pay for whatever new social spending programs the political class proposes,” Adam Creighton argues.[vii]

But, while every galah in the Paul Keating pet shop squawks about increasing taxes, doing it will not do any good. For a start, as Treasury Secretary Martin Parkinson told The Sydney Institute last week, “continued increases in the personal income tax burden will hit lower and middle income earners with higher marginal and average tax rates This will have adverse labour force participation impacts, while sharpening incentives for tax minimisation by higher income earners.” [viii] They may not pay much in absolute dollars but losing income thanks to bracket creep still hurts ordinary wage earners.

As for increasing the GST rate – increasing the rate is one thing (although the inevitable low income compensation would cost) but imagine the howls accompanying extending it to health and education.

So, if raising more revenue will not demolish the deficit, the feds will have to look at spending less. Good luck with that, given there are only two options – health and welfare.

As Dr Parkinson explains, Commonwealth health spending will rise from $64.7bn in nominal terms in 2013-14 to $116bn a decade on. And the three main welfare payments – aged pension, Disability Support Pension and carer payment will be $57bn a year higher in a decade. And only half of this is due to more recipients, the rest results from indexation.[ix]

As Judith Sloan suggests, “something has to give” with regard to who gets how much in welfare payments and what share of health care costs people have to pay.[x]

But it is hard to see what. Australians do not see pensions and public health as “entitlements”, they see them as rights. Protecting Medicare “slightly shaded” the GST as a deciding issue in the 1993 Fightback! election.[xi] And then there are all the people John Howard wooed with welfare, between 1996 and 2005, as social security expenditure rose as a percentage of Commonwealth outlays from 37 per cent to 42 per cent. [xii]

Nor do people like the idea of increased taxes, especially ones they notice week in, week out. That there are all sorts of GST exemptions is hardly John Howard’s fault – they are the price of passage extracted by the Australian Democrats (oh come on, you remember the Dems – like the Greens only less strident). But John Howard did buckle in the face of community anger over fuel indexation in 2001. As Mark Kenny points out, the revenue shortfall this created would “almost pay” for the National Disability Insurance Scheme this year.[xiii]

For all the talk of selling reform via explanation, people are suspicious when the government says their lives have to change in the national interest. Remember Work Choices? Despite all the Howard Government’s efforts to sell industrial relations, reform, voters suspected it was unfair. And in 2007 many voted accordingly. [xiv]

They will do so again if the Opposition and interest groups can peddle enough horror stories about cruel cuts. We will know budget reform is in trouble before it starts if Linda Mottram and Alan Jones listeners’ start calling in to complain about (a) poor people not affording medication, (b) old people facing assets tests on benefits and (c) working age people losing payments to encourage them into employment. And you know reform is gone when people start talking about unfairness to “working families”.

Ever since Paul Keating put economics at the centre of politics, with the banana republic warning nearly 30 years ago, Australians have focused on economics. But knowing we are in strife and accepting that it means less Canberra cash flowing into their bank accounts are not the same thing.

The idea of fairness runs deep in Australia – and it is now inextricably linked to a health and welfare system that people assume must exist, regardless of the state’s capacity to pay. General spending programs and higher income earners are going to get whacked before working families start accepting they have to cop cuts.

It is going to be a horror budget, but only for a few.

Stephen4@hotkey.net.au

For a bespoke speech or oped call me on 0417469093

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