Crisis? What crisis? Budget bluff finally becomes clear

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The sense of urgency that the government engineered going into this budget can now be seen in perspective. There was no crisis forcing savage spending cuts and revenue-raising measures.

Indeed, there was a risk that budget savagery would backfire, undermining an already tentative economic handover from the mining boom to the rest of the economy.

There was (and is) a longer-term problem, however (that’s problem, not crisis): the gap between revenue and spending, the budget’s ”Jaws” in financial parlance, are narrowing at a time when the government is already running a deficit that in the year to June will be 1.5 per cent of gross domestic product.

Joe Hockey’s first budget attempts to balance both issues, and while the wealth tax is confirmed, it is spending cuts that carry the strategy, delivering savings that start at $1 billion in 2014-15, rise to $15.5 billion in 2017-18, and total $28.1 billion over four years.

The budget is not as tough on spending as the 1996-97 budget that Peter Costello delivered at the beginning of the Howard government’s tenure. Costello cut spending by 0.5 per cent in year one, and 2.1 per cent in year two. Hockey’s budget will actually increase spending by an average of 0.8 per cent a year over the next four years.

That 0.8 per cent rate is less than half the ”do-nothing” four-year spending growth rate of 1.9 per cent in December’s half-yearly budget report, however.

All the big pre-budget leaks were confirmed, and the government is predicting that the squeeze will continue beyond the four-year horizon of the budget itself.

It says, for example, that the amount it sends to the states in specific grants for education and hospitals is ”unaffordable,” and that it plans to save $80 billion between 2017-18 and 2024-25 by re-writing the rules.

Unless school and hospital budgets are gutted, the $80 billion that Canberra expects to save will be an extra $80 billion that the states need to spend. If this is not to be merely a transfer of pain from Canberra to the states, then the states will need to find more revenue, in other words, and it will probably come in the form a taxation quid pro quo that includes an expansion of the GST.

The Reform of Federation and Reform of Tax white papers are both due to be tabled by the end of next year, and will set the stage for Canberra and the states to negotiate a new deal that Tony Abbott takes to the next election.

The budget pain was spread widely, as also pre-advised, and for businesses, it was a mixed bag. The government said it remained committed to cutting the corporate tax rate from 30 per cent to 28.5 per cent from July next year, for example, but persisted with a parental leave scheme. That means the 3000 or so largest Australian companies will still effectively pay 30 per cent after paying a 1.5 per cent parental leave levy.

The corporate tax cut does, however, promise to boost profits, spending and employment at about 750,000 other companies.

Industry support was slashed. Cuts start at $469 million this year, go past $1 billion in 2017-18 and total $2.5 billion over four years. They are ideological as well as practical cuts, and some of them will be reversed by the next Labor government. The impact of the cull can only be measured over time, rationalisation project by rationalisation project. It is being described as downsizing of government, but can service levels be maintained?

One small agency, the Corporations and Markets Advisory Committee, is for example eliminated as part of a wider rationalisation of more than a dozen smaller agencies that saves only $19.4 million over four years.

CAMAC has just three employees, and has provided important advice to successive governments for a quarter of a century about possible changes to company and securities law – advice usually provided after a debacle or disaster shows the current law to be inadequate, or after new developments overtake the rules. This is not work that grabs the headlines, but it is important, and it will still have to be done when CAMAC is gone. One wonders if it can be done as cheaply, or whether the change just means that a higher bill for the same service is buried.

Overall, this is the right point in the electoral cycle for a new government to deliver a tough budget. It will hope its third budget sets the stage for re-election. If Hockey’s first budget hits confidence and demand too soon and delays or derails the handover from the fading resources boom, however, the government will be relying on rate cuts to get it back on track.

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