Monday, March 12, 2012

Abbott's audit will find all the cuts he won't make

What do punters and economists have in common? Both like to delude themselves budgets can be balanced by relatively painless cuts in government "waste" and "profligacy" without resorting to unspeakable, unthinkable tax increases.

Both like to imagine wasteful and unnecessary government spending is almost infinite and easy to identify and eliminate. Both don't like to admit the obvious: that what's wasteful to my eyes is vitally necessary to the voters and businesses that benefit from it.

In the punters' case this is mere wishful thinking; in the economists' case it stems from the libertarian, anti-government ideology hidden in their neo-classical model.

If you think Julia Gillard will have trouble finding the spending cuts to produce a paper-thin budget surplus next financial year, consider the size of Tony Abbott's fiscal credibility gap.

Actually, no one knows the amount of spending cuts Abbott would have to find to cover the multi-year cost of his many election promises. Pouncing on a figure his finance spokesman, Andrew Robb, once mentioned in passing, the government keeps claiming it's $70 billion. But the opposition has repeatedly refused to confirm that figure, or nominate any other.

It has to be in that mind-boggling vicinity, however, because Abbott went to the last election claiming to have identified $50 billion in savings (even though Treasury and the Finance Department found $11 billion of it didn't stack up).

The reason the figure's so high is not so much Abbott's new spending promises, but his pledge to rescind Labor's carbon tax and its mining tax without also reversing the various tax cuts and spending increases Labor will use the two new taxes to pay for.

That Abbott wants the cheers for promising to abolish the two taxes but not the boos that would go with abolishing the goodies they pay for is the first reason to doubt his status as a macho-man spending slasher.

His reluctance even to put a figure on the size of his savings task - let alone produce a list of his intended cuts - is the second reason.

But on Friday Abbott unveiled the magic answer to his disclosure problem. He calls it a "commission of audit". A long-experienced election spin doctor from the other side calls it "the giant asterisk", which is used to prove the Libs' promises are "fully funded". Follow the * to the fine print and you read: "details to come after election".

Abbott says it's been 16 years since the Commonwealth conducted such a top-to-bottom independent review of public spending from the perspective: "If we were to start with a clean slate, what government spending and what government programs are really required?

"The last such review was the National Commission of Audit chaired by Professor Bob Officer in 1996, following the election of the Howard government," Abbott said.

And we all remember John Howard's first budget, in August 1996, included the most extensive collection of spending cuts and savings in living memory. "As the Howard government demonstrated, prudent fiscal management is in the Coalition's DNA," Abbott said.

He promised to make establishing a commission one of his first acts. What's more, he would require it to report within four months,

so "the operations of government can be improved and streamlined while a new government has maximum political capital to take hard decisions".

Convinced? I'm not. It's become established practice for incoming coalition governments - state and federal - to set up audit commissions headed by economic hard-men. But it's equally established practice for few if any of their (often worthy) recommendations to be acted on.

That was certainly the case with Officer's report to the Howard government. Next to none of its proposals were adopted. In one notable case, Officer recommended that pensions and benefits be indexed to a much less generous version of the consumer price index.

Howard's first budget did the opposite: switching from indexing to the CPI to indexing to the more generous average weekly earnings - though Peter Costello somehow forgot to mention this hugely expensive decision in the budget papers.

No coalition government has come to office with more "political capital" than Barry O'Farrell's. Yet the audit report he commissioned from a former Treasury secretary, Michael Lambert, has been largely ignored. It wasn't "released", but you can find it languishing on the NSW Treasury website.

So much for commissions of audit. All the cost-cutting in Howard's first (and only) horror budget came from a menu put up by the people whose job it always is, Treasury and Finance.

But let's not be too misty-eyed about that budget. Its huge cuts involved a monumental breaking of election promises and Howard's retrospective invention of the core and non-core promise.

Most of the measures involved cuts in areas favoured by Labor (job creation, the ABC, Aborigines and childcare) and they made room for increased spending on Liberal favourites (private health insurance rebate, bigger grants to private schools, payments to stay-at-home mothers).

Not long after the horror budget's announcement, the economy picked up and the budget's "automatic stabilisers" raised tax collections and cut spending on the dole, rapidly returning the budget to a healthy surplus.

As soon as Howard realised the budget was generating surpluses without his help he began reversing the unpopular measures in his first budget. Then, once the resources boom began filling his coffers to overflowing, he began spending heavily.

Howard's need to accommodate some expensive spending promises pales by comparison with Abbott's need to pay for the abolition of two big taxes. He'd either have to break promises wholesale or spend his first term utterly preoccupied with finding spending cuts he was game to make.