Wednesday, May 9, 2012

How Swan did his budget trick

If you are having trouble seeing the horror budget we were told to expect, that's according to plan. This government has always wanted to be tough in principle, but never in practice.

For most people, Wayne Swan's fifth effort doesn't contain much that is nasty and includes a few things that are quite nice.

To be sure, it does include some nasties for higher income earners. Individuals earning more than $300,000 a year will have the tax on their superannuation contributions doubled to 30 per cent.

Executives face a crackdown on the taxing of their golden handshakes and living away from home allowances. And the new financial year will see the means-testing of the private health insurance rebate for singles on more than $83,000 a year and families on more that $166,000.

Why are higher income earners copping it? Because there aren't many of them and few of them vote Labor anyway.

For most other people, however, the budget isn't bad. Top of the list of unexpected goodies is a lump-sum bonus of $820 or $410 a schoolchild to parents eligible for the family tax benefit part A, to be paid next month in place of the education tax rebate.

The education rebate was just an election bribe, and so this is an easier-to-obtain bonus. Its primary purpose is to soften the blow of higher electricity and gas prices when the carbon tax starts in July.

Swan says the budget contains tax cuts, but these are modest (typically, $5.80 a week), limited to individuals earning less than $80,000 a year and - in combination with special increases in pensions and family benefits - will merely compensate for the higher energy prices.

Swan says this is a "fair go budget", with the government "doing everything we can to protect lower- to middle-income earners". But not if your income is so low you are part of the undeserving poor.

"Labor values" can run to the expense of a new handout to parents of schoolchildren, but can't afford to raise the dole of $35 a day by more than about 50?.

By contrast, small business owners get instant writeoffs of the cost of new assets worth up to $6500 each, and the ability to carry back losses.

Then there is increased spending on dental care, aged care and an early start to the national disability insurance scheme.

But how does all this new spending square with all we've been told about the herculean efforts Swan would need to transform this financial year's budget deficit of $44 billion into a surplus of $1.5 billion next year?

On paper, this would be the biggest one-year budget turnaround in many decades. And, is it a sensible thing to do anyway, at time when the economy's growth is so mixed?

The first thing making it less heroic than it sounds is that Swan has been moving the budgetary furniture around for two or three years in preparation for this great day. He has been "reprofiling" his planned spending, pushing it off into the future to make his task easier.

More recently, he has brought forward spending originally intended for the new financial year - including compensation for the carbon tax and the replacement for the education tax rebate - to the last weeks of the old year, thus exaggerating the true size of the turnaround.

The second explanation for the surprising dearth of budget pain is last week's decision to defer about $5 billion worth of defence spending.

Third is the expected recovery in tax collections, particularly from companies, and fourth combines the government's many decisions not to proceed with previously promised tax concessions.

All this shows how the budget can seem so tough arithmetically without actually being very. It also explains why the budget deficit turnaround won't deliver the blow to the economy some people fear.

In any case, the outfit with the ultimate responsibility for keeping the economy growing steadily, the Reserve Bank, is in possession of a safety valve it showed last week it isn't afraid to use.

Should the economy slow, it will cut the official interest rate again. And should the banks commandeer part of the decrease, it will cut the rate some more.