Monday, May 19, 2014

Less to the budget than meets the eye

The more of the budget's fine print I get through, the less impressed I am. It's not a budget so much as a flick-pass.

On its main goal of returning to surplus, you can accept the plausibility of its projections that budget balance will achieved by 2018-19 without being terribly impressed by the quality of its claimed "structural" savings.

The policy changes proposed yield savings over the four years to 2017-18 totalling $38 billion (on an accruals basis). Contrary to all the government's rhetoric, almost a quarter of these savings come from increased tax collections.

But get this: fully 46 per cent of the total savings come in the fourth year. Until then, net savings are quite modest. There are various reasons for this delay. One is political: Tony Abbott is keeping some core promises by not breaking them until after the 2016 election.

Another is macro-economic: Joe Hockey is delaying the big cuts until he's confident the economy will be strong enough to absorb them. Yet another is that the Labor government's back-end loading of its new spending programs meant some very big bills fell due in the year beyond last year's forward estimates (where they were harder to see).

But there's one more reason: 2018 is the first year when the expiry of various agreements allows the feds to really start screwing the states on grants for public schools and public hospitals. From then on, grants will be adjusted only in line with inflation and population growth.

This means almost all of Hockey's cumulative savings of more than $80 billion on payments to the states for schools and hospitals over the decade to 2024-25 occur beyond the forward estimates.

Before the election, Abbott and Hockey claimed repeatedly to be able to return the budget to surplus by eliminating waste. In truth, they've identified and eliminated little or no genuine waste.
Rather, they've defunded worthy causes (grants to charities and cultural activities, overseas aid), imposed new user charges (Medicare benefits, the real interest rate on HECS), whacked up existing user charges (pharmaceutical benefits, university fees) and tightened up means-testing (family tax benefit B).

But a lot of the longer-term savings come from lowering the indexation of payments from a wage-related index to the consumer price index. In the case of pensions, this will cause the relative value of pensions to fall continuously over time, pushing the aged and disabled below the poverty line.

In the case of payments to the states for schools and hospitals - whose main cost is wages - it leaves an ever-widening gap the states wouldn't have a hope of covering by increased efficiency, only from other revenue sources. (The cost of medical supplies grows much faster than the CPI.)

As well as meaner indexation, there's a lot of two or three-year pauses in indexing thresholds or payments (family tax benefit, some medical benefits schedule fees, the Medicare levy surcharge, the private health insurance rebate, grants to local governments).

Note, these are largely temporary savings to the budget, though there's some ongoing saving because of the lower base (in real terms) established before indexation is resumed.

And note this. Hockey justified his exclusion of the cost of superannuation tax concessions from his efforts to curb the allegedly unsustainable growth in the cost of population ageing by saying tax expenditures would be considered as part of the coming review of taxation. In truth, he did fiddle with tax expenditures when it suited him (the mature age worker tax offset and the dependent spouse tax offset).

See what this means? If the Coalition ever does get around to reforming the concessional tax treatment of super, capital gains and negative gearing - each benefiting mainly high income-earners - it will do so not as part of the effort to balance the budget, but as part of a revenue-neutral tax reform package where the savings are used to (I bet) cut the top tax rate, with increased collections from the GST shared between the premiers and a lower rate of company tax.

The budget was a giant attempt to get back to surplus solely by cutting spending and not increasing taxes. It failed. Not so much because of the temporary deficit levy or the resumption of indexing the fuel excise, but because the cumulative $80 billion saving from short-changing the states on schools and hospitals - almost a quarter of the total saving - will have to be covered by increased state taxation.

A tax increase flick-passed to the states is a tax increase avoided? Any serious increase in state tax revenue would have to be made possible by the feds, in any event.