Swan the builder more of a maintenance man
Wayne Swan is looking more Stepford wife than Bob the Builder. His mid-year budget update yesterday was largely an exercise in housekeeping – a massive spring clean to balance the budget books – rather than a major structural renovation to fix the fiscal house.
It detailed a whopping 76 policy decisions taken since the budget to either increase revenue or cut spending to keep the budget in surplus – just – this financial year. While economic growth is at its historic average and joblessness still relatively low, it is prudent for the government to return to surplus.
The turn around in the budget from a big deficit to a slim surplus is already taking heat out of the economy and paving the way for the Reserve Bank to keep interest rates lower than otherwise.
This takes some pressure off the Australian dollar and helps industries like tourism, education and manufacturing struggling with a higher dollar.
But longer term, the federal budget house has a bad case of rising damp (increased spending) and dry rot (lower revenue) and yesterday’s budget update does little to tackle those underlying problems.
Big – if admirable – multi-billion dollar spending promise, like the National Disability Insurance Scheme and Gonski education reforms, remain off the books. Meanwhile, tumbling commodity prices have punched a significant hole in company tax revenues and the mining tax. The aging of the population will also put the squeeze on government resources.
Balancing the books in the longer term will require deeper “structural savings” - ongoing spending cuts or revenue hikes that build over time.
The closest the government came to major renovations yesterday were the decisions to reduce the baby bonus from $5000 to $3000 for second and subsequent kids and to limit increases in the private health insurance rebate. The later will go a long way in the longer term to reigning in one of the biggest ballooning costs in the health budget. But it’s hard to imagine the cut to the baby bonus will be the last.
The rest of the budget update was largely an exercise in wallpapering over cracks in revenue.
The biggest savings comes from simply “reprofiling” the timing of policies, including a whopping $8.3 billion saving over four years from getting business to pay company tax slightly earlier - monthly, not quarterly.
There are some clever cuts, like shifting the balance of lost super accounts under $2000 from super funds and onto the books of the Tax Office. This gives the government a new pool of funds on which it can earn a return, while savers get their funds protected from super fund’s fees and changes, plus interest at the rate of inflation. Win, win.
In total, yesterday’s budget changes will have only a modest impact on the economy and interest rates. The change in the size of this year’s budget surplus, from $1.5 billion to $1.1 billion represents a $400 million change in the stance of fiscal policy. To put that in the context of our $1.4 trillion dollar economy, that’s about 0.03 per cent – almost a rounding error.
The Reserve Bank was aware budget cuts of this magnitude were on the table when it cut interest rates earlier this month. Yesterday’s budget update is unlikely to have much bearing on whether the Reserve Bank stops the nation half an hour early on Melbourne Cup Day with an interest rate cut at 2:30pm.
Inflation figures due tomorrow hold the key to that.
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