Coalition governments have been banging on about the need for "smaller
government" since Malcolm Fraser started echoing Maggie Thatcher and
Ronald Reagan. They've talked without doing anything. Until now.
Few
have noticed, but the goal of this budget is to reduce government
spending by 1.1 per cent of gross domestic product (GDP), from 25.3 per
cent this financial year to 24.2 per cent in 2024-25.
If that
doesn't impress you, this may: Joe Hockey's plan is to cut government
spending to 0.7 percentage points below its 30-year average of 24.9 per
cent.
That makes this the most ideologically driven budget we've
seen - not that Hockey or Tony Abbott will admit it. They claim the
budget's harsh measures are needed simply to get the budget back to
surplus and start paying down the public debt.
They don't admit it
was their choice to do this in a way that achieved savings more by
cutting spending than by cutting tax expenditures. They cut the real
growth in pensions, but left high-income-earners' absurdly generous
superannuation tax concessions untouched.
They tightened up the
family allowance and cut young people's access to the dole, but didn't
tackle the concessional taxation of capital gains, negative gearing or
company cars, while ignoring the miners' diesel fuel rebate and other
business welfare. They imposed a co-payment on GP visits, but didn't abolish the private health insurance rebate.
The
intended effect of this bias against spending and in favour of tax
breaks is to make the budget significantly less redistributive. That's
because, particularly with our tightly means-tested welfare system,
government spending tends to benefit the less well-off, whereas tax
expenditures go disproportionately to people at the top.
So it's
the "end of entitlement" for people in the bottom half, but no change to
the entitlements of the well-off, save for a small three-year tax levy.
It's
true the government's 10-year "medium-term budget projection" sees tax
collections rising as a proportion of GDP from 21.6 per cent this year
to 23.9 per cent in 2019-20, at which point it would be prevented from
rising further. (This cap is based on the average tax ratio to GDP
between 2000-01 and 2007-08.)
This seems to indicate Hockey is
relying more on higher taxes than lower government spending to get the
budget back to a surplus of 1.5 per cent of GDP. But this impression is
misleading.
At 25.3 per cent of GDP, government spending at
present is only a little above its long-term average of 24.9 per cent,
whereas at their present 21.6 per cent, tax collections are well below
Hockey's benchmark of 23.9 per cent.
It's no secret why tax
collections are unusually weak at present: because the fall in mineral
export prices is causing real national income to grow more slowly than
real GDP and because of the continuing revenue loss from the eight
income-tax cuts in a row we enjoyed when the Howard government assumed
the resources boom (and its inflated company-tax collections) would run
forever.
To get tax collections back to a more normal proportion
of GDP, the government is relying mainly on allowing another six years
of bracket creep. The 23.9 per cent cap after 2019-20 is supposed
to allow the resumption of regular tax cuts (though who will benefit
most from those cuts is another matter).
What we do know is that,
whereas the eight successive tax cuts weren't particularly "progressive"
in their effect on the income-tax scale, its particular shape at
present means the following eight years of bracket creep will be highly
"regressive", causing average tax rates towards the bottom to rise a lot
further than those at the top.
So even the recovery in tax collections will come mainly at the expense of the less well-off.
It's
clear the government will have much trouble getting many of its more
controversial measures through the Senate. What the 10-year projection
will end up looking like is anyone's guess.
But even if the budget passes intact, it contains the seeds of its own destruction.
Pensions
heading inexorably below the poverty line? Pressure throughout the
public sector for wages - including for nurses, teachers, childcare and
age-care workers - to rise no faster than inflation, while private
sector wages continue rising in real terms with productivity growth?
The
vice-chancellor herd given total control over how high uni fees (and
graduate debts) rise, including whether they make training for jobs as
nurses, teachers and even government lawyers financially untenable?
This
budget is unsustainable because the wider implications of its measures
haven't been thought through. By knocking back its worst features, the
Senate will be doing the Coalition (and the nation) a favour.
