Crikey

As with Rudd Labor’s first budget, the lead up to Budget Day has seen a flow of leaks that has increased both in volume and the detail of the measures that are being leaked. And, also as with last year’s budget, the pattern of leaks reflected tightly organised message control. In neither case do there appear to have been any leaks in the traditional sense of the term, where information the government wants kept under wraps slips out as a result of carelessness or pursuit of private agendas.

So, while last minute changes are always possible, it seems reasonable to take the leaks we have seen as representing the message the framers of the Budget would like to send. In this context, the key phrase is “middle class welfare”. This phrase, as it is being used in the current debate, is somewhat misleading. In most cases, the proposals under consideration will means-test access to programs that are currently universal, in a way that will exclude households in the top 20 per cent of the income distribution, or even higher up.

The use of “middle class” to refer to the best-off members of the community is so standard in Australian political discourse as to go without saying. With the possible exception of those annually listed in the BRW Top 200, no one in Australia considers themselves rich. One consequence is that politicians, journalists, academics and others in the policy elite routinely overestimate average incomes.

Another is that terms like “middle class welfare” are crucially ambiguous. Some critics of middle class welfare want a residualist system where only the truly poor have access to publicly funded benefits. Others want a targeted system where the top quintile are expected to pay for themselves.

More important, in the present context, is that the language of “middle class welfare” is that of Treasury, rather than that of the Labor Party. The need to restore long-term budget balance has given Treasury the chance to dust off the hit list usually presented to an incoming government in its first term. Middle class welfare and its more obscure twin, tax expenditures always top this hit list.

While there are plenty of problems with tax expenditures and universal benefits, the Treasury line on these issues has never really embodied the insight that what matters is the operation of the tax-welfare system as a whole, and not one side or the other. Thus, Treasury has used redistributive arguments to support means-testing, while using efficiency arguments to favour flatter tax scales, a combination that makes little sense.

Unfortunately, if the leaks are to be believed the government appears determined to stick with the Treasury line in this budget. The income tax cuts promised at the 2007 election only as a tactical response to Howard’s irresponsible vote buying on the issue will stay, while many other promises, including those to core Labor constituencies in areas like health and education will be broken.

The idea that, with a semi-permanent decline in revenue from sources such as company tax almost inevitable, it will be possible to find expenditure savings sufficient to fund large cuts in personal tax does not stand up to scrutiny. Already “easy” options like public service efficiency dividends have been pushed to breaking point and beyond. Almost certainly, the government will face nearly irresistible demands for more spending in the wake of the crisis. But, from the point of view of the Treasury, this all the more reason for tying their hands now.

Although it has received somewhat less attention, the other big source of savings that has been leaked is “tax expenditures”.