The first Swan Budget does not take the promised meat-axe to Government spending but may be nearly enough to convince the Reserve Bank it is serious about restraining demand. Despite the big $21.7b surplus, this Budget spreads the pain across as many people and as few headlines as possible, but manages to slow the remorseless growth in Government spending since 2004.

Swan’s strategy has been simple: additional spending has been more than offset by a long list of small savings across a range of Commonwealth programs, while on the revenue side, a concerted attack on tax expenditures and some increased taxes and charges, along with the expected increase in company taxes from the resources boom, has pushed the surplus into near-record territory without the pain of slashing major programs.

Some of these are ongoing reductions — the means-testing of family benefits ($113m pa and rising) and Baby Bonus ($100m pa). Others big savings are the cancellation of the Opel project ($630m), the public sector efficiency dividend ($410m), the cancellation of the Access Card and the scaleback of operations in Iraq (both $300m) and savings from increasing the Medicare surcharge threshold ($230m) are some of the big ticket savings, in addition to a number of delayed expenses.

But the real cuts are in the minutiae of the agency expense measures across the breadth of Government activities. The majority are relatively small programs where the pain will be muted due to the size of the sectors involved. The Advancing Australia and National Food Industry Strategy programs in AFFA. Advertising cuts. The previous Government’s PC filters program. Apprenticeship schemes. The Realising Our Potential education programs. Green vouchers for schools. A delay in the start of digital radio.

All these have kept real growth in spending to 1.1%. I despondently predicted 2.8% last week so have to acknowledge a solid effort, although it’s not in the league of Peter Costello’s first two budgets. Problematically, however, spending is forecast to rise back to 4% next year. While this partly reflects the impact of pushing a number of big expenditures in 2009-10 – spending falls back in 2.1-2.2% in the out-years – it suggests that Lindsay Tanner’s razor gang needs to keep chipping away at the Howard legacy of profligacy.

On the revenue side, a range of tax concessions and rebates will be removed in areas such as crude oil excise, FBT exemptions, depreciation and capital protected borrowings. Together with the alcopops excise increase, the luxury car tax increase, and an old-fashioned rise in the passenger movement charge, this will yield an extra $2.4b next year and more in outyears. However, that is dwarfed by the $8.8b increase in forecast revenue growth achieved in spite of the collapse of capital gains tax revenue.

The vast surplus racked up by Swan and Tanner will be directed into three new funds – a new infrastructure fund to invest in road, rail, ports and broadband, worth $20b over two years, an extension of the Higher Education Endowment Fund into a new $11bEducation Investment Fund, and a $10b Health and Hospital fund, all to be managed by the Future Fund. A COAG Reform Fund (more correctly, a State Bribes Fund) will also be set up to channel reform-related payments to the States.

These will not be interest-only funds, according to Swan – they are designed to be fully expended if the appropriate projects consume the available funds, but his wording clearly indicated an expectation they’d be around for at least the nedxt six years.

This isn’t the savage attack on spending promised by the Government over summer. It’s a solid start – nearly enough to keep the Reserve Bank at bay. The question will be whether Lindsay Tanner can convince his Cabinet colleagues to keep it going next year.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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