It’s “softly, softly” budget, the economists say; it has “the appearance of a mouse”. Crikey asked the nation’s money men for their assessment of Wayne Swan’s fourth budget, with ticks for workforce participation but disappointment over the scope of savings and longer-term macro-economic reform …
Craig James, chief economist at CommSec:
What we have is a softly, softly budget. It is more like being hit over the head with a feather than a sledgehammer. The government has maintained its discipline on spending, found some savings but at the same time hasn’t saddled mum and dad Australians and small businesses with extra burdens. So I think it’s the right budget for the times.
The government is still focused on achieving a budget surplus in 2012/13. That is good stewardship — aiming to get back in the black. But there is no rush. The economy is growing, our budget deficit is among the smallest in the developed world and our government debt is the smallest in the developed world.
If there was one area crying out for attention it was the tight job market. And the good news is that the government has taken action in a big way. There are plenty of “carrot and stick” incentives to boost workforce participation and the migrant intake has been increased.
The economic assumptions can’t be faulted, if anything they are conservative. Interesting to note though that Treasury is not expecting an end to consumer conservatism any time soon. Overall, I think the budget deserves 15/20. What could it have done better: more migration that boosts labour supply much more quickly, alleviating Reserve Bank inflation worries. And the carbon tax — it’s the elephant in the room and we still don’t have any details on it.
Warren Hogan, chief economist at ANZ Research:
The first budget of the Gillard government is a good one. It is compassionate, smart and disciplined. The focus is to address the major challenges facing the economy at present. To tighten fiscal policy and take pressure off the economy and interest rates, and to try and increase the capacity of the economy, most importantly the labour force. Unfortunately the budget lacks any real vigour.
As the first budget in a new parliament this was the time to address the difficult issues. To act on some of the Henry Review recommendations on the interaction of the tax and welfare system; to tighten up the underlying structural budget deficit by reversing the untargeted welfare that crept into the system over the past eight years. But with little political capital at its disposal the government left these difficult questions to the side.
So it is a small step in the right direction. The government will not be adding to demand in the economy. All of the $20 billion in new spending is accounted for by offsetting spending cuts. But by not addressing the structural budget position and making deeper cuts into spending, it does not work to reduce demand in the economy. As such, market expectations for further interest rate increases will not be pulled back because of this budget.
The measures aimed at increasing participation are to be commended but are unlikely to make much of an impact on the problem of surging labour demand as the mining and construction boom lifts off this year. The impact of these measures will be too small and too slow. That said, increasing the skilled migrant intake is important. It will directly add to the supply of labour and the impact is immediate.
A good budget but not a courageous one. We still remain vulnerable to a downturn in China and commodity prices.
Stephen Walters, chief economist at JP Morgan:
Wayne Swan spent several weeks softening us all up for a “tough”, horror budget full of austerity and spending cuts, but pulled his punches on the night. There are some promised savings, but the budget does not go far enough in cutting the fat from some of the more bloated portfolios.
Indeed, new spending all but wipes out the promised savings. There are some welcome measures to boost the supply side of the economy, like lifting workforce participation via welfare reforms but, this is an opportunity missed. Essentially, the Treasurer is crossing his fingers and hoping that the revenue comes through. If it doesn’t, or spending blows out closer to the next election, Swan will go down in history as a Treasurer unable to deliver a surplus.
A big source of disappointment is the lack of “big-ticket” expenditure savings — real bell-ringers, rather than bits and pieces all over the place — that would have signalled that the government is really serious about cutting the spending that blew out during the GFC. While the government is promising to do its bit in tightening conditions in the economy by delivering a surplus, the heavy lifting still will be left to the Reserve Bank — the cash rate is headed up, most likely within the next few months. This budget has moved in the right direction, but has not done enough to prevent interest rates from rising.
The Treasurer locked in a whopping deficit of $49.4 billion (3.6% of GDP) for 2010-11, slightly less than we had expected, but still much larger than the shortfall he promised only last November. Swan pledges, though, to have the budget back in surplus within two years — this was a key election promise from last year that could not be broken. In other words, the Treasurer, who has not yet been able to produce a surplus, promises that he can … but not yet. Essentially, he’s telling us to listen to what he says about the promised surplus, and not watch what he has just done — delivered another monster deficit.
The main reason for the larger shortfall this year is that the “rivers of gold” enjoyed by the previous government during phase 1 of the mining boom have dried up. Revenue collections are running well below the level forecast just six months ago; the revenue ultimately will come, but the lags have grown longer. Also, there has been unexpected new spending arising from reconstruction and assistance payments associated with recent natural disasters. These were parameter changes not even the Treasury economists could forecast.
As for the savings, the budget papers show a total of $22 billion of total savings to be implemented over five years, but some of this seems merely to be a deferral of existing spending priorities and a boost to the nebulous “efficiency dividend”. Also, some of the savings already had been announced, so the additional savings are somewhat smaller than $22 billion. Worryingly, while indexation of some welfare benefits has been ended, the level of payment remains. Why weren’t these slashed, now that the economy is growing again?
Saul Eslake, The Grattan Institute:
Wayne Swan appears to have laboured mightily, in microeconomic terms, to produce something which, in macroeconomic terms, has the appearance of a mouse.
From a “micro” perspective, there’s a lot of good things in the detail of the budget. Most of what the budget papers call “saves” are “quality” measures — that is, they are both “good policy” (means testing of welfare payments, clamping down on tax loopholes, etc) and represent enduring improvements to the budget’s bottom line.
Likewise many of the new spending initiatives — especially those on skills and training, sharper incentives for increased workforce participation, changes to the tax treatment of infrastructure investment, additional spending on mental health, etc — represent “good policy”.
But when you stand back and ask what the budget does for the stance of macro-economic policy, the answer is virtually nothing. It cuts spending by, on my reckoning, $17.3 billion over four years (excluding what it pulled out of the contingency reserve); increased spending in other areas by $17.2 billion over four years; increased tax revenues by $4.9 billion over four years; cut taxes by $1.7 billion (most of which was the one-off change to the Low Income Tax Offset), resulting in a net improvement to the bottom line of about $3.2 billion over four years.
The net outcome of what is apparently the largest number of “policy decisions” in any single budget is to increase the surpluses in prospect for 2012-13 and 2013-14 by amounts equivalent to just 0.1% of GDP in each of those years. Whatever its micro-economic virtues, therefore, this is not a budget which does anything to lessen the prospect, flagged by the Reserve Bank last Friday, that interest rates start rising again in the next few months.
Nor does the budget provide any comfort that, after 2016-17, by which time the surplus will have returned to 1% of GDP, this government (if it is still in office) won’t start making the same macro-economic policy mistakes that the Howard government did in its last term.
Professor John Quiggin, University of Queensland:
The budget has been fairly successful as a political exercise in expectations management. A lot of cuts were foreshadowed but didn’t eventuate. That gave a sense of relief, and gave the government some cover to kill off a range of programs and tax expenditures which no one would seriously defend as good policy.
There was the dependent spouse offset, a relic of the days when respectable women didn’t go out to work, and was replaced years ago by Family Tax Benefit B for those with children. Showing its customary caution, the offset is being killed only for those born after 1971, so the number of people immediately affected must be tiny.
Then there’s the tax break for entrepreneurs, a Howard government initiative from which I benefited in my capacity as a columnist. I only claimed it after getting a series of letters and even (if I recall correctly) phone calls pointing out that I was eligible. I can’t imagine that those eligible for social welfare benefits are similarly encouraged to claim their full entitlements. Various other aspects of middle-class welfare (such as the Family Tax Benefit and rorts of the Low Income Tax Offset) have also been tightened.
And there’s been an attempt to rein in the long-standing rort of favourable Fringe Benefits Tax treatment for cars, partly offset by a giveway encouraging small businesses to buy new vehicles. This is targeted at the “ute owner” who seems to have displaced the “working family” in the governments affections.
The other aspect of expectations management is that we expected nothing positive and, with a handful of exceptions, that’s what we got. There’s a reasonable initiative on mental health and some modestly positive initiatives for the long-term unemployed, wrapped up in a bunch of focus-group-driven tough rhetoric.
But the Education Revolution championed by Julia Gillard before her rise to the prime ministership has been forgotten. The idea that the global financial crisis might imply a need for substantial restructuring of the economy along social democratic lines is similarly a distant memory. Overall, this is a budget that Peter Costello would have been happy to bring down.