Wayne Swan’s fifth budget contains few surprises. The government will return to surplus — although it’s an almost negligible result of $1.5 billion — and most of the major new spending has been announced already, with only some additional assistance for Newstart recipients and a Family Tax Benefit A adjustment being the big new spends not yet announced.
And while the government has emphasised the need to find spending cuts to offset big falls in revenue, it is primarily through fiscal discipline and tax rises rather than big cuts that the surplus has been preserved. If this is an austerity budget, it’s a pretty comfortable version of the hairshirt.
The government finds itself dealing with $7.4 billion less revenue (not including GST) across the four year period of the budget. The primary causes are further deteriorations in Capital Gains Tax and corporate tax revenue and lower retail spending. The MRRT has also been revised downwards substantially — from $3.7 billion to $3 billion in its first year — due to the strength of the dollar. The overall growth forecast has been revised down for this year but remains at 3.25% for 2012-13, as predicted at MYEFO; unemployment is expected to be a little higher in 2013-14.
In short, Treasury expects solid but not strong economic growth, enough to keep unemployment steady (helped by a small fall in the participation rate), and inflation comfortably within the reserve Bank’s target band (although 3.25% looks a little strong given current conditions). But it’s not high-revenue growth of the kind we got used to before the global financial crisis: corporate tax revenue continues to be flat, with businesses still working through financial crisis-era losses, and sluggish growth in property, equities and other assets means capital gains tax revenue continues to be flat as well.
This lacklustre revenue environment is likely to face governments for some years to come, particularly if the mining sector continues to invest heavily in new projects. The resources sector is generating nearly a third of corporate operating surpluses but only contributes 15% of company tax, due to its ability to write off its new investment. That is, the most robust sector of the economy is, regardless of the reason for why, not paying as much tax as the sectors it is crowding out of the economy.
The government’s response is not to go hard on big spending cuts but bump up the tax take with as little political pain as possible: stymied in its plans to give business a 1% tax cut in the Senate, the government has simply pulled the measure, meaning one of the key justifications of the mining tax has now been removed (bear in mind there’s now even less revenue from the MRRT than previously forecast, too). Super concessions for high income earners have been further curtailed, foreign workers have been hit again; the only really big spending cuts are in defence and foreign aid.
Despite this, government spending will next year — partly because so much has been moved into this year or the following year, but also because Labor has held the line on increases to government programs. This isn’t a particularly vigorous government when it comes to slashing spending, but it is better at keeping existing spending under control than its predecessor.
The result is, if you’ve been paying any sort of attention to politics in the last fortnight, unsurprising, even boring. But this is the new era of banal budgeting — steady growth, flat revenue, few new programs, few big cuts, steady as she goes economic management. It will be fine if the economy performs as predicted. But the offshore threat remains.
The budget predicts the Euro area GDP to shrink 0.75% this calendar year but grow by the same amount next year. That may yet prove an heroic assumption if the New Depression continues to deepen across the continent, let alone if recent events send a new financial crisis into the system.
In that event, of course, Wayne Swan will at least be able to argue there is fiscal and monetary room to manouevre in response.