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Federal

Apr 2, 2013

Ask the economists: we balance Swan's books

How is Labor going to pay for its big-ticket promises on education and disability care? Crikey intern Ben Westcott asks leading economists whether Wayne Swan should tinker with super, Medicare, taxes or the GST to balance his books.

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It’s almost time for the federal budget, and Prime Minister Julia Gillard’s government has another Herculean task ahead of it. Promises of a razor-thin surplus have evaporated as revenue fell away, and now the government has to find how to pay for big-ticket items like the Gonski education reforms and the National Disability Insurance Scheme.

Treasurer Wayne Swan has some hard choices to make. Luckily we’re here to help. Crikey asked some of Australia’s leading economists what major spending items they would cut, or how they would raise more revenue, to provide long-term, substantial savings to fund Gonski and the NDIS.

Chris Caton, chief economist at BT Financial Group, pointed out the Treasurer has a several options, but none of them are particularly easy.

“We know what they’re looking at, they’re looking at basically reducing the tax spending on superannuation, and that’s a big target. The plus side is that the [current] tax treatment of super does favour the relatively well-off. The negative of going for super is that we keep stuffing around with it, and when you stuff around with it you have a deleterious effect on confidence.

“But I’d [also] be looking at various changes to superannuation, nothing else really stands out. Particularly if you don’t want to get eliminated at the next election. It’s a very difficult question. In the end, you probably do have to look at a higher GST. Increase the rate and possibly the coverage also. We did have a chance with the mining resources rent tax but that’s been fluffed completely. If I were the Treasurer, I’d take a long holiday.”

John Quiggin, professor at the School of Economics at the University of Queensland, blamed the current situation on the government’s mishandling of tax reform.

“In my view, the best source of [funding for] the NDIS is probably an increase in the Medicare levy. On social savings, [the best option] is super, but they’ve made a hash of that. That’s the biggest saving. Then you’re down to various things that are more on the tax reform front, things like treatment of interest.

“The big money is in super, but it doesn’t look like they’ll be able to get anything there and you need a once-and-for-all reform, not just trimming away around the edge. What they need to do is admit that they couldn’t afford the tax cuts they gave out under the Rudd government [promised by John Howard’s government]. The budget’s been suffering from that ever since. If we’re going to afford major items, which we need, we should get a greater revenue share. You could cut Defence, but I don’t imagine the government will want to do that.”

Bill Mitchell, economist and blogger didn’t see the need to decrease spending at all.

“I think it’s an absurd thing to try to reduce the budget deficit at the moment. I’d be looking to use those Gonski-style investments [as a reason] to expand the budget deficit. The household sector is saving right now, at 10% of income. It has gone back to a fairly typical behavior, which they abandoned in the late 1990s up until the [global financial crisis], where savings dropped to almost zero. Households are returning to normal so the government has to return to normal, which included running small deficits.

“My view is at the moment we have 12.5% labor under-utilisation and GDP growth slowing, too slow to grow employment. We have a mining boom that’s starting to taper and the investment associated with that starting to stop. So if the government continues to try to pursue a surplus or offset other expenditures then the economy will slow even further and unemployment will rise.

“I wouldn’t be hiking taxes at this stage, and I wouldn’t be cutting taxes. There’s definitely room for tax reform, but they seem to have squibbed that … I would increase spending growth and push aggregate demand up a bit. We have no inflation problem at the moment and an employment problem. I would be creating a virtuous cycle of increased education spending, to fix the effects of the previous attempts to run surpluses, which resulted in the degradation of our public education system.”

Alan Oster, chief economist at NAB, suggested changes to the public service but couldn’t make the call on government spending.

“You need to know the details. The honest answer is that any economist sitting in the market doesn’t know. As a general rule, I’m not that uptight about getting back to surplus right away. I think what’s actually happening at the moment is that they’re shuffling money around.

“I’m not in the camp that says you should be playing with superannuation. I’d be looking for things that should be improving efficiency. I wouldn’t want to be scorched earth with the public service, but I think you need to take a look at it. And I think at some stage they’ll need a resource rent tax. Unlike the current model, you need a clean break. A project has a resource rent tax and that price is X. Now that won’t help you over the next year, but it will help you over the next 20. I think the focus should be more on sustainable surpluses into the medium term.”

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28 comments

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28 thoughts on “Ask the economists: we balance Swan’s books

  1. Achmed

    How Labor let themselves to be bullied into making the promise of a surplus defies explanation

  2. Carlene Colahan

    “………..the best source of [funding for] the NDIS is probably an increase in the Medicare levy..” couldn’t agree more – just do it

  3. Achmed

    Money from any resource rent tax should be quarantined to pay off the debt instead of more middle class welfare

  4. paddy

    And the winner is…..The Crikey sub who came up with that header.
    “Ask the Economists”indeed. Hahaha

  5. grubbidok

    The problem is that the solutions aren’t practically difficult, only politically. There is a metric s**tload of low-hanging fruit – negative gearing, private health insurance rebate, middle class welfare. The superannuation changes the government are trying to push through is another prime example of what can be done, but it is also a prime example of how politically poisonous equitable, sustainable and responsible economic decisions are. Is it any wonder no politician today wants to lead on this?
    Putting my public health hat, proper health reform would save Australia more than any cut mentioned *and* deliver better services. Fee-for-service is by and away the most inefficient way of paying for health services (the current Medicare and PBS models). Other countries with more coordinated care systems get far more results for far less cash than Australia. Unfortunately any effective change would require a referendum to get around the ‘civil conscription’ decision by the High Court in 1948 that has ensured Australia can never have a decent health system (similar to the referendum that Rudd promised, but never delivered).

  6. Mark Lynch

    My simple solution to increase revenue is to make religious enterprises pay tax. Billions of tax revenue not collected here. Not even the USA lets commercial enterprises of religious organisations have tax free status.

  7. Andybob

    Why don’t we ask Ken Henry ?

  8. Kristian

    Alan Oster, chief economist at NAB: “Now that won’t help you over the next year, but it will help you over the next 20”

    Alan is clearly not a politician then.

  9. fredex

    Bill Mitchell, who “didn’t see the need to decrease spending at all”, has the best head in the field by a mile.
    Listen to him.

  10. Harry1951

    @Mark: I like your idea but just watch the god botherers squeal! And that’s the thing, we have so many vested interests in this country who line up so say why x or y should not be done.

  11. Mark Errey

    Bill Mitchell is a very smart guy and great economics lecturer to listen to. Chris Caton should hang his head for suggesting an increase in the GST to pay for the NDIS. Chris, the GST revenue all goes to the states, the feds just collect it they don’t spend it. It would also take the agreement of the states to change the rate and or coverage of the GST, unlikely to happen anytime soon if they aren’t getting the proceeds.

  12. Ian

    In the developed countries of the northern hemisphere the future generation that was to pay for the profligate unfunded consumption of the past 30 odd years is now the now generation. And all this time inequality has been going up and up and exacerbating the situation for the majority.

    The ideological driven fetish that cries out for more austerity and the gutting of government programs that benefit the 99% has proved to be counterproductive and has literally ruined some countries in Europe.

    So Wayne Swan’s budget, if it is to be responsible, needs to begin reversing the policies that have brought much of the west to its knees and led to increasing inequality (including here in Australia). From this viewpoint increasing the GST as suggested by one of the economists is not an option. A substantial increase in resources rent taxes in my mind is a no brainer and to justify it or some variant of it Swan can point to a large number of other countries who “charge” in one way or another much, much more for their resources than we do. These include the Gulf countries, Norway and many South American countries.

    There should be no rush however to get rid of the deficit just for its own sake although the economists quoted in this article point to a number of ways to achieve this that would not by themselves support the trend to rising inequality eg reducing military expenditure and reforming the superannuation taxation regime as suggested by some.

    Why do our governments continue to attack the disadvantaged in their all out efforts to balance the budget? They should rather be taxing the rich to a greater extent and use tax as one tool to attack the “baddies” like speculation, advertising, environmental destruction etc.

  13. CML

    @ grubbidok – I agree with you. All good ideas, but as you say, political suicide for whatever government attempts to introduce them. However, I guess someone will have to go down this path eventually – especially the “referendum” bit!

  14. Ian

    @CML,

    Labor has all but committed suicide already (of course egged on by the opposition and press) so it might as well complete the job by doing the right thing now and claim as their excuse that it is for the longer term good.

    I’m sure the electorate will understand if not the opposition.

  15. Andrew ( )

    What Swan should say when delivering the bad news about tax increases or spending cuts being needed is that it would not be needed had the oppposition supported the original Mineral Resources Tax.
    Let Abbott take the blame.

  16. Mike Flanagan

    Not one of the above economic ‘brains’ identify a major provision in our budget that we must prepare for, climate change.
    The OECD predicts the costs to mitigate and remediaye the effects of climate change to account for 3% of GDP. That figure equates to a hit of approximatly 10% to the national budget outlays.
    The past two exremme weather events in Queensland have been estimated to have cost the national and state budgets $15Billion.
    And according to the physicist and climate scientists, we aint seen nothing yet, of an unleashed and unpredictsble force of weather extremes.

  17. Achmed

    Now lets see an examination of the policies of the Opposition who by the looks of it are going to be the next Govt. Lets examine what their policies will REALLY deliver instead of the just ;istening to the one line rants – “bad govt” and Labor bad – Liberal good”.

  18. morpheus

    Andrew @ 15

    Is that before of after Swanny answers why he setup Kevin for a fall with the MRRT and then walked away from it as if he had nothing to do with it. His incompetence has his finger prints all over it…

  19. Mike Flanagan

    Yes Achmed, but unfortunately there is little chance of the public gaining those facts from the media when even disciplines like economics can offer such as the above. Without reference to the impacts of climate change.
    The IMF recently reported that calender 2011-12 cost $1.2 Trillion dollars and was anticipatede to at least double of the coming years.
    The recent OECD report was accompanied by other independantly generated predictions of a cost of up to 19% of GDP.
    Truly alarming predictions of the costs that awaite us that is being ignored by many economists et al, at our peril.
    While being discouraged by much of their contributions, the mounting number of reports from well established accounting firms and international bodies, together with likes of Gittins, some of the data is gradually being made available, and all of it undermines Abbott’s policies.

  20. Achmed

    People should read the Liberal manifesto – “Real Solutions for all Australians”.
    In it Abbott is going to repeal the current carbon price legislation – continue funding the tax cuts and compensation provided by the “income” of the carbon price but without the “income” the CP provides to fund those tax cuts etc.
    He will also introduce his own carbon reduction plan – Direct Action – but does not explain where the $3.2billion+ will come from in the budget.
    The manifesto also talks about tax cuts for business, and that really contradicts his 2% business tax increase to fund Parental Leave.
    He has also now stated that he will not guarantee changing any changes by the Labor Govt to superannuation. But he will attack low income workers superannuation by removing the $500 contribution for those earning less than $37,500, mainly women, part-time workers and the underemployed.

  21. Ian

    Mike (19),

    Yes and the terrible thing about it now is that the 19% of GDP will not do anything but prepare for or fix some of the damage these extreme weather events will cause. The horse has bolted. I’m lucky, I suppose because I won’t be around to witness the real devastation and won’t have the opportunity to watch from above and make knowing comments like “I told you so.”

  22. Ian

    My comment is awaiting moderation. It’s infuriating because I really don’t know what I am doing wrong.

  23. Hamis Hill

    Now who said it will have to get worse before it gets better.
    Certain Australian voters will only be forced to abandon their seriously debilitating delusions about the non-existence of climate change and conservative economic competence by the school of hard knocks brought on by Abbott’s inevitable recession inviting in the GFC and by paying for more billion dollar, extreme weather events.
    Try paying off Howard’s Trillion dollar mortgage debt time bomb then! Kaboomenomics.
    That’ll learn ’em.
    Perhaps those gourmet Tv programs should try some grass, bark and earthworms recipes.

  24. Peter Bayley

    Why on earth are you asking “Economists” about funding. Hasn’t every prediction, expert opinion, pronouncement and lauded opinion they have ever made been completely and utterly wrong? Why don’t you ask a herbalist or a aquaculture enthusiast or a surfer. The results will be just as accurate. I am constantly amazed that economists can continue to get everything they predict utterly wrong and still turn up, time and again, on the news and chat shows to predict some more. Quackery, pure and simple.

  25. Peter Bayley

    @Achmed For a more-accurate idea of what Tony will do, see this IPA article

  26. supermundane

    @Peter Bayley
    Most economists yes. Bill Mitchell however has been bang on the money with his predictions well before the GFC and his predictions and opinions continue to be accurate.

    It’s the likes of Bill Mitchell that our politicians and commentators should be listening to.

  27. Ian

    Thanks Peter,

    I cringe whenever I hear the name IPA. They are huge on non fact-based assertions and like to manipulate what facts they do use to conform with their right-wing agenda.

    Okay, okay I’m making some assertions myself but what the hell.

  28. Achmed

    Peter – the only thing missing from the IPA/right wing Abbott supporter list is for more choice of icecream flavours

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