Budget comments

Short summary: it's all a con.

A lot of the reaction tonight is pretty positive, but those taking a more cynical view seem to me (of course!) to have the more realistic take on it.

This summary here on ABC Online seems pretty right. It's not taking spending cuts seriously at all. Of course, as Turnbull had warned, severe spending cuts were not necessarily good in current circumstances anyway. However, (again as Turnbull complained tonight,) Swan was selling the need for "inflation fighting" spending cuts before today, but he hasn't really delivered on his own promise.

There was an economist writing in the Courier Mail today who argued that assessing the likely effect of a budget on inflation was extremely difficult and depends on assessing the effect of all cuts and spending programs in the entire budget. This makes a lot of common sense, but I can find no link.

In any event, it seems clear that the $2 billion net savings in the budget as delivered will make next to no difference to inflation. Are people forgetting that only a couple of days ago Access Economics was claiming that every $3 billion dollars saved would prevent a .25% interest increase? Some months ago, Ross Gittins claimed that it would take an extra $10 billion in surplus (or a surplus of 2.3% of GDP) to have the equivalent effect. I think I heard that this budget has a surplus of 1.8% of GDP. Therefore, even on Access Economics more 'optimistic' view of how effective spending cuts could be, any praise for this being an inflation fighting budget seems distinctly premature.

On the nature of some of the savings, Alan Kohler made this interesting point I haven't seen elsewhere:

One of the big savings measures is a bit of a fiddle though. The cancellation of the $959 million “Australia Connected” fund that was awarded to Singtel Optus and Elders has been counted as a saving, but the $4.7 billion National Broadband Network amount that replaces it is not counted as an expense because it hasn’t been spent yet and is not detailed in the forward estimates.

And on the point of the "future funds," which really are there just to delay large infrastructure spending until the lead up to the next election, the Crikey budget blog notes this:

...Wayne Swan today indicated both the capital and interest would be spent on appropriate projects. Given the expected inflation environment over the next few years – and the fact that, when it comes to infrastructure, we are suddenly playing catch-up for years of State Government neglect – it’s hard to work out how expenditure by these funds won’t have a similar inflationary impact several years hence as they would now.

The Opposition has made the point that its education endowment fund was a permanent fund that earned ongoing income to upgrade universities; it was not simply a pool of capital to be spent and disappear over a few years.

As I say, all a con.

On the other big political issue of the week (the Medicare surcharge levy adjustment), there is no denying that there was a logical argument for increasing the limits, as there is with taking bracket creep into account in tax tables. But also as with tax bracket creep, governments that adjust too quickly are not really helping their bottom line.

Given that there was no adjustment for 10 years, some adjustment was justifiable now. But to take it from $50,000 to $100,000 for a single person is just ideology at work, not logic. (I've had a quick look at CPI figures for 97 to 07, and it looks to me like $67,500 would be the correct inflation adjusted figure.)

Isn't that effective "tax cut" going to have an inflationary effect?

There's no doubt a significant number of single people will first drop out of private health insurance because of this change, followed by more married couples when the funds increase their already barely tolerable premiums because of the loss of the single people.

It's the first case of a unexpected and clearly bad idea borne of Labor ideology for this government. As Tony Abbott ably argued, it is very likely to make dealing with the problems within the public health system much worse in the long run.

UPDATE: I typed this last night then forgot to post it. I see now that Andrew Bolt was making the same points. Peter Hartcher makes the case for it actually being bad for inflation.

UPDATE 2: I hear that Malcolm Turnbull is running with the case that it is actually going to stimulate inflation, and he may be right.

So, to get my criticisms in order:

It's not that I was looking for a budget that did cut into people's income (eg by not delivering the tax cuts,) but the government is trying to sell the budget on pure spin, as Bolt says.

Swan is selling increased tax as a "saving": does that really make sense? Some of the other savings may well be illusory too, as noted above.

Putting the surplus into funds to be spent in future might not be such a bad thing, provided the process of identifying infrastructure spending comes up with sound projects. From that point of view, the budget is a bit of a "wait and see" proposition, as it may or may work well in the future.

It's not a budget that deserves strong condemnation; on the other hand it is not one that deserves praise either.

It is definitely the most highly "spun" budget we have seen for many years.