Pre-Budget Speculation

It goes without saying that tomorrow's Budget is a big one for the Rudd Government. So let's just just it anyway. It's a bloody big one for the Rudd Government.

It will define it.

I'm actually quite confident that it will be a good one - good in that it will be economically responsible and provide good stimulus through infrastructure, while beginning the long and horrible pruning job required to trim all the Howard-Costello hand-outs.

Crikey has a good list of all the Budget leaks.

The only one that really cuts me is the tinkering with the child care rebate. Mostly this is because it was not an inherited scheme, but something the ALP promised at the last election, and delivered last year.

Hopefully they just means test it, and have it done on a sliding scale and don't cut it off completely. Personally I think all Government handouts should be means tested - after all, income tax by virtue of the progressive taxation regime we have always had is means tested, so why not spending?

But herein lies the difficulty for Rudd and Swan and Co. To hand down an economically responsible budget they have to get rid of so much of the crud left over from the Howard years. All those masses of middle-income welfare, that now seems to be some sort of God given right.

Swan was right to blame Costello and Howard for the budget being so badly in deficit now - because it is NOT all the spending by the Government which has sent this budget into deficit. It is the collapse of around $100 billion in revenue. The reason revenue has collapsed so badly is that Howard handed out tax cuts as a matter of course during the boom years, thinking that Australia could cope by getting more of its taxes through Corporate Tax.

This policy worked really well and meant we stayed in surplus. There's was only one small caveat. It only worked so long as we continued to have a once in a generation mining boom.

The reason is that in a recession Corporate Taxes dive because profits dive. Income tax however doesn't go down by as much, because employment generally falls slightly, or flatlines (unemployment mostly increases because people coming into the workforce can't get a job). So reducing the dependency on income tax and increasing dependency on Corporate Tax makes for greater volatility of revenue.

So we're heading for a cut back of spending, and a big deficit.

Thankfully we've got Peter Costello to show us the way. Today, in responding to Swan pointing out Howard's and Costello's woeful record as economic managers. He said:

I think you’ve got to get a grip on the dimension of this,” Mr Costello told Melbourne radio today, on the eve of tomorrow's federal budget. “It is quit possible that Mr Swan has put this country into a debt that will not be repaid in our lifetimes. “Young people have got to know this; that they have been put into hock for a very long period of time by this government and they’ll be paying for it through their taxes probably for generations.”

Well I guess it was a bit much to hope for intelligence form Costello. Yes according to Peter, debt is always bad. I guess he'd prefer a depression, so long as there was no Government debt. Then again this a was guy who presided over a health system, the central tenant of which was to massively subsidise private health insurance to the detriment of public health, and whose idea of a good education policy was to increase subsidy of private schools to the detriment of public schools.

Here's some real intelligence Ross Gittens in the Sydney Morning Herald (and a bit of history):

When Howard was handing out tax cuts and cash bonuses with gay abandon, no one had a moment's doubt about their legitimacy. No one conducted long inquisitions into whether the money would be saved or spent, or even put through the pokies.

The fact that there's so much disapproval of cash bonuses now - but, no doubt, little disapproval of tax cuts - nicely illustrates a quirk of human nature that behavioural economists call "framing": people can react quite differently to essentially the same phenomenon depending on how it's framed or, as we'd say, packaged.

If it's news to you that the cash splash was invented by the sainted Howard, let me remind you. In the 2001 budget he and Peter Costello gave a one-off payment of $300 to everyone of age pension age, plus cash payments of $25,000 each to former prisoners of war of the Japanese, at a combined cost to the budget of more than $900 million.

In the 2004 budget Howard and Costello gave one-off payments of $600 per child to people receiving the family tax benefit, bonus payments of $600 or $1000 to carers, and cash payments of $3500 per place to providers of aged care accommodation, at a combined cost of $3 billion.

In the 2005 budget the $600 or $1000 bonus payments to carers were repeated at a cost of $320 million. The exercise was repeated again in the 2006 budget, by which time the cost had risen to $360 million. Seniors got a one-off utilities allowance costing $200 million.

In the 2007 budget the cash bonuses to carers were repeated, plus a one-off bonus to seniors of $500 each, at a combined cost of $1.7 billion. And that year's co-contribution for superannuation savers was retrospectively doubled, just the once, at a cost of $1.1 billion (with all of that, of course, guaranteed to be saved).

He then takes fools who think a Budget deficit and Government debt is bad by the scruff of the neck and gives them a few slaps:

Another difference is that whereas Howard's cash splashes were reducing a budget surplus, Rudd's are adding to a budget deficit. Howard could afford his, whereas Rudd can't afford his.

Think that's a good argument? If so, congratulations. Your understanding of the role of government budgets and the macro management of the economy is state-of-the-art circa 1936.

That is, it's pre the Keynesian revolution. Since Keynes, the great majority of economists have accepted that things such as stimulatory cash grants are unhelpful during times of boom (because they risk adding to inflation), but likely to be helpful during recessions (because, to some extent at least, they should add to private spending and hence diminish the rise in unemployment).

So, contrary to what a sort of Good Housekeeping approach to budgeting would suggest, good management involves governments being less generous during booms and more generous during recessions.

And here's something for you to ask next time your hear anyone (including Peter Costello or Malcolm Turnbull or Joe Hockey) say how bad this Budget deficit is, or how bad all this debt we'll have to pay off for "generations" - what should we cut, and what shouldn't we spend?

If their answer is "the cash splash", ask them why, seeing how IT WORKED. But then I guess you can say, well done you've now cut back around $20b of the deficit, but you have sat by while retail spending went down the toilet, and staff were laid off in their thousands. Congratulations.

Then ask what they were going to do about the other $80b that they need to cover due to decline in tax revenue.

Because here's the thing. You will not here Turnbull or Hockey or Costello refer to the $100b loss of tax revenue. All they will talk about is the "cash splash". I'm betting that according to them, every single cut in Government services (ie middle-income welfare) will be as a result of the 'cash splash'. You got $900, so that's why your private health rebate is now means tested. You got a cash splash, so that's why people won't be able to afford IVF treatment. etc etc.

It's all bull. But it will be effective.

And it's an easier sell than Rudd and Swan pointing out the decline in tax revenue due to a stuffed up tax revenue mix thanks to John Howard and Peter Costello. Regardless of the truth people will look at the Howard years and ignore the mining boom, and just think the surplus was proof the Libs knew what they were doing.

And with a newspoll set to come out next week, it's fair to say Rudd and Swan have some hard work in front of them - both economically and politically.