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The Business Week ahead

Michael Pascoe discusses yet more jockeying and positioning ahead of the federal budget.

PT4M37S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2inof 620 349

Just 15 more sleeps until Wayne Swan has his half-hour upon the stage with the federal budget – a more dangerous beast than usual thanks to the election four months later. And that was before the Prime Minister said she would reveal a $12 billion hole in government revenue.

And not only will whatever Swan produces be viewed through an election prism, it comes after several warm-up acts that have focused on serious structural deficit challenges for whoever's sitting on the treasury benches in the years ahead.

Last week the Grattan Institute promised a combined federal and state structural deficit of $60 billion in 10 years, but that was trumped on Friday by a Minerals Council-commissioned study from Macroeconomics that found just the federal government structural deficit was $65 billion last year. Perhaps just coincidentally, the Minerals Council study showed how dependent governments over the past decade have been on the minerals industry.

Treasurer Wayne Swan speaks to the media during a press conference, at Parliament House in Canberra on Wednesday 3 April 2013.
Photo: Alex Ellinghausen

Treasurer Wayne's Swan will deliver this year's budget speech as government revenues slump. Photo: Alex Ellinghausen Photo: Alex Ellinghausen

(As an aside, that study pointed the finger at the Howard and Rudd governments for wanton spending – yes, despite the much ballyhooed surpluses, history is judging Peter Costello to have been a second-rate Treasurer. And I suppose that's why the Minerals Council wouldn't like to consider that we should have had a decent minerals resources rent tax a decade ago, or maybe even now, because the pollies would just waste it.)

Leaving aside the detail of who can come up with a scarier figure and just what the difference is between the usual deficit and an hypothesised structural deficit, no-one's in a position to deny the growing gap between what people apparently want from governments and governments' ability to pay for it.

And it should be no surprise to anyone either. Treasury secretary Martin Parkinson has been banging on about it for the past year or so and it was inherent in the Henry Review. It also was front and centre at the tax summit in October 2011 – something I know a little about because I co-chaired it.

Despite the low media expectations for that summit, it turned out to be a very worthwhile exercise that's still working its way through the policy system. Among other things, this month's botched piece of superannuation tuning arguably started life there and one (but only one) territory was helped along the way to phasing out real estate stamp duty.

Successfully developing solid policy is a slow process, as Labor's haste on a number of issues has demonstrated. The process of coming to terms with our tax and spending conundrum is ongoing, but mainly below the surface, still at the stage of steadily spreading awareness so that no treasurer can avoid it.

It was an opportunity lost that Joe Hockey and co boycotted the summit for cheap political reasons, as they might well have learned something and could have contributed to the bi-partisan policy development we need to tackle such a difficult issue. But at this low ebb in the body politic, that would be expecting way too much.

It was blindingly obvious then, 18 months ago, that Australia is facing severe fiscal challenges if it wants governments to continue providing the present level of services, let alone improve them, while not increasing the tax take. The states have debased their revenue sources and lack the political mettle to fix even the taxes that do harm to their citizens, while the feds are in no position to bail anyone out.

The budget tomorrow-fortnight has the potential to make this worse by the Gillard/Swan administration wanting to go out on a high note of delivering, or at least promising to deliver, a so-called National Disability Insurance Scheme and major education reform as well as the NBN – and effectively set some improvised explosive devices for Tony Abbott in the process.

Both sides of politics are guilty of raising expectations of what government can afford to do while hoping the revenue side will somehow look after itself. It won't. Thus there's a game of passing the buck, hoping someone else will be left with the unpopular task of reducing “entitlements” and raising taxes and charges.

But for all the present rhetoric about investing in education and health, here's a little fact tucked away in the mid-year economic outlook: the Federal Government actually is spending less on both health and education in the current financial year than it did in 2011-12.

The detail in the MYEFO documents in October showed that federal spending on health was $61.2 billion last financial year and was expected to come in at $61 billion this year. The feds spent $29.3 billion on education last year, but trimmed that to $28.7 billion this year. Given that inflation in the health and education sectors runs at 5 or 6 per cent, that is rather extraordinary.

It's stating the obvious to recall that last year's effort was not an election budget. I feel a Gonski and NDIS coming on.

Meanwhile another lost opportunity looms for the coalition with its dumbed-down focus on government debt levels. With Tony, Joe and Barnaby forever chanting big numbers that don't mean much about federal debt, they're painting themselves into a corner that precludes running a sensible amount of debt.

Debt per se is not a bad thing, as any businessperson should be able to explain. It's a question of what it's used for and whether it can be comfortably serviced. On-going debt to pay pensions, teachers' salaries and medical tests is a bad thing. Sustained government debt equivalent to about 20 per of GDP for building and subsequently privatising necessary infrastructure would be a very good thing – but don't try to explain that to our politicians or expect that they would be capable of explaining it to the electorate. They seem much more comfortable keeping it simple, real simple.

Michael Pascoe is a BusinessDay contributing editor.