Swan budget big on class warfare
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When Treasurer Wayne Swan wrote his controversial essay on the rising influence of vested interests he was laying the groundwork for a federal budget based more on politics than economics. Today, he took aim and fired a big dose of class warfare.
The promised 2012-13 federal budget surplus of $1.5 billion was achieved largely by targeting companies and the so-called one per centers, sprinkling it with a good dose of accounting trickery (shifting some expenditure between years), and using some overly optimistic economic forecasts and super-sized projections for carbon pricing.
To make the class warfare seem real, and reposition itself as the party for battlers, the treasurer hammered the point that he was spreading the benefits of the mining boom to the “most vulnerable in society”. This included tripling the tax free threshold and dishing out a Schoolkids bonus.
Adding to the histrionics was a decision to abolish the generous living-away-from-home perks largely exploited by highly-paid executives and clamping down on “golden handshakes,” which again benefit high income earners receiving large payouts.
But the biggest savings came from backflips on previous promises, again mostly aimed at the wealthy or medium to big companies. These included a decision not to proceed with a 1 per cent cut to company taxes on July 1, which will save them a whopping $4.7 billion over the next four years. Another was the dumping of the standard deduction on work related expenses, which will save the government more than $2 billion over four years, and the scrapping of a proposal to offer a 50 per cent discount on interest, which was announced in last year's budget to encourage Australians to save more. The decision to renege on this will save them $1 billion.
This reprioritisation of the tax reform agenda away from the rich towards the “vulnerable” is a cynical move to try and win back Labor's heartland and get its polls out of the toilet. When taken in this light it explains why the few infrastructure projects that it has listed as supporting are in constituencies that traditionally have a strong Labor vote.
Other nips and tucks include a deferral of higher concessional contributions cap to save it $1.45 billion and a reduction of the higher tax concession for contributions on Australians earning more than $300,000 a year, to save almost $1 billion over four years.
In Swan's own words: “Across the budget, by saving and redirecting $33.6 billion, we're balancing the books. Making room for $5 billion in new payments to households.”
While the budget and Swan's speech is a desperate attempt to have him posturing as the modern day Robin Hood, it is fundamentally flawed. While nobody denies that a return to a budget surplus is a good objective, the argument is more about timing and the big rush to get there when so many things are up in the air. The latest developments in Europe and the worse-than-expected US job figures out last Friday are a timely reminder that overly optimistic forecasts about China, economic growth and inflation could easily make this budget a meaningless set of numbers.
It is a budget that promised to be austere but it has left Australia vulnerable to the gathering risks in the global economy, with too much punted on the China boom continuing to hold.
The economic outlook assumes the economy will remain strong, the outlook positive, the unemployment rate will remain low and inflation will be contained, not to mention an unprecedented pipeline of mining investment. The budget forecasts for the next four years are premised on real GDP growing at 3.25 per cent in 2012-13 and 3 per cent the following three years, the unemployment rate remaining stable at 5.25 per cent and employment growth of 1.25 per cent through the year to the June quarter of 2013 and 1.5 per cent through the year to the June quarter of 2014. It says: “Emerging economies, particularly China and India, are expected to account for a large part of global growth over the next two years.”
This is no longer certain. Nor is the size of tax collections, which have grown less than expected because of several factors, including reduced capital gains tax revenue owing to the poor performance of the sharemarket and falling property values.
To put it in perspective, capital gains tax as a share of gross domestic product tripled to 1.5 per cent in the five years to 2008. When the financial crisis hit, causing tax losses, the share fell to 0.5 per cent of GDP. This translated into a fall of $11 billion.
If Europe burns and China comes off the boil, it will adversely affect company and superannuation taxes, as well as the estimated $9.7 billion in net revenues expected to be raised from the new mining tax, the minerals resource rent tax (MRRT). The jury is out on whether this is doable. Even the company tax raised by the miners is unlikely to be as high as the government anticipates as most of them have allocated substantial capital investment to new projects, and have offset a large part of their tax bill with depreciation.
Swan has spent billions of dollars in a new round off handouts, which has left the country with a budget that has little to cushion it when it next turns down.
He is also relying on overly optimistic forecasts on carbon pricing. The budget papers set out for the first time carbon price estimates for the 2015-16 year year, when the scheme transitions to a flexible price that is linked to the international market. The problem is that the forecasts are almost double the international market forecasts which leaves it vulnerable to a multi-billion dollar black hole.
Swan is clearly hoping for a miracle. He might need one for the next election.