Gittins: Understanding the tricks in this budget
The new Medical Research Future Fund will allow the Government to cut spending on health while claiming it's hasn't cut spending on health. Ross Gittins explains.PT3M39S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-39uo2 620 349 June 10, 2014
Tony Abbott has turned out to be a chameleon. Before the election, he took the guise of a populist, opposed to all things nasty and in favour of all things nice. Since the election, he's revealed himself to be a hard-line ideologue, intent on reshaping government to suit the interests of big business and high-income earners.
Before the election, he was the consummate vote-seeking politician. Since the election, he has transformed into an inflexible "conviction politician" who doesn't seem much worried about whom he offends.
Illustration: Kerrie Leishman
Dr Mike Keating, former top econocrat, says the budget is always the clearest guide to a government's priorities and values. That's certainly true this time.
This budget scores high marks for its efforts to get the budget back on track. As almost every economist will tell you, there is no "budget emergency". But there would be problems if we allowed the budget to stay in deficit for another 10 years, which was a prospect had Abbott failed to take tough measures (all of which were in marked contrast to his sweetness and light before the election and many of which were in direct contradiction to his promises).
The budget's great strength is its approach of announcing savings while delaying their major effect until 2017-18, by which time it's hoped the economy will be strong enough to cope with the reduced spending. That, plus Treasurer Joe Hockey's efforts to increase spending on infrastructure in the interim.
But the budget goes further than is needed to fix the budget. It's our first genuine attempt to achieve (as opposed to talk about) "smaller government". So as to minimise the need for future tax increases, it puts government spending on a diet.
It does so partly by increasing user charges (for GP visits and tests, pharmaceuticals and university tuition), but mainly by changing the indexation of pensions and government grants to the states for public schools and hospitals, from indexes linked to the growth in wages to the main index linked to consumer prices.
That's a saving of at least another 1 per cent a year, cumulating every year forever (or at least until it's reversed as politically and economically untenable).
By restricting his savings to cuts in government spending and studiously avoiding all the lurks hidden in the tax system, Abbott ensured the burden of his savings is carried overwhelmingly by low and middle-income earners, leaving high-income earners largely unscathed, save for a small temporary tax levy. He also ignored almost all the government spending constituting welfare for businesses.
You would have to be terribly trusting to believe all this happened by accident rather than design.
The public's wholehearted disapproval of the budget makes it likely a lot of its measures won't make it through the Senate. Abbott's opponents will have a field day acting as our saviours.
No doubt much of this disapproval arises from simple, short-sighted self-interest. After all, Abbott spent the past four years fostering our selfish incomprehension. People got it into their heads that their cost of living was rising rapidly, causing their standard of living to slip. It wasn't true, but Abbott reinforced rather than corrected the misperception. (To be fair, the Labor government was no better.)
But I'd like to believe there’s more to our disapproval of the budget than simple selfishness. John Howard says the public will accept a tough budget provided people are satisfied it's reasonably fair and in the nation's interests.
Trouble is, this budget is neither fair nor in the nation's interest – unless you share the Business Council's certainty that the world would be a much better place if only big business was allowed to do whatever it pleased and executives paid minimal tax.
What surprises me is how Abbott could change from being such a supremely pragmatic, vote-obsessed pollie in opposition to being so willing to alienate so many interest groups while in government.
I never imagined I'd see the day when any government decided to take on perhaps the most powerful voting bloc of them all, Grey Power. The fury of the old will be even greater when they fully comprehend how the planned change in pension indexation will lower their relative incomes. If it survives, it will be a hot issue at the next election.
Nor did I ever expect to see any government declare war on virtually the whole of the younger generation. The plan to deny education leavers the dole for six months involves high social costs with little budgetary or economic merit, but is the reappearance of one of Abbott’s personal bonnet-bees.
The plan to let universities charge what they please for their courses and impose a real interest rate on students' HECS debt will saddle our brightest and best with big debts, lingering for many years. I've heard of worse injustices, but it seems a strange way to endear yourself to those who represent the future Liberal heartland.
Abbott is no doubt counting on there being a long time for voters to forgive and forget before the next election in 2016.
But despite its goal of avoiding future tax rises, the budget's incorporation of a further two years of bracket creep means it will push up the tax rates faced by a lot of low to middle-income earners, something they won't easily forget.
If I were Abbott, I wouldn't be counting on too much voter gratitude for fixing the budget.
Ross Gittins is economics editor.