A budget to protect Labor's legacy

To surplus or not to surplus? That, once again, is the question.

I am now almost certain that – despite all the dire revenue warnings – the centerpiece of next Tuesday’s federal budget will be the revelation of a return to surplus in the last year or two of the forward estimates.

For government ministers, this has long since ceased being a budget about winning the September election.

This is a budget about preserving Labor’s legacy for the next generation.

This is about setting the Labor party up for a return to government not this year, but at some point in the next decade or two.

Labor has woken up with a mining boom induced spending hangover and is desperate to clean up after itself.

The clearing of the decks so far has been an enormous task, a veritable pirate ship with promises thrown overboard with nary a moment’s regret.

Backbenchers in marginal seats have bit their tongues. They know they’re walking the plank and the government must do all it can to stop the good ship Labor from sinking beneath the waves forever.

So punters have been brutally informed they can forget about a carbon tax-linked increase to the tax free threshold from $18,200 to $19,400 that would have delivered an extra $1.57 a week into paypackets of low income earners.

The $1.8 billion boost to family budgets that was the centerpiece of last year’s budget? You can forget that too.

This sort of broken promise is political poison, but the junking of these two promises is the right thing to do.

Bad policies should always be abandoned, no matter how late the hour.

First, the tax cuts. Australia’s personal income tax base has been so denuded by first the Howard era tax cuts (and Rudd’s incoming commitment to match them) that further cuts were always questionable.

And given the move from a fixed to floating price emissions trading scheme will see the price of carbon plummet, creating no additional price pressure for families, they are completely unnecessary.

Ditto the planned boost to family payments. Given the mining tax has failed to raise more than a few beans, the argument for “spreading the benefits of the boom” is laughable.

The irony is that Labor has, in successive budgets, done much admirable work to scale back eligibility for family payments – more than it would care to admit. When Howard left government, about 80 per cent of families received welfare payments. That has been scaled back to around 60 per cent.

But last year’s promise to take the mining tax revenue that would have been spent on a corporate income tax cut (good tax policy) and spend it on handouts to families was a low point for good public policy.

Political journalists were dazzled by the politics, but economists should have been more appalled at the end-of-days style cash-dash.

I am assured there will be no such rabbits out of the hat this year. I’ll believe it when I see it – these are politicians after all – but there are likely to be no pre-election handouts in this, Wayne Swan’s sixth budget.

If we believe what I am told, next Tuesday’s documents will more closely resemble the budget of an incoming government. Restraint and prudence will be the order of the day.

The headline writer won’t thank them for it. Opening the papers on Wednesday morning will be another bruising experience for our Treasurer.

Punters, having clamoured for spending cuts, will hate them when they appear. The political atmosphere for more tax hikes is so toxic that either business or welfare groups will bemoan the changes.

But on its death bed, Labor is likely to show the sort of restraint that has been so lacking over the past decade of Australian government.

Tuesday’s budget will reveal a path back to surplus over the forward estimates because the alternative is, in the long term, even more dire than the short-term political pain Labor will wear to produce it.

Having failed to deliver a surplus in government, Labor cannot afford to leave the government benches with no plan to return the budget to surplus. A decade of deficits is already on the books.

Does it matter if the budget is in surplus?

Yes, yes it does. It always did. It was just a question of how long it would take.

It is alarming how quickly the public debate has jumped from obsession about surplus in 2012-13 to being relaxed and comfortable with the prospect of no return to surplus at all.

It is not hard to imagine a nightmare scenario where the budget pressures of the unwinding mining boom run seamlessly into the budget pressures created by an ageing population, leaving the budget in deficit for the foreseeable future.

The good news, for a government that doesn’t get much, is that this week’s data flow could help them marginally on the revenue side.

The fall in the Australian dollar, worth a couple of cents, could add billions to the budget bottom line if Treasury sees fit to assume it will last. Treasury does not forecast future movements in the Australian dollar, but assumes it stays roughly where it is on budget eve. 

This week’s jobless report too, showing an unemployment rate of 5.5 per cent, is bang on Treasury’s forecast from last December of where we will be mid year. At 5.6 per cent it was clear Treasury would have to revise up its jobless forecast. It may yet do so, but a better jobs market means more tax revenue.

And at this stage, every little bit helps.