KGB TV: The Spectators on the budget

The Spectators give their unique views on what is likely to be Wayne Swan's last budget.

Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz tell Business Spectator's editor Jackson Hewett:

An Abbott government won’t have a problem considering whether to keep the budget ‘cuts’ because they are ‘full of holes’

Wayne Swan has put disabilities and education on the agenda, regardless of whether they get funded in the way that’s been proposed

The public service will be the first place an Abbott government will look for further cuts if necessary to fund these key programs, while the GST and spending could also be reviewed 

There needs to be a ‘spring clean’ to re-examine budget figures, welfare means testing, the size of the public service, the tax system and regulation

Government would initially save more than it would spend under education and disability arrangements, but after 2015 a lack of clarity on the source of savings will present a huge challenge

A change in government would be welcomed by business, particularly small business, who have been hit hard by red tape

Bipartisan support for spending on infrastructure should put it on the agenda in future, regardless of which party is in power

Jackson Hewett: So Alan, Robert, Steve – thank you for coming in today. Alan, you called it a budget full of fiddle and spin, but not too bad. What did you mean by that?

Alan Kohler: Well the first answer to that is that all budgets are full of fiddle and spin, so that’s a given. That’s kind of a base line starting point.

The second thing to say is that budgets are like these massive controlled experiments in journalism, so what you get is all the political and economic and business journalists in the country in the same place, writing the same thing, and so you get to compare what everyone writes. And what I knew is that in this case the focus would be on the $44 billion of cuts that Wayne Swan announced over the forward estimates over four years, and that that would be about will Abbott do the same cuts…if he’s going to accept the programs, the national disability insurance scheme and the Gonski education reforms and that, he has to have the cuts as well.

So what I wanted to do was look at those cuts. How real are they? Because we’ve got an election in six months, don’t forget, in September. So really what happens after September, all bets are off…All that matters is what happens now. So I wanted to firstly focus on the next two years and to examine the $44 billion of cuts and see whether they were real or not.

The budget for this next couple of years is fine – it’s not that tough. Spending is increasing 4.3 per cent real. Receipts increase nominal 7.3 per cent. It’s quite a lot. So there’s nothing wrong with the budget, but the $44 billion dollars is full of holes. It’s ridiculous. Like, $10 billion of it is from the Medicare levy increase, which is a tax increase. It’s not a cut at all. Other cuts are all fiddles or smoke and mirrors, so I don’t think Abbott‘s got a problem, to be honest. That’s why I say if you look at the budget for now, which is what matters because there’s an election in six months, it’s fine. But the long-term cuts with which Swan is trying to wedge Abbott are full of holes.

JH: Full of holes, but this is the last budget probably for Wayne Swan, so Robert, what would you say is Swan’s legacy?

Robert Gottliebsen: Swan will have a legacy that will last decades, because he has taught successive treasurers for the next 10 to 20 years. Look at the Treasury sums – regard them as wrong and go out there and check them, because the Treasury guys can’t forecast anything. For 10 years they’ve been getting it wrong: five years under Howard when it was too high – the revenue was higher than they expected – and now under Swan they’re just hopeless at trying to estimate. And you know why? Because they don’t go out to business and have a look. And that’s Swan’s great legacy.

The other thing he has done is that there’s no doubt he’s put disabilities and education on the agenda and how much we fund all of that will depend on what the new government – and we’ll assume it’s Abbott –can bring it down to, and what sort of revenue they’ve got.

What’s going to happen to China? What happens to the dollar? And so, if the revenue goes against us and China doesn’t buy as many minerals and the dollar holds up too high, then those education and disabilities programs are not going to be funded in the way that is said. But he has put them on the agenda.

JH: Steve, you look at those assumptions. There are some pretty big growth numbers that are forecast in the budget there and that was supposed to deliver the kind of receipts that the government needs. Are you worried about the numbers for GDP growth going forward?

Stephen Bartholomeusz: Well, when you consider the track record, and we were supposed to get a $1 billion plus surplus this year and it’s a nearly $20 billion deficit, you’d say you’d be quite concerned about the assumptions, particularly on the revenue side.

There seems to be a sort of core assumption in the budget that things will get back to normal a couple of years out, and given the state of the world and China you’d think that would be a fairly risky assumption to make.

The government has got a history, and Treasury, of completely overestimating how much revenue they’re going to get and underestimating how much they’re going to spend, which is why we’ve got over the course of these budgets, assuming they actually meet the projections, two $220 billion in net deficits through the Swan era. That’s the legacy – $220 billion in seven budgets.

JH: If those numbers aren’t hit, obviously an issue for Joe Hockey is to find where he can cut. Where is the first place he would look, do you think, to start to take some of the costs out of government spending?

AK: The bureaucracy. The Labor government expenditure on general administration is somewhere between $8 billion to $9 billion per year – more than in the last year of the Howard government. So that’s where it is.

The trouble for Joe Hockey and Tony Abbott is that they can’t really say that they’re going to do that. They have to do it, and they are clearly preparing to do it, but they can’t announce it. And they will be under pressure between now and the election to reveal where their cuts are going to be, because they are going to adopt the programs, the NDIS and the spending programs of the Labor party, so they do have to come up with cuts. It may be that after the election they change the cuts and don’t do what they were going to do and just cut the public service back to what it used to be before the Labor party took over, and that’s fine. But that’s where I think that some of the big savings are.

JH: You wouldn’t see a kind of a clearing house where they come in and say okay, start again, we’re going to completely revisit all the figures, revisit all the spending, get rid of ‘middle class welfare’, as it’s been described?

AK: Oh, I think there needs to be a spring clean, and I think they will do that. There’ll probably be a commission of audit of some sort, going through the budget line by line. It’ll take a fair while to do that, probably a year or something. So absolutely there’ll be that.

What I think should happen is there should be an examination of means testing of all welfare, and there needs to be in my view a consistent and standardised means test across all forms of welfare that everyone can understand and actually ensures that welfare gets targeted at those who need it.

So I think there’s a lot of work to do on the means test, a lot of work to do on the size of the public service and also the tax system needs to be looked at.

RG: I think that the regulations will be one area they’re going to focus on very hard. There are 22,000 regulations the Gillard and Rudd governments have put in (according to the Liberals, I haven’t done the count). And it should be able to get down to about five.

A huge change there, and that will free up small businesses, free up universities, free up mining projects. And each one of those regulations – or it’s a group of regulations – has a pod of public servants who report to someone, who report to someone else and they just go and are vaporised.

JH: Robert, you looked at the shift in pay-as-you-go from quarterly to monthly. It’s a sort of an anti-business budget wasn’t it, in a sense, if you look at it from that perspective?

RG: Oh, they start off with companies that are $20 billion dollars turnover, but they get down by 2016 and 2017 to $20 million and then they’ve put in superannuation funds and trusts and sole traders and that. If they got back in, they’d go right down to milk bars and that would…

AK:  No, it doesn’t, Bob.

SB: It doesn’t.

AK: Well, what they’ve announced doesn’t. A $20 million dollar turnover? My milk bar is not $20 million yet.

RG: You know what? I put this to Penny Wong last night and said, if you get back in, will you take it all the way down? And her eyes lit up. And of course they’re not taking it down now.

AK: Yeah, but she won’t be there.

RG: Well, there you are. But what that does mean is that up to $20 million you suck the money out of the corporate system, out of the superannuation funds that are bigger than that, and funnily enough it actually will mean that some banks will have to do some lending because they’ll have to fund the spare cash that’s taken out of the system.

SB: That’s one of Alan’s fiddles, by the way, because it shifts the timing of cash flow receipts. It doesn’t actually increase the pie in any sense. But in terms of the macro stuff, the challenge for Abbott and Hockey is actually much larger than it appears, because if you look at these budget projections, in the first couple of years of the NDIS and Gonski they’re actually saving more from the Medicare levy and from the cuts to higher education national partnership schemes – the self-deductions for self-education. They actually save more than they spend on Gonski and NDIS, and it’s not until 2015/16 and beyond that the spending on those programs starts to accelerate and it gets very large. Alan referred to the fiddles earlier. Within that $43 billion to $44 billion of savings, a quarter of them go under the headline ‘other’. What’s ‘other’?

AK: Yeah, I know. Other. Love that other.

SB: So if you look at the legacy that they’re going to inherit, it’s extremely challenging, really daunting in terms of the scale of the numbers they’re going to have to deal with.

RG: And just to underline that, back around 2015 or 2016, that’s when all the mining investment stops. It just stops to a walk. And that’s the final year of the next government’s term – and suddenly all the mining investment ends.

SB: Oh  but the mining taxes go up though, Bob.

AK:  (Laughter) Yes.

JH: It was only a tax hike that was getting them through the budget this time, this 0.5 per cent increase in the Medicare levy, which means are we looking at more tax hikes down the track if they’re going to fund all these programs?

AK: It depends what Hockey and Abbott can do with spending. I mean, there is a lot of room to cut spending, I think. They’re not going to be inclined to increase taxes but who knows – they might have to, I suppose.

I personally think the GST should come in for some attention. It’s pretty low and the main thing I think it should do is to be broadened to include food and education and health, probably, which would raise a lot of money.

JH: Corporate Australia thinks this is a good budget or a bad budget, would you say, Steve?

SB: I think they think it’s a disappointing budget. And corporate Australia wasn’t actually damaged too much by this. I mean the cash flow issue is one thing, but I think there was only sort of $4 billion of savings over the budget framework out of business tax measures, so it hasn’t actually impacted them much.

I think the disappointment is just at the quality of what they’re getting and the recognition that the position going forward is still based on pretty optimistic numbers – and even then it doesn’t look as though we’ve got a sustainable position. So I don’t think business is all that happy with what they’ve got.

RG: I think there’ll be a sense of relief in business that this government is out of the way. It has lost all credibility with the business community, particularly the small business community where they’ve been hit harder than the bigger business community through industrial relations, through the independent contracting issues, the way the taxman has operated and the regulations, because they don’t have the infrastructure to cope with these things and they’re a pretty unhappy lot…

They and their staff are going to vote this government out. And if it was not to happen, the sort of vague instruction of don’t cut back your job…

AK: It’s possible they didn’t vote for the Labor party last time either.

RG: Nah, but their staff did. Not this time they won’t.

JH: And what about the point of view from investors, Robert? What do you think was in the budget for them?

RG: Oh look, I think that when Abbott gets in, or assuming he does get in, there will be a rise in confidence. And that will help things. But as far as investors, this market has had a good run.

What's interesting is that where there is agreement between the parties is that we need to spend a lot of money on infrastructure and the government is saying look, we’re looking at tax – they didn’t quite say this, but they hinted – they’re looking at tax breaks for ordinary people or superannuation funds who invest in infrastructure. Although they didn’t say it, they just hinted that it might happen, and some of the press has speculated that it will.

Now, that will be something that Abbott will have to look at, but we’re going to have to mobilise, whether it be an Abbott government or a Gillard government, large amounts of private capital for infrastructure and that will be a very important development. It’ll provide income securities for a lot of people that currently just rely on banks and bank deposits.

And now the projects will need to be good and they’ll need to be properly organised, but there are plenty of examples where projects weren’t properly organised…And the users of infrastructure, the people who take trains, the people who take roads or hospitals, they’re going to have to pay for their capital. It’s a big change.

JH: I think we’ll leave it there. Alan, Robert and Steve, thanks for joining us.

AK: Thanks.

RG: Thanks.

SB: Thanks, Jackson.

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