Step right up to a budget sensation

Hands up who wants the government to implement the measures in the national disability insurance scheme?

Everyone.

Who wants their kids to have a better educational opportunities and for there to be even better support for workers losing jobs in the industries in the 'slow lane' so that they can transition to jobs in industries expanding in the 'fast lane'?

Again, almost everyone.

Who wants to see money put into health to maintain and extend the pharmaceutical benefits scheme? Great hospital care? Support for our elderly?

Wow. It is almost unanimous.

Road funding? Childcare? The CSIRO? Foreign aid? Border protection? Yes. Yes. Yes. Yes. Yes.

Now hands up who want to pay a few dollars more in tax to pay for these initiatives and programs with a tightening up of what seems to be generous tax breaks for superannuation? Who wants to pay more income tax? Who is keen for the means testing of government payments for those earning over $150,000 a year? Who wants to see that road project postponed or cancelled so we can fund these initiatives?

What! No one?

This little scenario encapsulates the issue of governing.

So many demands for worthy projects, so few people willing to pay for them.

Having spent some time recently working in the Prime Minister's Office, I got to see the difficulties and inevitable trade-offs involved in making these decisions. The decisions are not difficult because there is much wrong with most ideas, but rather the dilemma is how each initiative will be funded and whether there is another item on the agenda that has greater importance. Priorities, in other words.

Questions like, do we spend a few billion dollars on a fighter jets for the air force now or do we spend a few billion dollars on education? Should we raise the tax free threshold to boost workforce participation or spend money on private health insurance subsidies for those earning more than $150,000 a year?

Almost always, you can't have both – or if you do, the funding offset takes money from someone or somewhere else in the budget. Much of the commentary about government spending, cuts and taxation cherry picks at only one side of this dilemma.

Why was all that money spent on school halls a couple of years ago? The government could have easily chosen not to spend that money, for sure, but had this been the case then on just this issue alone, unemployment would have been a few tens of thousands of people higher, there would be no new infrastructure (halls, toilet blocks, tuck shops, libraries, halls) at each school but the level of government debt now would be a bit lower and there may even have been a comfortable budget surplus coming up this year.

That was the trade-off. Nothing more, nothing less.

Jobs and school infrastructure, or a smaller deficit and faster move to surplus?

When Tony Abbott is prime minister later this year, as seems likely, he and his government will experience the same difficulties, trade-offs and concerns that confront Julia Gillard and her team when looking at spending and taxing issues. He should remember these from his time as a senior cabinet minister in the Howard government, although to be fair, the deluge of revenue which saw tax receipts hit all-time highs in that government meant policy trade-offs were rarely needed in Howard cabinet meetings. To be frank, almost no new spending programs needed offsetting saving elsewhere as the Treasury was continually overwhelmed with windfall revenue inflows. The Howard government could spend at a very rapid pace on an array of projects without savings offset and still have surpluses.

This may explain Abbott's current dilemma in revealing the costings of his policies and acknowledging, publically at least, that to lose the revenue from abolishing the carbon price and mining tax and to ramp up spending and then still move to surplus, there have to be some almighty yet-to-be revealed spending cuts elsewhere.

By way of example, if Abbott wants to ramp up infrastructure spending, as he alluded to in his recent Press Club speech, what programs will he cut to fund it? Or should taxes be increased? Which ones? Or should there be a temporary budget deficit with extra debt and extra borrowing? Or is there an issue of higher priority than infrastructure, such as defence, which Abbott has committed to boosting to 3 per cent of GDP?

There are a million and one good ideas out there, each with merit, each that a good government could implement. The question, as always, is: where's the money coming from to pay for it all?

Both sides of politics have the same bottom line of fiscal management – a small surplus over the course of the business cycle, although Abbott seems to be upping the ante on this with talk of perpetual surpluses of 1 per cent of GDP.

To that end, Abbott had done the right thing in being transparent with the paid parental leave. His scheme will be funded by a hike in company tax for large companies. Good on him for spelling out the trade-off.

Over the next few months, the government too must come clean and give details on where the money is coming from to fund its favoured projects such as the NDIS and education. This should be done by budget night on May 14. The Opposition will need to do the same shortly after that, given its large and growing list of promises.

Stephen Koukoulas is managing director of Market Economics and was former economics advisor to the Prime Minister Julia Gillard.