Stumping for a small deficit strategy

Now is not the time to be ripping spending from the budget and with some downward adjustments to revenue expectations, a series of small deficits seems the best strategy.

Crikey

A concerted effort will be required to address structural flaws in the budget. But a series of savings measures intended to deliver big savings at the end of, and beyond, forward estimates can provide a relatively painless path back to surplus and toward structural balance as the economy begins to face the impacts of an ageing population.

As the basis of a 'fantasy budget' for 2013-14, we've calculated the current state of the budget based on last year's mid-year economic and fiscal outlook numbers, adjusted for policy announcements since then, and with corporate tax, MRRT and capital gains tax revenue written down to match significantly lower expectations in each of these areas. We've also slashed carbon price revenue from 2015-16, with the carbon price expected to approximately halve (at least), for a total of $60 billion worth of writedowns on current projections and forecasts through to 2015-16, as well as additional writedowns on projected revenue for 2016-17.

The result is a budget stubbornly stuck in a relatively small deficit, despite savings measures on superannuation, higher education funding and the National Disability Insurance Scheme levy from 2014 already locked in by the government.

On top of that, wastrels that we are, we've opted for around $44 billion of new spending. The bulk of that, however, is the direct transfer of additional GST revenue to the states, funded from the removal of the GST food exemption. This will strengthen the budgets of under-pressure state governments, which are facing their own fiscal difficulties. Placing the GST on currently exempt food products (which is a category that has grown more rapidly than other retail sales in the last couple of years) further strengthens the case for a rise in the Newstart Allowance, as Newstart recipients are disproportionately found in the lowest quintile of income earners. We've suggested a 10 per cent rise in Newstart, which would be around $53 a week for a single parent.

We've also included the restoration of the foreign aid budget cut made by the government last year, and for the same reason we proposed it last year: as one of the world's richest countries, we can do more on foreign aid, particularly when China is using aid as a key weapon of soft diplomacy around the world.

Further, we want to increase Australia’s humanitarian migration intake to 25,000, an addition of 5000 people per year on the new, higher level former immigration minister Chris Bowen lifted it to last year. There are moral reasons for doing this – Australia can afford to take more people in need of sanctuary – but also policy reasons: if we are going to adhere to a punitive policy of deterring maritime arrivals, further strengthening the incentives for asylum seekers to pursue non-maritime ways of reaching Australia will make deterrence more effective.

Two other ideas we put forward last year also make a reappearance. We remain fans of opposition finance spokesman Andrew Robb's infrastructure partnership bonds policy from the 2010 election and expect to see it return later this year in the Coalition's policies (whenever they appear). While we're not convinced it will leverage as much private infrastructure investment as Robb suggests, if implemented properly it would provide a substantial ongoing addition to infrastructure spending and could be scaled up once proven and the budget improves. And we've retained a direct Commonwealth program to increase the level of social housing construction, which would channel money to the states for low income housing on the basis that they did not cut levels of social housing spending (as New South Wales and Victoria have in recent years).

We've also found about $80 billion worth of savings or tax rises. Again, $28 billion is from the GST, which goes directly to the states. We've also gone further than the government recently did and proposed a phase-in of 15 per cent tax on superannuation drawdowns, starting in 2014-15 over three years. We've conservatively costed the revenue impact, but the real benefits would be beyond forward estimates as the growth in the cost of superannuation tax expenditures is curbed. After 2017, the adjusted super drawdown tax rate is likely to add around $10 billion a year to the budget, while preserving a lower taxation rate for super drawdown.

We've also phased out the iniquitous private health insurance rebate, which even after means testing remains inordinately expensive and pointless except as a giant handout to the private health insurance industry. But we also want to sell Medibank Private, which has no purpose in government hands that the current health insurance premium regulation framework can't meet. The sale of Medibank Private was estimated in 2010 to generate $4 billion, but would entail the loss of its annual dividend – and the government’s capacity to raid it for 'special dividends'.

And while tempted to entirely abolish Family Tax Benefits for people outside the bottom quintile of income earners, we've settled for further cutting the thresholds for Family Tax Benefit payment cutoffs.

We've also transferred the tax burden away from the broader corporate sector and placed it more heavily on the mining and banking industries. Miners would have their diesel fuel rebate removed and large miners would lose their access to non-depreciating exploration expenditure, the latter option having been canvassed and costed by the Business Tax Working Group last year. We've also imposed a banking super-profits tax designed to recoup about half a billion dollars a year. But we've given the broader corporate sector a 1 per cent tax cut to assist with the slightly precarious transition from the mining boom to a more normal Australian growth pattern. We're also disinclined to continue to pay for large Detroit and Tokyo-based transnationals to employ a few tens of thousands of people, so the Automotive Transformation Scheme will be nixed at the end of 2015.

A further spur for efficiency comes in the Defence Department by imposing a special 1 per cent efficiency dividend. And as we proposed last year, ASIO's budget should be significantly pruned – ideally back to its pre-2002 size, but for the sake of a quiet life we've only proposed cutting it back to 2005 levels, and we even, generously, indexed the 2005 levels.

The structure of all these savings is backloaded. Ripping billions out of the economy via spending cuts next year has significant risks given Australia's external environment. Instead, the savings measures are designed to make the budget more sustainable on a long-term basis by slowly reducing middle class and corporate welfare and containing the relentless growth in superannuation-based tax concessions that will undermine the budget more and more every year. In the interim, a couple of years of modest deficits will do no long-term harm.

*Revenues and expenditure for 2016-17 are estimates based on projections until budget is released

This story first appeared on www.crikey.com.au on May 7. Republished with permission.

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