THE DISTILLERY: Budget bottom lines

Treasurer Wayne Swan has nominated big business as the loser in this year's budget – which wasn't as painful as expected – in order to achieve a skinny surplus predicated too much on the Asian growth story. That's the pretty strong consensus in this morning's mega-edition of The Distillery, though we do also touch on some commentaries that defend the government's growth assumptions and stimulus spending.

Firstly, Fairfax's Jessica Wright couldn't help but notice Swan's declaration that "the surplus years are here”.

"But hauling the budget back into the black and easing the concerns of Labor's traditional voter base comes at a heavy cost for the corporate sector. The government had proposed reducing the corporate tax rate by 1 per cent to 29 per cent which was to be funded from the profits of the mining resource rent tax. Instead, the profits of the mining tax are to be funnelled into a $3.6 billion fund for cash handouts and tax breaks for families, low income earners and the jobless, as well as a new tax write-off for small businesses. In a swipe against mining billionaires like Andrew Forrest, Gina Rinehart and Clive Palmer, Mr Swan announced his ‘Sharing the Benefits of the Boom' strategy. More than 1.5 million Australian families will share in $1.8 billion worth of tax breaks to Family Tax Benefit Part A while $1.1 billion was allocated for a supplement of up to $210 for those living on income support.”

The Australian Financial Review's Jennifer Hewett argues that Swan simply doesn't see the political benefits of following through on the promised company tax rate cut anymore, and Labor has the political cover to abandon that promise.

"Instead, he will spend more of the billions of dollars that Treasury (although no one else) still expects to get from the new mining tax on increases in family payments and allowances for people on other forms of income support. He even gets the political bonus of being able to blame Tony Abbott for dudding business. That is because the Liberals, in an uncomfortable alliance with the Greens, have already announced they would vote against the corporate tax cut in the Senate as part of the Coalition's opposition to the mining tax which supposedly funds the reduction. An ebullient Treasurer declared yesterday that he wasn't about to ‘sit around twiddling his thumbs' as the corporate tax cut went down in the parliament. Certainly not when he has a brand new slogan ready to go – which is ‘spreading the benefits of the mining boom' to everyone else who doesn't think they're getting much out of it (or the Gillard government).”

The Australian Financial Review's Chanticleer columnist Tony Boyd says that retailers and gambling venues are in line to benefit from the support to lower income families if the financial crisis stimulus spending is anything to go by.

"But any benefits for struggling retailers and gaming houses could be short-lived. The budget papers make clear that the government sees no end to the factors that have hit the discretionary sectors of the economy, including the strong Australian dollar, continued high savings by households and the reluctance to take on new debt. Investors looking for clues from federal Treasury about a turnaround in the troubled parts of the economy will be disappointed. The housing market will remain subdued for at least another year, which is bad for building materials companies.”

Now for the well-founded scepticism for whether that $1.5 billion surplus will ever come to pass. The Age's Peter Martin backtracks six months to when Swan made the surplus prediction and looks at how the treasurer has scrambled to achieve it.

"Between then and now the government's finances have worsened somewhat, but not by as much as the Treasurer had led us to believe. The weaker than expected economy means non-GST revenue will be $4.5 billion lower than had been forecast, but it has also cut projected spending. Low inflation means the government will spend $2 billion less than it had been planning to, mainly because it won't need to lift indexed payments as fast. But rather than take the short cut of finding the $2.5 billion needed to restore the surplus Wayne Swan has gone the long way around, slashing billions from defence, axing business tax cuts about which he says business was unenthusiastic about, and postponing a planned increase in foreign aid.”

The Age's Adele Ferguson writes that the budget's bottom line is too reliant on the growth of China and India, explaining just how easily government revenues can be influenced by economic shifts.

"The economic outlook assumes the economy will remain strong, the outlook positive, the unemployment rate will remain low and inflation will be contained, not to mention an unprecedented pipeline of mining investment. The budget forecasts for the next four years are premised on real GDP growing at 3.25 per cent in 2012-13 and 3 per cent the following three years, the unemployment rate remaining stable at 5.25 per cent and employment growth of 1.25 per cent through the year to the June quarter of 2013 and 1.5 per cent through the year to the June quarter of 2014. It says: ‘Emerging economies, particularly China and India, are expected to account for a large part of global growth over the next two years.' This is no longer certain. Nor is the size of tax collections, which have grown less than expected because of several factors, including reduced capital gains tax revenue owing to the poor performance of the sharemarket and falling property values. To put it in perspective, capital gains tax as a share of gross domestic product tripled to 1.5 per cent in the five years to 2008. When the financial crisis hit, causing tax losses, the share fell to 0.5 per cent of GDP. This translated into a fall of $11 billion.”

The Australian's Judith Sloan puts the expectations for the increase in tax receipts into its proper historical context.

"In the early years, the growth of taxation receipts was underestimated by about 2 to 4 percentage points. Since 2008-09, the rates of projected growth in taxation receipts have been too high. In 2010-11, actual taxation receipts growth was 5 percentage points below that forecast; this year, the error is in the order of 3 percentage points. It is against this backdrop that we are expected to believe that government receipts will increase by nearly 12 per cent between 2011-12 and 2012-13, which raises receipts as a percentage of GDP from 22.3 per cent to 23.8 per cent. The only other time in the past 35 years during which receipts rose by a similar proportion of GDP was between 1983-84 and 1984-85, as the Australian economy was really hitting its bootstraps after the damaging recession of the early 1980s.”

While the projections for tax receipts might look optimistic, The Australian's economics editor David Uren points out that the government is well within its rights to predict the economy is going to grow at roughly trend rates. After all, that's what private sector economists, the International Monetary Fund, the Reserve Bank and the Treasury are forecasting. However, Uren also says the Treasury is just coming clean about its own recent forecast shortcomings.

"Treasury says there are three sources of its error: mistakes in its economic forecasts, mistakes in translating the view about the economy into tax revenue and then factors such as court decisions and government policy. The past year has brought the first two. Growth was much lower than forecast, partly because the Treasury underestimated the intensity of consumer caution and exaggerated the broader economic benefit from the surge of resource investment. It also took far longer to drain Queensland's coalmines after the flooding, and this had a major effect on export revenue. European instability caused a global slowdown in the final quarter of last year, while the RBA suspects that the persistently high value of the dollar has been more damaging to the economy than economic models would predict.”

And The Australian's George Megalogenis hits a small posse of recently converted stimulus sceptics for second guessing the Rudd government's actions during the GFC, arguing this year's budget is better off because of it.

"It is easy to mock the stimulus with the hindsight of its excesses. But the budget is, by definition, in better shape than it otherwise would have been because the largest item on the revenue side – the Pay As You Go taxes that workers cough up each week – has defied the trend of falling revenue. Personal tax collections are, in fact, stronger today than Treasury thought they would be at the depths of the GFC panic in early 2009, when the Rudd government unloaded its second stimulus package comprising a second round of cash for the retail sector as well as the pink-batts program and Julia Gillard's Building the Education Revolution for the construction sector. Pedants may want to argue the toss about the effectiveness of any of these measures, but the alternative universe of job losses does not bear thinking because, as the budget papers show, revenue fell off the cliff, anyway, without a recession.”

If you think we're done, guess again. There's a lot of comment out there this morning. The Australian's John Durie says that if relations between the government and business weren't cordial before the budget, they're going to be positively bitter after it. The Age's Eric Johnston expects the Gillard government to cop some flack from the banking sector for shelving tax breaks aimed at encouraging Australians to save, although his colleague Andrew Main says investors could be thankful of the things Swan didn't put on the chopping block.

The Sydney Morning Herald's economics editor Ross Gittins says this budget is simply too good to be true, with its lack of difficult spending cuts, while his counterpart at the AFR, Alan Mitchell, explains that Labor's paper-fiddling demonstrates that it has failed thus far in its 2007 promise to end the reckless, politically-charged spending of the Howard years.

Now, for some of the playful zingers this morning. The Age's Malcolm Maiden delivers his own version of Swan's budget speech, in which he describes the numbers as having more rubber in them than Gumby. The Sydney Morning Herald's Jessica Irvine says the government's habit of announcing spending initiatives in one budget and then canning them the next amounts to a strategy she dubs the ‘Hokey Pokey'. And The Age's Asian affairs reporter Peter Cai describes the budget as being a "hostage” to Asia's growth outlook – nicely put!

Finally, The Sydney Morning Herald's Elizabeth Knight claims to have found something worthwhile to report on other than the budget. Centro's apparent $200 million settlement looks to be the largest in Australia's decade-old class action history.