The 2011 budget: Wishful thinking or a reasonable effort?

What does one make of the Gillard's 2011 budget?

The general tone of the budget, which was hardly harsh and a bit optimistic, is not surprising. After all, it is Labor which retains its tendency to be less willing than the Coalition to slash spending, yet also to promote wishful thinking.

Nevertheless, the 2011 budget provides another step towards Australia becoming an increasingly competitive society (and perhaps more efficient).

As many commentators note, there is little budgetary savings in the next few years, despite warnings six months ago that revenue estimates were far too high. As Alan Kohler indicates, the net effect of decisions made since last November on this year's budget plus the budgets of the next two years is actually minus $2.5 billion. While there is supposed to be $21.7 billion saved over four years, offset by $18.9 billion in new spending, most of the net savings of $2.8 billion are "back-ended to after the next election."

To get the budget back into surplus, the budget relies on a boom in commodity exports, with government revenue predicted to increase by $73 billion by 2012-13 (24 per cent in two years), including a 36 per cent increase in company tax receipts.

Labor's budget, merely reflects Australia's fortune of having an abundance of minerals in the ground and a hope that authoritarian China keeps booming and purchasing our basic merchandise goods.

At best, as Paul Kelly indicates, the Gillard government is adapting to new realities from China's resource boom, which "will dictate changes to Australia's political culture and economic policy from this point." This is indicated by Labor's incremental start on a series of reforms "to boost skills, increase Labor-force participation, advance tax reform, curb high-income family benefits and restrain defence costs, while enshrining a new priority for mental health."

To a large extent, Kelly is right. For all of my whinging about the rise of authoritarian China, it would take a brave Australian government not to seek fortune from what we have in the ground. Anything else would leave us facing the same budgetary difficulties now faced by many Western nations.

But make no mistake about it. Australia has its own domestic problems, which will only be addressed by how well and fairly we distribute our resources to meet the many economic, social and environmental needs.

Poor Labor. While it has rightfully sought to streamline social welfare assistance, although controversially by limiting most assistance to families earning less than $150,000 with a freeze on indexation for now, it now faces criticism for such a proposal. The Household, Income and Labor Dynamics in Australia Survey, crunching the latest numbers, indicates that this will exclude about 15 per cent of income earners.

In truth, if we cannot streamline welfare assistance, given that social security and welfare payments will still consume around a third of all Commonwealth outlays in 2011-12, then what hope do we have of preventing a society turning in against itself in terms of budgetary reform, to help distribute resources to other important areas?

If we are to share the burden of painful reform, then welfare assistance must be reduced in accordance to the equity principle of less assistance the more one earns with an effective cut off point. Albeit, the upper limit should always be adjusted over time.

It is not enough to make life tougher for young parents, the long-term unemployed and many disability pensioners. This is despite the need to encourage them to make a greatera greater contribution, when possible, in accordance with mutual obligation principles which includes assistance and training.

Indeed, cuts to social welfare assistance may need to go much further in coming years, especially if the China bubble deflates for a variety of reasons that are virtually ignored by the Australian government, with its revenue projections and its reliance on commodity exports.

There are also new and added costs that the government must address, as indicated recently by natural disasters (the Queensland and Victorian floods), and the higher costs of running detention centres for asylum-seekers. Offshore processing now requires an extra $290 million this current financial year and $819 million in 2011-12.

As Australian governments struggle to meet a variety of old and new policy needs, all Labor can do is use its time in the sun to make sure it helps those most in need as best as it can. Yet, this will inevitably mean a juggling of priorities in accordance to the popular issues and demands of the day.

The 2011 budget increased spending for mental health and regional health, education and infrastructure, yet made cuts to other important policy areas. For instance, savings included $345 million from slowing the rollout of the National Rental Affordability Scheme and $211 million from aged care, at a time when greater infrastructure investment is needed.

Furthermore, significant concern has emerged in regards to the funding of important renewable energy industries, including upgrading the electricity grid to include new energy sources. $4.3 billion will be saved by cuts and savings measures from Defence over the next four years.

In the end, perhaps we ask too much of Labor. As Gillard notes, the 2011 budget's real spending growth of one per cent compares favorably with the three per cent average under the Howard government, although the latter did virtually eliminate Commonwealth debt by using some of the regular budget surpluses.

What is central for me from the 2011 budget, despite its timid approach to cutting outlays and its optimistic faith in the Chinese boom, is just how accepting Australians will be to future moves that streamline our welfare system in a fair way thus reducing assistance the more one earns.

If this policy move is undermined, then I am hardly confident that future policy reform will be conducted in a fair way, should budgetary pressures increase further and the growing reliance on China falters.