A bad budget for future leaders

Many of my friends describe John Howard as a racist because of his use of the refugee issue in the last election. This might be fashionable, but it is inaccurate. John Howard is an opportunist, not a racist. Given his druthers, I am reasonably sure he wouldn’t have beaten up on refugees, just as I am reasonably sure that given his druthers Paul Keating would not have beaten up on the GST in 1993. But for most politicians there is no greater evil than your opponent holding power, so opting for lesser evils in preventing that seems justified.

Howard’s campaign ran almost entirely on the issue of illegal immigration because there was little community support for the rest of his platform. During six years in Government the Coalition has failed to sell any major policy change, apart from arguably the GST. This is largely because it has a complete inability to frame policies in a way that the community will support, or to provide an overarching vision that will justify financial pain in specific cases for general community benefit. So it is forced to campaign on peripheral, but populist and emotionally charged issues, at the same time as it buys support by pork-barrelling key constituencies (like superannuants) and backs down on unpopular issues, like indexing of fuel excise.

Last month’s budget continued the theme. It had no vision, and from a political point of view it was not sold properly. The selling of a budget starts perhaps a month out and always takes the form of leaks of all the planned spending cuts, plus some that aren’t planned. When the budget comes out with more modest spending cuts and some increased unanticipated spending everyone is relieved, and the only news left to be reported is the handouts. In fact, a number of the cost-saving measures were out before budget night - like the broad shape of changes to the Pharmaceutical Benefits Scheme and the Disability Pension - but there were no false alarms, and no goodies that hadn’t also been telegraphed well in advance. As a result talk-back radio gave the document a pounding.

Not that the opposition was in a position to take advantage of the budget. Its inability to come up with a credible position on asylum seekers tangled its attack. It is obvious that the major reason the budget actuals were in deficit last year, and barely in surplus this year, is because of the increase in spending caused by the "Pacific Solution". Yet Bob McMullen, Labor’s Treasury Spokesman, was on TV blaming every other spending increase. Well, yes, they did play a part, but only as support players. He couldn’t blame the real culprit, because if he did the Opposition would be accused of being weak on border security. Until the Labor Party can craft a credible alternative to the government’s refugee policy, it is going to continue to turn uncomfortably on the spit of last election - unable to satisfy voters in the middle, or voters on the left.

What should the budget have looked like? The first thing that it needed was vision. While Costello had undertaken to produce the Intergenerational Report as part of the budget, it needed to be out before this budget so as to produce a credible need for decreasing expenditure on items like health and disability pensions. Otherwise the government risks repeating the nursing home debacle. This was caused when it changed funding arrangements for nursing homes, in a manner that cost pensioners (and their heirs, because it involved the family home) money, without establishing first that there was a crisis in the industry. No crisis, no perceived need, and Bronwyn Bishop, the responsible minister, went to her political death over the issue.

By producing the Intergenerational Report now, Costello may be providing the government with a structure for a third-term agenda, but that agenda needed to be implemented this budget, not next.

The government also needs to start building a war chest for the next election – which means surpluses. While the budget documents do predict a rapidly growing surplus this will be significantly generated by an increase in direct taxation caused by bracket creep as inflation takes taxpayers into higher tax brackets. This of course erodes some of the advantages of the GST which was meant to shift the burden away from direct taxation

Economically the budget should have been more contractionary as well. Recession and harsher times will inevitably return, and the government needs reserves to be able to stimulate the economy when they do. Howard and Costello have not been good at running surpluses, even slipping into deficit last year. Over the course of the seven Costello budgets, the cash surplus, measured as a percentage of GDP, is pretty close to zero. Most debt has been paid back through asset sales, not skill in managing the purse, which puts the proposed final sale of Telstra in an interesting light. A budget that was further into surplus would also have reduced the need to increase interest rates. Higher interest rates are going to alienate business and home buyers, at least in the short-term, at the very least providing fuel for a mid-term slump for the government.

There was one brave move in the budget. This was to tighten eligibility for the Disability Pension. As Mark Latham has observed, much of the decrease in unemployment in the last six years is illusory. The unemployed have merely moved themselves to the Disability Pension, where benefits are more generous, and they no longer count in the unemployment statistics. While tightening eligibility will save the government money, it will do so at the cost of increased headline figures for unemployment.

However, the Treasurer’s solution merely fiddles at the edges of a much larger problem. The increase in disability pensioners occurred because there was a financial incentive for welfare recipients to be disabled rather than unemployed - more proof that economically rational man and woman can be found just about anywhere. This is yet another example of distortions in the social welfare system which produce perverse consequences. The best known are the welfare traps that penalise people returning into the workforce with effective marginal rates of tax sometimes in excess of 100 per cent.

Social welfare needs reform, and successful reform of the system will deliver huge benefits to the budget bottom line as disincentives to work are eliminated, and welfare recipients become taxpayers.

The government cannot claim that this is a new issue. They have been back in power for six months and this budget was the time to be bold. Rather than just fiddling at the edges, why couldn’t they have been ready to implement a plan that would eliminate most of these problems? Perhaps a universal social wage with enhancements like tax credits for those in low-paid employment, and add-ons for those with special needs, like the disabled, and therefore additional costs? Most of the work has been done, and they would not have been open to the charge that they were beating up on the sick and feeble.

Everything in Canberra is being seen through the prism of leadership at the moment, and not just on the Government’s side. Glen Milne reported in today’s Australian that there is dissatisfaction with Simon Crean’s leadership. This is not a good budget for Howard, but it is even worse for Costello. By wasting an opportunity to set a third-term agenda, it makes the next election, under either, potentially more difficult. Howard can duck the election and retire with his prestige intact, while Costello can’t. For this reason Costello ought to be pushing for a mini-budget later this year, and initiatives that will set the right tone for the next two and a half years. Crean’s failure to get to grips with the budget, particularly the blow-out in military spending, and the inability to even point to where the need for long-term visionary action lies, makes it likely that the rumbles will increase. Marginal changes in internal affairs aren’t going to still those rumbles, they are going to make them even louder.

This wasn’t a good budget for future leaders.