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Budget ... and fudge it

Frank Stilwell

This year's federal budget got a generally positive response from the media. 'A tax cut for every Australian' headlined the Sydney Morning Herald the following day, followed by 'Surprise handout sweetens health and education overhaul'. 'Costello's tax cuts take the cake' headed Laura Tingle's 'overview' in the Australian Financial Review, without any evident irony being intended.

More careful consideration of the budget indicates deeper problems and some downright trickery. Indeed, Peter Costello's 2003-4 budget represents the nadir of fiscal policy in Australia. This is so for three reasons:

· there is inconsistency in the way the budget figures are presented;

· the 'tax cuts' actually leave the government with more tax revenue and leave the Australian people poorer;

· the budgetary strategy does not address the actual economic challenges facing the nation.

Rubbery figures

Peter Costello proclaimed a 'charter of budget honesty' in 1996, promising 'to improve the discipline, transparency and accountability applying to the conduct of fiscal policy'. The contrast with his actual practice is glaring.

The most obvious fiddle is the exclusion of the GST revenues from the data on federal taxation. Costello obviously refuses to concede that the GST is a federal government tax, even though it is imposed by federal legislation and collected by a federal agency, because it is passed on to the state governments. Meanwhile, the state governments don't want to claim the GST as their tax either, producing a crazy situation where the $27 billion generated annually by the GST seems to fall into a financial black hole. On one level, this is just a silly matter of inconsistent federal-state accounting procedures. But, on another level, it is the basis for systematic deceit. By excluding GST from the calculations of government revenue, Costello is able to claim that federal taxes are only 21 per cent of gross domestic product. If GST were included, that figure would rise to 24.8 per cent, higher than the previous peak of 24.4 per cent in 1986-7, and therefore making this government the highest taxing government ever in Australia. That may be good or bad, depending on your point of view, but it is downright embarrassing for a person with a rhetorical commitment to the virtues of 'small government' and low taxes. And it makes it extraordinarily difficult to trace the changing patterns of government spending, such as how defense spending is changing as a proportion of total spending. One has to make adjustments for the missing government 'spending', which involves the transfer of GST revenues to the states not appearing in the government's own budget figures since May, 2000.

Even more duplicitous is the inconsistent basis on which the accounts are presented. The advantages of using an 'accrual' basis were argued strongly by the treasurer when introducing his 'charter of budget honesty', because it provides a better basis for seeing whether a government spends more or less than it receives in any year. That approach has now been abandoned in favour of a return to calculations of the 'cash balance', which ignores the cost of future obligations like superannuation, currently estimated at about $83 billion for the federal government alone. Using the 'cash balance' basis for presenting budget date effectively pretends that such obligations do not exist.

These inconsistencies were identified in some remarkably had-hitting articles in the Australian Financial Review on the eve of this year's budget, titled 'Costello's balancing act' and 'GST lies are tax evasion'. As Tony Harris, former NSW attorney-general and the author of the latter article argued, 'The errors caused by excluding GST might explain why Costello's budget speeches no longer mention accrual surpluses or deficits. If he used this once-preferred measure in parliament, he could be accused of intentionally 'misleading parliament' (AFR 13.5.03). If the experts can't agree on consistency in these matters, a layperson could be forgiven for thinking that the whole process is a fiddle designed to produce the appropriate political window dressing.

Tax cuts: 'Now you see them ...'

The presentation of the budget's so-called 'tax cuts' is hardly any less duplicitous. This element of the budget was an unusually well-kept secret. Perhaps for that reason, the general media response was to accept the income tax 'cuts' more or less at face value. Sure, it was widely noted that their incidence was progressive over some ranges and regressive over others. Low income earners typically get $6.30 a week off their tax bill; middle income earners get $4 a week, while taxpayers earning more than $65,000 get $11 a week. In other words, the direct benefits are greater for those with above average incomes.

It is actually very difficult to fiddle with the tax scales to get consistently progressive outcomes. Raising the marginal rate of tax on higher incomes is the only certain way of doing so, but any such policy is anathema to the Liberals' class politics (and in this respect, the practice of the ALP in government was no different). Other measures to raise the tax-free threshold, or to raise the income levels at which higher marginal tax rates kick in (the preferred strategy this time), reduce taxes for lower and middle income earners, but their benefit in absolute dollars terms is inevitably greater for high income earners.

But are these real tax cuts anyway? All the government is doing is returning some of the additional tax revenues resulting from 'bracket creep'. The slow but steady inflationary pressures have been pushing people into higher marginal tax rates, even when the real spending power of their incomes has not risen. An indexation of tax scales would get rid of this 'bracket creep' phenomenon once and for all. But no government is willing to embrace such a policy, because of the evident political advantages of periodically announcing tax cuts.

Are people any better off as result of the 'cuts' announced in this year's budget? In practice their positive, albeit modest, impact on people's disposable income will typically be swamped by the increased costs of health care and tertiary education. The greater application of a 'user pays' principle in those areas has long been a declared policy preference for the Liberals. It has some superficial appeal: let the people dispose of their income, on health and education services, on food, clothing, entertainment or holidays, however they see fit. It is on this 'libertarian' reasoning that the treasurer has justified his policy - not just the small tax 'cuts' in this budget, but also the more general future commitment to continue returning surpluses via tax cuts, while extending the application of 'user pays' to finance services.

The problem with this reasoning is twofold. One is that services like education and health have the essential characteristics of public goods. The benefits of their production and consumption are partially reaped by the society at large, not merely by the individuals 'consuming' them; so it makes sense to organize and finance them collectively through public provision, at least partly. 'The government implicitly accepts the 'public goods' argument by targeting 'defence' and 'security' for major spending increases. But it can't seem to accept this for health and education. 'Private' secondary education now gets more government funding than the whole of 'public' tertiary education. Of course, we can reasonably debate whether the financing of education, for example, should be 80:20 public/private, 60:40, or whatever. And the Liberals are not suggesting that either health or tertiary education should be 100 per cent privately financed. But any shift towards a greater reliance on private financing brings in the second problem - violating the principle of equity.

In a society with growing inequality in the distribution of income and wealth, a shift towards 'user pays' principles in health and education necessarily widens the gulf between the 'haves and have nots'. But it would be unthinkable to deny all heath care to the latter because they have not the ability to pay. So it is inevitable that the universal health care system gets restructured as a two-tier system, with means-tested access to public care. Meanwhile, tertiary education places come increasingly to be allocated according to ability to pay, rather than ability to learn. The result is that, as a society, we pay a high price for these continued incursions into the quality of our public services.

Survey results show a growing public awareness and concern about these problems. Many Australians are now expressing their willingness to trade-off tax cuts for more government expenditure on public services. It would be too optimistic to see this heralding the end of the era during when political promises have been overwhelmingly pitched at the 'hip-pocket nerve'. But it certainly poses a major challenge for the ALP. Simon Crean got significant kudos for coming out fighting on health and education policies in his speech in reply to Costello's budget. One would hardly expect anything less: if Labor cannot differentiate itself from the Liberals on this set of issues it is "all over, red rover'. However, there seems little likelihood of the ALP leadership actually having the political coverage to start talking about the case for higher taxes on the rich and on corporations, or about the circumstances in which budget deficits are appropriate, and the rationale for public debt. Even the embrace of a Keynesian approach to these fiscal policy issues - a matter of orthodoxy before the neo-liberal/'economic rationalist' ascendancy to which Labor contributed - still seems remote.

Fiddling while Rome burns

The consequences of remaining trapped within the parameters of a neo-liberal approach are particularly problematic at present. The world economy continues to teeter on the brink of a major recession. The US economy, the engine of growth in the 1990s is particularly problematic. Many of the current economic indicators in Australia, particularly those relating to the labour market, are now looking notably more negative. Costello himself conceded in his budget speech that there is 'a larger than usual element of risk surrounding the near-term outlook for Australia'. A budget with a modest surplus, and without any other measures to address structural problems seems somewhat 'ostrich-like' in these circumstances. Of course, if the economy were to plunge into recession in the year ahead, there won't be a budget surplus anyway. As people lose jobs and incomes, tax receipts tend to decline, while government expenditures rise as a result of the growth in claimants for unemployment benefits. From the viewpoint of Keynesian economics, the resulting unintended budget deficit is a good thing, because it works as an 'automatic stabiliser' tending to ameliorate the downswing in economic activity. But it leaves the declared budgetary strategy in tatters.

Similar concerns relate to the failure of the budget to address the relationship between economic environmental concerns. What of the case for increased spending in areas needing improved ecological management and restoration? What about the possibility of reform embracing 'carbon taxes', or other measures to shift patterns of consumption and production towards more ecologically sustainable goods, services and processes? What of the case for restructuring energy policy to foster faster switching to renewable energy source? In the budget, liquid petroleum - a 'cleaner' fuel - gas is denied its current tax-free status from 2008, but the tax rate to apply to all fuels, petrol included, is not to be announced until later this year, and is expected to be lower than the current rate of 38.1 cents per liter.

It may be asking too much of an annual budget statement to address all these economic/ecological concerns in detail, but one might reasonably have hoped for some consideration of the importance of making them central to our national economic policy. The Greens are stressing the need for these innovative policy linkages and, judging by the polls, more and more people are taking notice. The Liberals are simply ignoring these issues. In this respect, there is indeed a continuing 'budget black hole'.


Peter Costello's 2003-4 budget is fiscally irresponsible. The figures are rubbery: whatever credibility the treasury may have formerly enjoyed as a more-or-less objective source of economic data and analysis has been severely compromised by Costello's political chicanery. The tax cuts are largely illusory too - a political 'smoke and mirrors' trick intended to divert attention from the major shifts being made in the burden of health and education expenses. And the budget fails to link fiscal policy with other measures to cope with the growing instability in the world economy and the challenge of restructuring for ecological sustainability. A responsible budget from a man suited to be our next prime minister? Hardly.


Frank Stilwell is Professor of Political Economy at the University of Sydney and a member of the Evatt Foundation's Executive Committee.


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