An odd first Budget

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An odd first Budget

In 1996, the newly elected Howard Government delivered a budget that delivered almost $10 billion of cuts to expenditure over two years. As part of its zealous drive to return the budget to surplus, funding was slashed for the ABC, the Commonwealth Dental Scheme was wrapped up, a 2% public service efficiency dividend was introduced and welfare benefits for the jobless were cut.

It wasn’t all just spending cuts though. A number of revenue raising measures, such as lifting tertiary education fees for students, increasing the co-payment contribution under the Pharmaceutical Benefits Scheme, introducing a superannuation levy for high income earners, and privatising the Commonwealth Employment Service, were also introduced.

Despite all of this the budget was popular with voters. As Peter Costello remarked in his memoirs, “it was one of the best received Budgets in Australian history. People knew there was a problem and they also knew the Government was trying to do something about it.”

Time will tell whether the first budget of the Abbott Government earns the approval of voters but, at first glance, neither Joe Hockey or Tony Abbott have the same degree of political judgment as Peter Costello and John Howard. Unlike the 1996 budget, this is an odd budget that mismatches new spending priorities in health and infrastructure with some genuine spending cuts and revenue raising measures.

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If we consider where the Abbott Government is cutting expenditure, more than $7 billion will be found in reductions to family welfare payments, and $80 billion of savings will be achieved by ending the previous Labor Government’s health and school funding agreements with State Governments. No one knows where States will find the money to pick up the tab for lost income on schools and hospitals unless it is through an increase or broadening of the GST.  The rise to the petrol excise tax will be felt my motorists everywhere and, when added to the cuts to welfare and family benefits, it paints a bleak financial picture for the standard of living of some in the community.

Tony Abbott and Joe Hockey have tried to pre-emptively justify the need for significant spending cuts by arguing that Australia is facing a “budget emergency”. A true budget emergency would probably necessitate a substantial cut in the size of Government—after all, that’s what Paul Keating did in 1988 and Peter Costello in 1996. Instead, the size of the Commonwealth Government under Abbott and Hockey will barely shift over the forward estimates, dropping from 25.9% of GDP in 2012-13 (Labor’s last full year in Government) to 24.8% of GDP in 2017-18.

At the same time, there is a noticeable uplift in the amount of revenue the Commonwealth will receive, with revenue rising from 23% of GDP in Wayne Swan’s final budget to a forecast 24.9% of GDP in 2014-18.

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In terms of spending priorities, the new Government has nailed its colours to the mast, with nearly $10 billion allocated to infrastructure investment–presumably motorist grief at petrol price rises will be offset by the faster commutes to work many years down the track. It will be interesting to see how many of the new road projects are completed, and how much of its funding is in fact spent, in the next four years. Even assuming that these projects are completely meritorious, large road infrastructure is generally constructed in phases over a number of years; perhaps the Government might have been more sensible to stagger this funding to allow money to be spent elsewhere. My suspicion is that in future budgets the Government will be forced to reallocate some of this unspent money to new priorities.

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The big surprise of the night was in health. When Peter Dutton kicked off debate on the possibility of a Medicare co-payment in February this year, it was premised on ensuring the sustainability of a (universal) health system in the face of mounting costs from an aging population. Had the Government maintained this course of action with the introduction of the $7.00 co-payment then it could at least have mounted an argument that the co-payment was guaranteeing the future of Medicare for the community.

Instead, the co-payment is mostly raising money for what the Government hopes will be a $20 billion health research fund to build on Australia’s strengths in this area. No doubt this is valuable research but, as with the road funding, a more measured increase could have left money for investment in other health related expenditure. It also looks strange to see the Government take away funding from tertiary education with one hand whilst injecting a tremendous amount of money into a health research with the other.

Part of the reason the Howard Government’s first budget was politically successful was that, despite the tough rhetoric, they remembered to reward their own constituency with the introduction of signature policies like the Family Tax Initiative and a government funded private health insurance rebate. These policies buttressed their political support amongst the “battlers” and middle class more broadly.

In contrast, in the Abbott’s Government’s first budget the rewards are few and far between for the oter suburban voters that elected them –unless of course it is the “warm inner glow” that some might experience by seeing Joe Hockey delivering the budget rather than Wayne Swan.

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The other reason the Howard Government’s 1996 budget succeeded politically was that it identified areas of the Budget that were closely identified with the Labor Party’s core constituencies–public servants, Indigenous people, students, people that relied on the social security and health systems–and honed in on them like a cruise missile.

On this point, Abbott and Hockey are following their political predecessor’s playbook, with a fair brunt of the cuts being borne by Labor’s state-dependent constituency. By reducing the growth in the rate of the pension, limiting the access of young unemployed people to benefits, ending the Gonski program after four years, cutting half a billion dollars from Indigenous programs, and even slashing foreign aid by $7.9 billion, Hockey has started to deliver on his much vaunted “end of the age of entitlement”.

According to Joe Hockey in his budget speech, the entitlement epoch is going to be replaced by an “age of opportunity”. Other than construction workers and health researchers it is unclear who this budget is meant to provide an opportunity for.

One is ultimately led to the conclusion that Hockey and Abbott’s odd first budget does not quite measure up to the Government’s own  alarmist rhetoric about the state of Commonwealth finances. But we should not allow this disjunction between rhetoric and reality to allow us to lose sight of something more fundamental at work: the government is beginning to remake the state in its own image. Time will tell whether voters like what they see.

 Timothy Wilson was an Adviser to Martin Ferguson, the former Minister for Resources, Energy and Tourism in the Rudd and Gillard Governments.